The Greatest Business Model

 

Over the years, I have received a great deal of mail about my Media Realism (MR) posts. Some 99% of the response comes from readers who do not post on the blog but maintain their privacy by e-mailing me directly at doncolemedia@gmail.com

 

One thing has stood out—every month or so, someone asks me what company or companies out there has a perfect business model. The simple answer, of course, is that the perfect model does not exist. Many do not accept that and ask which company has the best? Most people who write to me feel that Amazon is the best and, until recently, a number felt that Netflix was #1.

 

Here is my answer. No one has a complete handle on all the businesses across the globe of any size that could be analyzed but my “vote” goes for Costco.

 

While Amazon gets high marks who their stunning array of products, lightning-fast delivery times and customer-centric nature, I give Costco the nod when you look at all metrics (Full disclosure—I am not nor have ever been a Costco shareholder. That could change someday  ).

 

In brief, Costco Wholesale is a membership warehouse retailer that has been around since 1983. Founded in Seattle, Washington, it now operates 832 locations in 14 countries and continues to grow regardless of the state of the economy. In terms of volume, it is the 3rd largest retailer in the world.

 

Why do I admire them so? They, as is certainly true of Amazon, are laser focused on being customer-centric.  And, they resemble Amazon in that they think long term, in fact, very long term. As Costco has grown, so have the benefits to members. Costco basically caps profits of 15% on every item while most retailers go for up to 30% or more in many categories. The firm operates on a slim profit margin of 2% and makes the majority of their operating income on membership fees. You get a 5% discount on all  warehouse sales if you use the Costco Visa card. They treat employees quite well and pay better than other retailers. Shareholders benefit nicely with increasing dividends and somewhat recession resistant share prices over the years. I have tried to time visits to my nearest warehouse to avoid crowds but the parking lot is generally full.

 

Costco critics do not like that you often have to buy in bulk. This is because they can get better deals on merchandise by having a limited number of SKU’s (stock keeping units). You do not find 45 different toothpaste SKU’s at Costco, for sure. What they do have is great value. So, Costco may not be great for a single person living in a Manhattan studio apartment. I did suggest to one that he go long a few cases of tuna fish and store them under his bed. For homeowners for kids, Costco makes great sense.

 

A spectacular bargain is their ¼ pound hot dog and 20-ounce soda (plus a refill) that weighs in at $1.50 as it has been for decades. Not a healthy snack but long term customers love it.

 

These are attributes that have given Costco what Warren Buffett calls a durable competitive advantage. They are in the game for the long pull and have built loyalty among customers, employees and shareholders even though short term earnings may be suffered.

 

Speaking of Warren Buffett of Berkshire Hathaway, his long- term financial partner, Charles T. “Charlie” Munger joined the Costco board of directors in 1997. Many Costco policies to me look to have Charlie’s fingerprints of ethical treatment of all stakeholders all over them.

 

Companies of all stripes could learn a great deal by studying Costco. They move steadily but patiently forward quarter after quarter. The company has focus and the macroeconomic environment be damned.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com