Could Costco Be the Most Beloved Corporation in the World?

Today was a special day for me. I went to lunch with my family at Chipotle and afterwards we decided to go to Costco for a few things. 

I like to talk about the immeasurable power of corporations in America and these two are what I interacted with most today. 

Most people know that Costco isn't just a store; it's a force or phenomenon to reckon. It's a business where customers pay for the mere privilege to shop. Their employees are some of the happiest in retail history, and the competition is constantly left scratching their heads, wondering how they're getting beat year over year. "We have a responsibility to figure out how little we can make off a product instead of how much we can make," sums up their philosophy.  

With their over $250 billion in annual sales, nearly 900 warehouses across the globe, and an extremely loyal membership base, this retail giant has mastered a formula few have been able to replicate. But what really sets Costco apart is its relentless focus on simplicity and value. Well, they will sell you everything from diamond rings to bulk bovine meat all under the same roof of the store. And somehow, they manage to convince people to leave with more than they originally planned to buy. Have you ever realized that?

And let's not forget the customer favorite: the $1.50 hot dog combo, a meal that hasn't changed its price since the 1980s. They sell over 130 million hot dogs each year! In an industry defined by thin margins and cut-throat competition, Costco doesn't simply operate; they dominates. It's the third-largest retailer in the U.S., only behind Walmart and Amazon, both of which owe much of their earlier successes to ideas borrowed from Costco’s founders.  

So how did Costco turn a wholesale shopping warehouse into a cultural and financial phenomenon like it's today? The answer lies in a mix of brilliant strategies, a rebellious disregard for conventional retail wisdom, and a history rooted in respecting their customers.  

Costco's story starts with lessons learned over 30+ years in retail. Although Costco was founded in 1983, its existence is thanks to Saul Price, one of the most influential figures in retail history. Even Sam Walton, the founder of Walmart, admitted to stealing more ideas from Saul than anyone else in his career.  

Saul began his retail journey in 1954, purchasing a warehouse in San Diego, California, inspired by Fedco, a membership-based grocery store for federal employees. When Fedco declined his proposal to collaborate, Saul refined the idea himself, launching FedMart, a store that sold goods at rock-bottom prices to members.  

Saul's legal background allowed him to sidestep regulations that restricted selling below manufacturer prices, as membership clubs technically weren’t open to the public. FedMart thrived but eventually fell apart after being sold to a German retailer.  

Undeterred, Saul started over in 1976 with Price Club. His business model evolved when Jim Sinegal, a former FedMart employee, suggested including general consumers as members. In 1983, Jim teamed up with Jeff Brotman to launch Costco in Seattle, Washington. The two companies merged in 1993, eventually becoming Costco as we know it today.  

A masterclass in simplicity and efficiency Costco operates with nearly 890 stores worldwide, generating $254 billion in revenue in 2024. That is the true business model of costco. Surprisingly, over $4.8 billion of their income comes from membership fees, making up just 2% of total revenue but over half of their profits.  

By charging an upfront fee, Costco locks in customer loyalty, creating a psychological incentive to shop there. Their curated inventory of 4,000 SKUs (compared to Walmart's 150,000) reduces decision fatigue and allows for faster inventory turnover. Costco sells through its stock 12 times per year—much faster than competitors like Walmart or Home Depot.  

This high turnover, combined with strategic purchasing agreements, creates a negative cash conversion cycle, enabling Costco to operate without heavy reliance on debt.  

Costco’s ever-changing inventory fuels excitement and FOMO (fear of missing out). Items like discounted grills or running shoes appear unpredictably, nudging customers to buy now. Costco also caps its markup at 14% (15% for its private label, Kirkland Signature), compared to department stores that markup 50-100%.  

Kirkland Signature, Costco’s private label, generates more revenue annually than Nike. It guarantees quality equivalent to name brands while saving customers 15-20%.  

Costco's Ethical Code and Workforce  

Costco’s code of ethics emphasizes:  

1. Obey the law.  

2. Take care of customers.  

3. Take care of employees.  

4. Respect suppliers.  

This commitment extends to its workforce. With average hourly wages of $26 (compared to Walmart's $19.50), robust benefits, and a strong promote-from-within culture, Costco boasts one of the most loyal employee bases in retail. Hourly worker turnover is a mere 6% after one year, compared to the industry average of 20%.  

Costco's success defies conventional wisdom. Wall Street critics argue the company could make more money by paying workers less, but Costco prioritizes long-term sustainability over short-term profits.  

"Wall Street is in the business of making money between now and next Tuesday. We're in the business of building an organization and institution that we hope will be here 50 years from now," says Jim Sinegal.  

By combining simplicity, efficiency, and psychology, Costco benefits everyone involved—employees, customers, suppliers, and shareholders alike. It’s a rare example of capitalism at its best.

That's why I regretted selling my Costco shares years ago and I'm now always on a look for a good price to get back into but with the stock now trading at $909.80 per share at the time of writing this piece, it's hard to tell if it will ever come down for small investors like us to get a piece of that wonderful pie. We will see.

I remain your observing big business Pal,

Ronnie Law

PS: You can find more about Costco on their own website, their investment filings with the SEC, yahoo finance, finviz etc. If there is one company I'll recommend for you to follow, it's Costco.