Costco is scooping up customers like nobody’s business! While other big retailers are squeezing every last dime out of their customers’ wallets to cover their increased sourcing costs, Costco is standing out and not raising prices, in general.
Their strategy can be seen in the two attached charts. The percentage that their gross profit (revenue minus cost of goods sold) are to their revenues has shrunk from almost 13.5% (3rd Q 2020) to below 11.9% (3rd Q 2022) over the last 9 quarters. During the same time, the same number (Gross Margin) in absolute terms has increased.
What is going on here? Simply, they have decreased their margins and are making it up with greatly increased volumes. This means they are pulling in lots of new customers who see them as a great value.
In the retail business, it is all about creating habits. Once people establish a habit, most are unlikely to change it. As new customers are drawn into the excellent value Costco presents, they are likely to remain devoted Costco customers.
So while other retailers are beating up their customers up to save their short term profits, Costco is thanking those retailers by taking their customers off their hands. I love it!
Wall Street has always hated how Costco accepts lower gross profits when they could make much more. But who cares what Wall Street thinks. Costco has been building a world class business while Wall Street analysts continue to carp over their mode of operation.
When tough times come, value sells. Don’t ever forget it!
Be smart, be well-read, be aware and be successful.
