Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Costco Defies Retail Convention with the Treasure Hunt
Transcript
- Lucas: So there's this retail metric that most companies obsess over — sales per square foot. By that measure, Costco is one of the best in the world. But here's the thing: Costco does not optimise for that metric. Luna: Because if they did, they'd stop hiding the milk in the back corner of the store. Lucas: Exactly. And that's the perfect place to start today. Because Costco's entire model is built on something called the 'treasure hunt' — and it's almost a direct inversion of what every other retailer does. Luna: Let's define that first. The treasure hunt — what does it mean in practice? Lucas: It means Costco deliberately keeps its product selection small. About three thousand seven hundred SKUs in a typical warehouse. Compare that to a Walmart Supercenter — which carries over a hundred thousand. Or a typical supermarket — around thirty thousand. Luna: And they rotate those SKUs constantly. So you never know exactly what you'll find. That's the treasure hunt. Lucas: Right. You walk in for a rotisserie chicken and a case of paper towels, and you walk out with a kayak — because there was a pallet of kayaks in the middle of an aisle. And it was priced at three hundred dollars, which is a hundred less than you've seen anywhere else. Luna: And that kayak won't be there next week. So you buy it. That's the scarcity mechanic. Lucas: Let's talk about the numbers that make this work. Costco's gross margin is capped internally at about fourteen percent on most items. Fourteen percent. Target and Walmart run closer to thirty. So Costco is intentionally making less per item. Luna: But they make it up on volume and membership fees. That's the classic Costco story. Lucas: It is, but the treasure hunt is the engine that drives the volume. If Costco just sold cheap bulk staples with no surprises, people would buy online. The treasure hunt is what gets you into the building. And once you're in, you buy the staples too. Luna: So the milk at the back of the store isn't an accident. It forces you to walk through the entire treasure hunt to get it. Lucas: And that walk-through is where the impulse purchases happen. Costco's average transaction is about a hundred and thirty dollars per visit. That's almost double a typical grocery trip. And a lot of that delta is unplanned — the treasure hunt items. Luna: But there's also a risk — if the treasure hunt feels too chaotic or too gimmicky, customers stop trusting the value. So how do they calibrate that? Lucas: They anchor it with what I'd call 'loss leader landmarks.' The two most famous are the rotisserie chicken at four ninety-nine and the hot dog soda combo at one fifty. Luna: Which Costco has refused to raise the price on — ever. And it's been something like forty years since they introduced that hot dog combo. Lucas: Jim Sinegal, the co-founder, famously said, 'If you raise the hot dog, I'll kill you.' And they mean it. That hot dog combo loses money for Costco. But it's a signal. It tells the customer: if we're not making money on the hot dog, we're definitely not gouging you on the bulk paper towels. Luna: It's a trust anchor. And it works because the customer sees the treasure hunt items as genuine deals, not marketing tricks. Lucas: Let's talk about the membership base. Costco has about seventy-two million member households as of early twenty twenty-six. Renewal rates in North America are over ninety percent. That's insane loyalty. Luna: And a big part of that loyalty is the treasure hunt. Because it makes shopping feel like a game. You're not just buying — you're hunting. Lucas: Yeah. And the membership fee itself — sixty dollars for a basic Gold Star, a hundred and twenty for Executive — that's where most of the profit comes from. Costco actually operates its retail business at near zero profit margin. The profit is the membership fees. Luna: So the treasure hunt drives membership renewals. Because you keep coming back to see what's new. Lucas: And then there's the curation element. Costco's buyers are famously ruthless. They'll test a product, and if it doesn't turn fast enough, it's gone. That creates an interesting dynamic with suppliers. Luna: Suppliers want to be in Costco because it's a signal of quality. It's like getting a Good Housekeeping seal. Lucas: Exactly. And Costco uses that leverage to negotiate even lower prices. They also often demand exclusive packaging — bigger sizes, special bundles — so you can't easily price compare with Walmart or Amazon. Luna: That's a moat. If the customer can't comparison shop, the price advantage is more abstract but also more trusted. Lucas: Right. And the treasure hunt extends to the back end too. Costco's inventory turnover is about twelve times a year. The retail average is around six. So they're moving product through the warehouse incredibly fast. Luna: Which means less capital tied up in inventory, less risk of obsolescence, and fresher products. Lucas: By the way — if today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Luna: Yeah, even a couple of dollars a month means we can keep producing these. Buy me a coffee dot com slash fexingo. Lucas: So the treasure hunt also shapes Costco's real estate strategy. They build warehouses in lower-rent areas, not prime retail corridors. The treasure hunt is the draw — not foot traffic. Luna: And they keep the interiors intentionally sparse. Concrete floors, steel shelves, no music. It's almost industrial. Lucas: That's by design. Every cost saving — no bags, no elaborate displays, no signage beyond basic price tags — gets passed to the customer. That reinforces the value perception. Luna: There's a psychological element too. Scarcity triggers a fear of missing out. When you see a pallet of something unique and you know it won't be there next time, you're more likely to buy on impulse. Lucas: And that impulse buying is what pushes the average transaction up. Costco's average visit is about ninety minutes — long enough to explore, short enough to not feel exhausting. Luna: Now, does the treasure hunt model work for every retailer? Or is it specific to Costco's membership structure? Lucas: It's hard to replicate without the membership fee. Because the membership fee creates a sunk cost. You've already paid sixty dollars to be there, so you're more motivated to find deals to justify that fee. The treasure hunt is the reward. Luna: So if you tried this model in a non-membership store, you'd just look like you have messy inventory management. Lucas: Exactly. And that's why you see imitators like Sam's Club — which is a membership warehouse — but they don't quite capture the same magic. The curation isn't as sharp, the treasure hunt isn't as intense. Luna: One last angle — the treasure hunt is also a defense against e-commerce. You can't replicate the in-person serendipity online. Lucas: That's a great point. Amazon can recommend products, but it can't force you to walk past a pallet of patio furniture to get your milk. Costco's physical footprint is a competitive advantage precisely because it creates experiences that can't be digitised. Luna: So the treasure hunt is not just a gimmick. It's a strategic architecture — from product selection to pricing to store layout. Lucas: And it's been remarkably durable. Costco started in nineteen eighty-three. The treasure hunt has been central since day one. In a retail landscape littered with bankruptcies — Toys 'R' Us, Sears, Bed Bath & Beyond — Costco keeps growing. Luna: I wonder if the next generation of shoppers — who grew up on Amazon — will still respond to that in-store serendipity. Lucas: I think they will. Because the treasure hunt isn't about nostalgia. It's about the thrill of discovery. And that's a human constant.