Latest / The Pivot Podcast with Fexingo: How Businesses Change Direction and Survive Disruption / How Costco Pivoted From Wholesale Club to Retail Giant
Transcript
- Lucas: Costco reported its most recent quarterly revenue at nearly sixty billion dollars. That's bigger than McDonald's. Bigger than Starbucks. And it came from a company that started as a single warehouse in Seattle in 1983 selling bulk toilet paper and industrial-sized ketchup. Luna: Right. And the remarkable thing is that they basically haven't changed their core model in forty years. But that's not quite true either — they've made a series of subtle pivots that turned a low-margin warehouse into a retail powerhouse. Lucas: Exactly. The pivot story here isn't about a dramatic reinvention. It's about a sequence of deliberate, almost counterintuitive bets that transformed Costco from a wholesale club serving small businesses into a retailer that seventy percent of American households shop at. Luna: So what was the first real pivot? I'm guessing it wasn't the hot dog. Lucas: Actually, the first big shift happened in the late eighties. Costco realized that its core customer wasn't just the small business owner buying in bulk for a restaurant or a office. It was also the regular family looking to stock up. So they started adding fresh produce, meat, and bakery items. Luna: Which is a huge operational change. Fresh food has a short shelf life, it requires refrigeration, it's completely different from selling pallets of paper towels. Lucas: Right. And they had to build an entirely new supply chain. But it paid off because fresh food drove frequency. Instead of coming once a month for bulk staples, members started coming every week. That increased foot traffic, which meant more impulse buys on those high-margin treasure hunt items. Luna: And that's when the membership model really started to shine. Because once you're in the door for milk and eggs, you're going to walk past the electronics aisle, the book table, the seasonal stuff. Lucas: Exactly. The membership fee is essentially a tollbooth. And Costco's genius is that they keep margins razor thin — around eleven percent on merchandise, compared to twenty-five to fifty percent at traditional retailers. That builds trust. Members know they're getting a deal. Luna: But that trust had to be earned. I remember reading that in the early nineties, Costco had a problem: members didn't always recognize the quality of the brands they were selling. Some products were off-brands that didn't perform well. Lucas: That's the context for the second big pivot. In 1995, Costco launched Kirkland Signature. The idea was to create a house brand that stood for quality — good enough to compete with national brands, but at a lower price. Luna: And they didn't just slap a label on cheap stuff. They made it premium. Kirkland batteries are made by Duracell. Kirkland vodka is produced by Grey Goose. Costco essentially said, we'll sell you the same product for less, and we'll guarantee it. Lucas: That was a huge pivot from the wholesale club mentality. Kirkland Signature now accounts for over thirty percent of Costco's sales and generates higher margins than branded goods. It also gives Costco pricing leverage with suppliers — if a vendor tries to raise prices, Costco can say, we'll just put the Kirkland label on it. Luna: And here's the thing — Costco's culture of paying employees well and keeping turnover low is directly tied to this strategy. You can't have a high-quality house brand if your staff doesn't care. Costco pays cashiers twenty-five dollars an hour on average. That's double the industry average. Lucas: It's a moat that competitors can't copy easily. Amazon tried to compete with Amazon Fresh and Whole Foods, but they can't replicate the treasure hunt experience. Costco's buyers curate a rotating selection of high-end merchandise — a Le Creuset pot, a diamond ring, a seventy-inch TV — and once it's gone, it's gone. Luna: That scarcity creates urgency. You see something and you buy it because you know it won't be there next week. That's not something you can replicate online easily. Lucas: And that's why Costco has survived the rise of e-commerce better than almost any other brick and mortar retailer. They've barely invested in e-commerce — online sales are still less than ten percent of total revenue. But their stores are so experiential that people still go. Luna: There's a lesson there about not chasing every trend. Costco could have tried to become Amazon, but they double down on what they're good at: physical retail, treasure hunt, membership. Lucas: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. If these conversations have moved your work forward in some small way, that's where you can help keep them ad-free. Luna: Yeah. It's a small group already, and it makes a real difference. We don't run ads, so listener support is what keeps the lights on. Lucas: So back to Costco's pricing philosophy. There's no better example than the hot dog and soda combo. It's been one dollar fifty since 1985. Not adjusted for inflation. Still one fifty. Luna: And Costco's CFO has said publicly that they would rather raise membership fees than raise the hot dog price. That's commitment to the brand promise. Lucas: That single item is a metaphor for the entire business model. Costco could easily charge two fifty or three dollars. Nobody would complain. But they don't, because the hot dog is a signal. It tells the customer: we're on your side. Luna: And it works. The hot dog line is a loss leader, but it gets people in the door and it builds goodwill. It's the same logic as the one-dollar frozen yogurt or the cheap rotisserie chicken. Lucas: Those rotisserie chickens are another example. Costco sells about sixty million of them a year. They lose money on each one — about thirty cents per bird. But they drive traffic to the deli aisle, and once you're there, you buy other things. Luna: So what's the next pivot for Costco? They're already experimenting with gas stations, pharmacies, even hearing aid centers. But the big question is: can they replicate their model outside the US? Lucas: They're trying. Costco has over eight hundred warehouses worldwide, with significant presence in Canada, Mexico, Japan, and the UK. But international expansion is tricky. In China, they opened a store in Shanghai in 2019, and it was so crowded they had to close for safety. But replicating the treasure hunt model in markets with different shopping habits is hard. Luna: Still, if any retailer can do it, it's Costco. They've shown an uncanny ability to stay true to their core while adapting just enough. The pivot wasn't one big move — it was a series of small, consistent bets on quality, trust, and membership. Lucas: And that's the real takeaway. In a world where everyone is chasing the next disruption, Costco's strategy is almost boring. They pay well, keep prices low, treat customers with respect. And it's made them a hundred billion dollar company. Luna: Sometimes the most disruptive thing you can do is just be really good at the basics. Lucas: And keep the hot dog at one fifty.