From: acquiredfm
Costco, a prominent retailer, has been a significant investment for Charlie Munger, who has served on its board of directors. Munger views Costco as one of the rare “few moments in a lifetime” investment opportunities where one can “bet heavily” because they “know you’re right” [00:12:41].
Munger’s Early Involvement and Investment
Charlie Munger first encountered Price Club, the precursor to Costco, through Rod Hills, who knew Sol Price [00:08:41]. Munger drove down to visit and speak with Sol Price, an “intelligent man” who had started the Government Employees Discount Company at age 39 after being a lawyer [00:08:57]. Munger invested in Price Club by buying stock in the market before its merger with Costco [00:09:21].
Jim Sinegal, then CEO of Costco, later asked Warren Buffett to join the board as an independent director with a financial reputation [00:09:33]. Buffett declined, suggesting Munger instead due to shorter plane rides to director’s meetings [00:09:45]. This led to Munger’s involvement with Costco’s board.
Berkshire Hathaway, Munger and Buffett’s company, attempted to acquire Costco when Carrefour, a French company, was divesting its stake, but Warren Buffett “wouldn’t do it” [00:09:58]. Buffett’s reluctance stemmed from his general dislike and fear of retail, considering it “too damn difficult” due to the high rate of failure among “monz mighty” retailers [00:10:07].
The Costco Business Model
Munger highlights several key virtues that made Costco a standout business:
- Low Prices and Efficiency They consistently sold cheaper than anyone else in America [00:13:12]. This was achieved through big, efficient stores [00:13:14].
- Ample Parking Stores featured 10-foot wide parking spaces, wider than the normal 8 feet [00:13:19].
- Membership Model Costco kept out people who didn’t do big volumes and offered special benefits like reward points through the executive membership [00:13:32].
- Capital-Light Structure The business model is described as “capital light” [00:13:45]. Costco has “no investment in them” as they make suppliers wait for payment until after goods are sold, meaning they have high-quality merchandise in 900 warehouses around the world without having it “sitting on their books” [00:13:54]. This is a form of “leverage” without traditional debt [00:17:47].
- Low SKU Count Costco effectively leverages a low Stock Keeping Unit (SKU) count [00:14:52].
- Customer Demographics Interestingly, Costco’s audience “skews wealthy” with “smart wealthy customers” who are also “picky” [00:52:00]. This was an intentional strategy from the Price Club days, as Sol Price “always wanted the rich man trying to save money” [00:52:05].
The "Central Norm"
“The central norm was don’t raise the market, get it low and keep it there forever.” [00:49:52]
A famous example of this norm is the unchanging price of Costco’s hot dogs, which is seen as “half famous” and contributes to people bringing their kids to the store [00:52:53].
Leadership and Culture
Richard Galanti, a long-time executive at Costco, is highlighted for his extensive knowledge of the company [00:28:26]. The success of Costco is attributed to the “magic of the business model and culture” combined with “very reliable hardworking determined execution for 40 years” [00:49:24].
An internal struggle occurred within Costco’s early leadership where co-founder Jeff Brotman, initially intended to be Chairman and CEO, moved aside for Jim Sinegal to become CEO [00:19:15].
Growth and Expansion Challenges
Costco’s growth rate, around 10% per year, is limited not by capital constraints but by the difficulty of opening too many new stores annually [00:50:33]. Each new store requires a new manager, new politics, and significant learning and teaching to put systems in place [00:50:44].
For a long time, Costco was reluctant to expand into China [00:51:07]. The first attempted store opening was thwarted by a $30,000 bribe request, which left such a bad impression on Jim Sinegal that he refused to consider China for about 30 years [00:51:15]. The board eventually agitated for entry into the Chinese market, leading to its eventual presence there [00:51:34].
Comparison and Imitation
Walmart, despite seeing Costco’s success, failed to replicate its model because they were “too wetted by the ideas they already had” [00:28:16]. Walmart was accustomed to cheap real estate in small towns and efficient big stores, which made them resistant to paying for good locations in rich suburbs where Costco specialized [00:28:30].
Home Depot as a Copy
Home Depot, founded by Bernie Marcus, directly copied the Costco business model for home improvements [00:26:31]. Marcus even visited Sol Price, who was “happy to share the Playbook with everybody” [00:27:41]. Floor & Decor is noted as a current imitator of the Costco model in vinyl flooring [00:26:58].
While there are many imitators, Munger suggests that few opportunities like Home Depot and Costco remain [00:28:07].# History and Business Model of Costco
Costco, a prominent retailer, has been a significant investment for Charlie Munger, who has served on its board of directors. Munger views Costco as one of the rare “few moments in a lifetime” investment opportunities where one can “bet heavily” because they “know you’re right” [00:12:41].
Munger’s Early Involvement and Investment
Charlie Munger first encountered Price Club, the precursor to Costco, through Rod Hills, who knew Sol Price [00:08:41]. Munger drove down to visit and speak with Sol Price, an “intelligent man” who had started the Government Employees Discount Company at age 39 after being a lawyer [00:08:57]. Munger invested in Price Club by buying stock in the market before its merger with Costco [00:09:21].
Jim Sinegal, then CEO of Costco, later asked Warren Buffett to join the board as an independent director with a financial reputation [00:09:33]. Buffett declined, suggesting Munger instead due to shorter plane rides to director’s meetings [00:09:45]. This led to Munger’s involvement with Costco’s board.
Berkshire Hathaway, Munger and Buffett’s company, attempted to acquire Costco when Carrefour, a French company, was divesting its stake, but Warren Buffett “wouldn’t do it” [00:09:58]. Buffett’s reluctance stemmed from his general dislike and fear of retail, considering it “too damn difficult” due to the high rate of failure among “monz mighty” retailers [00:10:07].
The Costco Business Model
Munger highlights several key virtues that made Costco a standout business:
- Low Prices and Efficiency They consistently sold cheaper than anyone else in America [00:13:12]. This was achieved through big, efficient stores [00:13:14].
- Ample Parking Stores featured 10-foot wide parking spaces, wider than the normal 8 feet [00:13:19].
- Membership Model Costco’s membership model kept out people who didn’t do big volumes and offered special benefits like reward points through the executive membership [00:13:32].
- Capital-Light Structure The business model is described as “capital light” [00:13:45]. Costco has “no investment in them” as they make suppliers wait for payment until after goods are sold, meaning they have high-quality merchandise in 900 warehouses around the world without having it “sitting on their books” [00:13:54]. This is a form of “leverage” without traditional debt [00:17:47].
- Low SKU Count Costco effectively leverages a low Stock Keeping Unit (SKU) count [00:14:52].
- Customer Demographics Interestingly, Costco’s audience “skews wealthy” with “smart wealthy customers” who are also “picky” [00:52:00]. This was an intentional strategy from the Price Club days, as Sol Price “always wanted the rich man trying to save money” [00:52:05].
The "Central Norm"
“The central norm was don’t raise the market, get it low and keep it there forever.” [00:49:52]
A famous example of this norm is the unchanging price of Costco’s hot dogs, which is seen as “half famous” and contributes to people bringing their kids to the store [00:52:53].
Leadership and Culture
Richard Galanti, a long-time executive at Costco, is highlighted for his extensive knowledge of the company [00:28:26]. The success of Costco is attributed to the “magic of the business model and culture” combined with “very reliable hardworking determined execution for 40 years” [00:49:24].
An internal struggle occurred within Costco’s early leadership where co-founder Jeff Brotman, initially intended to be Chairman and CEO, moved aside for Jim Sinegal to become CEO [00:19:15].
Growth and Expansion Challenges
Costco’s growth rate, around 10% per year, is limited not by capital constraints but by the difficulty of opening too many new stores annually [00:50:33]. Each new store requires a new manager, new politics, and significant learning and teaching to put systems in place [00:50:44].
For a long time, Costco was reluctant to expand into China [00:51:07]. The first attempted store opening was thwarted by a $30,000 bribe request, which left such a bad impression on Jim Sinegal that he refused to consider China for about 30 years [00:51:15]. The board eventually agitated for entry into the Chinese market, leading to its eventual presence there [00:51:34].
Comparison and Imitation
Walmart, despite seeing Costco’s success, failed to replicate its model because they were “too wetted by the ideas they already had” [00:28:16]. Walmart was accustomed to cheap real estate in small towns and efficient big stores, which made them resistant to paying for good locations in rich suburbs where Costco specialized [00:28:30].
Home Depot as a Copy
Home Depot, founded by Bernie Marcus, directly copied the Costco business model for home improvements [00:26:31]. Marcus even visited Sol Price, who was “happy to share the Playbook with everybody” [00:27:41]. Floor & Decor is noted as a current imitator of the Costco model in vinyl flooring [00:26:58].
While there are many imitators, Munger suggests that few opportunities like Home Depot and Costco remain [00:28:07].