“Qin Peng Observation: How Costco Became the Pioneer of Warehouse-style Retail”

Hello, viewers. Welcome to “Observation by Qin Peng”.

Today’s focus: He is the spiritual father of the world-renowned warehouse club Costco, and his innovation and persistence have also benefited Home Depot, SAM’s Club, and Amazon.

He is a business legend, who, after his retirement, has been extensively involved in charity work. However, Warren Buffett’s partner, Munger, pointed out that the contributions private companies like Costco make to society are more significant than those of big-name charity foundations.

He is Sol Price, a legend in the American business industry. Today, excellent businesses worldwide are learning from Costco, but find it hard to reach its level.

This episode is part of my series “Crazy Finance: 20 People Changing the World”. We will continue to tell you about the world’s most outstanding business figures, share their extraordinary experiences, unlock the secrets of their business success, and explore how they have deeply impacted the world.

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We often say, “You get what you pay for,” meaning cheap goods are not good, and quality items are expensive. However, this concept failed in one company – Costco. Its products are of exceptional quality, attracting millions worldwide, with many Chinese people purchasing and shipping its products back to China. Costco offers excellent products at a high value for the money.

This unique business model has attracted and nurtured numerous business giants. The protagonist of our story today, Sol Price, and Costco’s co-founder, James Sinegal, were once colleagues under Sol. They are known for their willingness to share. The business world tells stories of their influence and inspiration on other prominent figures.

In 2001, Amazon’s founder and later world-renowned billionaire, Jeff Bezos, met with Sinegal in Seattle. Facing pressure due to a significant drop in Amazon’s stock price, Bezos planned to raise prices across the board. However, Sinegal shared Costco’s business philosophy: “There are two types of companies in the world – those that try to milk customers for every penny and those that try to charge customers as little as possible.”

Bezos was enlightened and decided not to raise prices. Instead, he significantly lowered prices on some flagship products, with some seeing a 30% reduction. By the end of 2001, Amazon’s sales began to rebound, and the company turned profitable for the first time. Later, Amazon introduced its membership system, providing better and more services while announcing: Spend less, consume happily.

Even Walmart’s founder, Sam Walton, admitted to learning a lot about the retail industry from Sol Price. The name and business philosophy of Walmart were inspired by Sol. Despite many imitators and competitors, Costco has continued to outshine others in performance.

In 2024, despite a historic surge in artificial intelligence, Costco’s performance exceeded many top tech companies. Its stock price rose by 50%, surpassing Amazon and comfortably beating Microsoft and Apple. In 2023, the stock price almost saw a 50% increase, far exceeding the S&P 500 index’s 28%.

Business Insider evaluated Costco as excelling in the complex retail environment with its unique membership model and high-value retail positioning. While inflation has eased, the cost of living remains a top concern for consumers, making Costco’s high value proposition align with consumer trends. Costco boasts a membership renewal rate of over 90%.

Warren Buffett’s partner, Munger, has consistently advocated for investing in great companies like Costco without worrying about exiting. He stated, “I’m not good at exiting. I don’t even like thinking about exiting; I want to hold onto shares. Seeing Costco thrive so remarkably, why would I convert this experience into a series of transactions?”

Sol Price, born in 1916 in New York, came from a family that immigrated to the US during the early 20th-century Jewish immigration wave from Russia. Despite initially having nothing, his family eventually founded their own clothing factory in downtown Manhattan. In 1928, due to tuberculosis, his father moved to San Diego, California.

A year later, Sol, along with his mother, brother, and sister, moved to San Diego. Having adopted a frugal and pragmatic approach, Sol went on to establish Fed-Mart, the first members-only store in San Diego. His commitment to low-price, high-quality products laid the foundation for the business model of Costco.

By emphasizing member fees, Sol created a win-win scenario for customers and the company. Customers enjoyed lower prices by becoming members, contributing to the company’s success. The Costco model of member-based, warehouse-style wholesale retailing revolutionized the retail industry.

Fast forward to James D. Sinegal, who started as a dockworker at Fed-Mart and later became Executive Vice President, responsible for sales and operations. Following Sol’s departure from Fed-Mart, Sinegal continued the visionary principles set by Sol, attributing much of his success to Sol’s teachings.

Sinegal’s management philosophy, heavily influenced by Sol, prioritized customer and employee welfare over shareholder interests. This customer-centric approach sometimes faced criticism from Wall Street for its minimal profit margins. However, Sinegal remained focused on building a company that would stand the test of time, rather than short-term financial gains.

Costco’s success can be attributed to its unique business approach, high-quality products, and customer loyalty. By focusing on relationships with customers, employees, and even suppliers, Sol and Sinegal effectively built a culture of trust and value within the company.

This is the story of Sol Price, the pioneer of the warehouse club membership model. As we navigate the competitive business world, what principles will you use to build your wealth?

That concludes today’s sharing. Once again, Happy New Year to everyone. See you next year. Thank you!