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TMFLegendPhoenix (< 20)

Excuse me sir, but that R2-D2 is in prime condition, a real bargain.

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August 27, 2011 – Comments (7) | RELATED TICKERS: COST , AXP

There's a place I can't stand to inhabit for more than about 90 seconds.  Ironically, it's also my father-in-law's absolute favorite place on Earth.  Literally everything he buys, he purchases here; jeans, flat screen TVs, digital cameras, thanksgiving dinners, beer, tires for his truck, pickles, DVDs, gasoline, personal computers…everything.  This place is a warehouse (literally) where products are placed haphazardly among its towering storage shelves.  In any given aisle you may find a pallet of camping tents stored next to 5-gallon buckets of mayonnaise next to a selection of caskets.  The lack of coherent organization grates on my nerves, but the main reason for my anxiety while in the building is the horde of bargain hunters.

My wife and I invite her dad to come spend extended periods of time with us and it's inevitable that I'm going to have to endure many trips to this wretched store, so I tried to think of a way to not only make the trips bearable for me, but maybe enjoy or actually get excited to be there.  Perhaps if I owned a portion of this company, I wouldn't see the multitudes of slow-moving shoppers as obstacles, rather I may welcome them as profits.

My stock pick for this week is Costco (COST) at roughly $77.25.

Due to the fact that the products at Costco are sold at extremely low prices, they have had to come up with lots of ways to cut operating costs.  American Express is the only accepted credit card (in the United States, Canada, and Japan) because they charge Costco very low interchange fees.  Costco does not carry multiple brands or varieties where the item is essentially the same except when it has a house brand to sell, typically under the Kirkland Signature (Costco's store brand) label.  If Costco management feels the wholesale price of a product is too high, they will refuse to stock the product. Costco also saves money by not stocking extra bags or packing materials; to carry out their goods, customers must bring their own bags or use the merchandise shipping boxes from the company's outside vendors.  Lighting costs are reduced on sunny days, as most Costco locations have several skylights. During the day, electronic light meters measure how much light is coming in the skylights and turn off an appropriate percentage of the interior lights.  The majority of Costco locations are not unionized, yet Costco has a "Costco Employee Agreement" which sets forth such things as benefits, compensations, wages, disciplinary procedures, paid holidays, bonuses, and seniority.  Non-supervisory hourly wages ranged from $11.00 to $21.00 in the United States, and 85% of Costco's workers in the United States have health insurance.

This no-frills, low-cost, bulk-shopping model has done well in the US and Costco has begun expanding their stores internationally.  Despite the fact that I feel a bit claustrophobic shopping there, Costco’s core values should lead them to succeed wherever they may grow:

Obey the law
Take care of your customers
Take care of your people
Respect your suppliers

My father-in-law is a Costco gold star member.  He has a Costco American Express credit card that he uses exclusively (it annually pays 2% cash back up to $500).  Their return policy is excellent: they guarantee almost all of their products with a full refund within a reasonable amount of time.  They even go so far as to negotiate with manufacturers to extend the manufacturer’s warranty to two years for new TVs and computers.  Because of their return policy and extended warranties, my father-in-law buys all home electronics that he purchases at Costco.  I'm not sure if he is a typical Costco consumer, but he certainly tries to take advantage of everything they have to offer which has made him extremely loyal to the store.  And measuring my frustration navigating through the bargain-hunting hordes, he's not the only one.

I should disclose that I plan to buy Costco if wall street still exists after hurricane Irene.

 

I'll leave you to ponder the following scenario:

You’ve just finished shopping with your nephew when he cries out “Uncle, this R2 unit has a bad motivator!”  If you had bought it at  Costco, you wouldn’t be left wondering “What were they trying to push on us,” – you could just take it back for a full refund.

 

7 Comments – Post Your Own

#1) On August 28, 2011 at 6:07 AM, mhy729 (30.12) wrote:

but the main reason for my anxiety while in the building is the horde of bargain hunters.

Whatever mass of people you've seen at your local Costco, I am most certain that it pales in comparison to the crowds you can see here in Korea (yes, we've got Costco over here too).  I'm not entirely sure what the relationship is, but Samsung Group is involved in Costco's business (and profits) over here.  Samsung is known for its consumer electronics in the States, but that is only the electronics division of a rather huge conglomerate (and like GE, they've got a finance arm as well).

One thing very nice about Costco is that you can use your membership anywhere in the world. 

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#2) On August 28, 2011 at 10:06 AM, TMFLegendPhoenix (< 20) wrote:

Thanks for the Korean intel, mhy729.  That's music to my ears.

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#3) On August 31, 2011 at 12:43 PM, chk999 (99.97) wrote:

One investing strategy I've heard discussed is to buy stock in companies that you hate, but have to do business with whether you like it or not.

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#4) On August 31, 2011 at 12:58 PM, ContraryDude (40.74) wrote:

stored next to 5-gallon buckets of mayonnaise next to a selection of caskets...

Hmm - makes me wonder if it's really haphazard!

Good post.  I hate going in there, too, but I would consider owning stock just because of all the people like your father-in-law who love the place!

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#5) On August 31, 2011 at 2:21 PM, TMFLegendPhoenix (< 20) wrote:

There's actually a lot to love about Costco, it's just that I'm an impatient shopper.  I like to plan what I'm buying before I even get into the store, go directly to the location of these products and get out as quickly as possible.  Costco's layout lends itself to people spending a ton of time there and potentially buying tons of impulse items (at a great bargain).  Not to mention that Costco isn't the type of place you run in to grab just a gallon of milk.  

It's not uncommon to see people pushing multiple carts that are absolutely filled with anything and everything you could imagine.  As an investor, I'm pretty sure I'm going to grow to love Costco.

 My wife has been suggesting we buy Costco for a couple of weeks now and I'm glad I finally listened to her.  

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#6) On August 31, 2011 at 2:31 PM, mm5525 (< 20) wrote:

Given the state of the world, I see no way a place like Costco ever lands in the equivalent of Princess Leia's detention block of AA-23.  

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#7) On August 31, 2011 at 5:27 PM, TMFAlison (< 20) wrote:

Does this mean you're more likely to go with Dad to Costco? He's going to be so pleased! Very berry sundaes all around to celebrate!

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