THE GENIUS OF SIMPLICITY


Q. One of the ways that the Department of Defense and the Army want to make affordability a fundamental requirement for acquisition investments is to do more market research before choosing vendors. What drives Costco’s research into the products you decide to buy? What are you looking for?


A. In terms of the types of products that we want to sell to our members, it starts with the 80-20 rule: What are the 20 per- cent of items that represent 80 percent of the sales? Ten, how can we choose from that limited set of items and pro- vide the best-quality merchandise at the lowest possible price to our members? At Costco, you’ll find fewer than 4,000 active SKUs (stock keeping units). Tat might compare to a supermarket with 40,000 to 50,000 items and a supercenter with 100,000-plus items.


Te total number of items is a little less than 4,000, but the breadth of the items is enormous, from tires to mayonnaise, to fresh foods, to furniture, to jewelry, to certain services. So it’s a wide selection of items but not a lot of depth within each category. Tat is very deliberate. If you think about the fact that a supermar- ket generally marks up its goods 20 to 25 percent or more, and home improve- ment centers 30-plus percent, and the mall stores 50 to in excess of 100 percent sometimes, and we’ll mark our goods up about 11 percent on average, you’ve got to bring great efficiencies—not just buying in large volumes, but efficiencies throughout the system.


Take something as basic as a can of peaches. If you go into a supermarket, you’d expect to find three or four brand names plus perhaps a private label. You’d then find four or five different sizes for each of those brands. Ten you’d find sliced and diced and halves, and then


108 Army AL&T Magazine


you’d have heavy syrup and light syrup. In the end, you might have 40 different choices just of canned peaches.


Part of our ability to sell at such low markups is to identify those fast-selling items that not only provide great quality but also the very lowest price—not just the purchase price but also the lowest cost in terms of logistics: shipping and han- dling by both the manufacturer and the employees at Costco, including stocking and ringing up the goods through the cash register.


At Costco, we’re going to sell what’s referred to in the business as a No. 10 can, which would be for a restaurant, commissary or day-care center, as well as a six-pack of one of the leading national


brands. Maybe it’s


sliced, maybe it’s


diced, but it’s going to be the regular consumer-size can. Unless your 8- or 10-year-old is having a birthday party and you need the peach halves so you can put whipped cream and a cherry on top, nine times out of 10, the person buying that can of peaches is going to bring it home, open it up and put it on the table for dinner with the family. And you’re generally indifferent whether it’s one of those three leading brands or the private label, as long as you know it’s going to be high-quality.


So what we’ve done is say, Okay, we’re not going to have 40 different choices of canned peaches. One, we don’t have to make 40 different buying decisions every week. Two, in a supermarket chain, the


STAYING AHEAD GLOBALLY


Costco operates 622 warehouses in eight countries. In 2012, the company ranked No. 1 among warehouse stores with a 46.5 percent market share, compared with 38.4 percent for Sam’s Club, a unit of Wal-Mart Stores Inc. Costco is the second-largest retailer in the country and the seventh- largest in the world by sales, as well as ranking No. 24 on the Fortune 500 list.


April–June 2013


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