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Every October, thousands of dead strip malls, Blockbusters, and Radioshacks crawl out of their graves and spring to life with orangesigns.
While Halloween spending has steadily grownin recent years, the number of pop-up stores has absolutely exploded.
Companies like Party City and Spirit Halloweenhave no trouble finding empty 50, 60, 000 square-foot buildings in the middle of town.
For that, they have to thank the so-calledRetail Apocalypse.
In the last three years alone, Sears lost142 of its stores, Toys-R-Us filed for bankruptcy, J.
Penney lost about 200, Payless ShoeSourceclosed all 2, 000, and RadioShack, about a thousand.
The obvious question is Why? and the obviousanswer is Amazon.
But not exactly.
It’s not retail stores that are dying.
All these brands have something in common:they suck – usually because they failed to adapt.
Sears tried to do everything and ended updoing everything… terribly, J.
Penney forgot its customers, and Toys-R-Us thought the internet was a fad.
Millennials didn’t “kill” your business, they stopped putting up with its 18th-century practices.
Other companies are thriving, like Ross, Lush, Aldi and Dollar General.
One, specifically, Costco – succeeds againstall odds not by copying Amazon but doing almost the opposite.
While both sell just about everything – fromfood, to tires, vacations, and lawnmowers, Costco’s strategy could hardly be more different, and that’s exactly why Amazon should be paying attention.
Most grocery stores – cheap, premium, big, and small – have the same basic strategy.
They know everyone buys milk, eggs, bread, and bananas, and almost everyone knows what they cost.
So they lure customers in with cheap pricesfor these staples, even at a loss, and then profit from their large volume, repeat business.
Costco is no different, with its five dollarrotisserie chicken and bargain gas stations, which usually attract long lines.
But unlike almost all of its competitors, Costco’s deals aren’t aimed at the general public.
While the average grocery store does anythingto get you in the door, Costco charges you.
You won’t even be allowed inside withouta membership, which starts at $60 a year, or $120 for Gold Star Executive.
This, like Amazon Prime, triggers a sunk-costfallacy.
Once you’ve already paid the 60, $120, youfeel invested – why shop around when you already have Prime? By not using it, you think, you’re justwasting money.
Soon, you stop comparing prices and automaticallygo to Amazon.
But what’s really genius about Costco’smembership is that it’s mandatory.
Amazon users will self-sort – each individuallycalculating whether buying Prime will save them enough money to be worth it.
This does create loyalty but doesn’t fundamentallychange the company’s business model.
Costco, on the other hand, makes 75% of itsmoney from membership fees.
Membership isn’t its loyalty program.
Membership is its business model.
In 2018, Costco had 94 million members, alittle less than Prime’s 100 million, despite having only 700 stores around the world.
That’s significantly more than cheaper, digital subscriptions like Apple’s Music’s 60 million or Hulu’s 25, and yet 90% reneweach year.
Why? Because its prices are so, ridiculously low.
Not because it’s a charity or makes moneyfrom more expensive items while you’re already there, but because it’s incentives are alignedwith yours.
Its first priority is getting its customersto renew their membership – which means impressing them time after time with low prices and highquality.
Raising prices would only generate a few centstoday and cost the company $60 next year.
That’s why it has a self-imposed rule: Noitem can be marked up more than 15%, or 14% for branded items, giving it an overall averagemarkup of 11%, far lower than Walmart’s 24%, 30 across all supermarkets, or Home Depot’s35.
Almost everything about its stores is designedto accomplish this goal.
True to its name, Costco stores are, in everysense of the word, warehouses – there is no ”back-room”.
Instead, forklifts move pallets of productsdirectly onto store shelves.
There are no fancy decorations and aislesdeliberately feel crowded – basically the opposite of an Apple store.
But for as big as its warehouses are, theirselection is surprisingly sparse.
Your neighborhood supermarket will sell, onaverage, about 30, 000 unique items, a Walmart Supercenter, 140, 000, but Costco, only about4, 000.
Many of its stores have a gas station, pharmacy, hearing aid center, optometrist, photo processing center, tire garage, liquor store, and foodcourt, but for each “kind” of item, there will usually be only one or two choices.
Rather than paralyzing shoppers with an endlessrow of similar brands, Costco offers large quantities of whatever it considers the highestquality.
Not only does this make shopping and stockingshelves simpler, but it gives Costco immense buying power, and by extension, immense negotiatingleverage with its suppliers.
Companies want so badly to be the one or twochoices at Costco, they’ll lower prices and work to adapt their product to its needs.
At one point, for example, Costco reengineereda container of cashews so it could fit more in the same space, ultimately saving 24, 000pallets a year – money it passed onto the customer.
If Costco is unsatisfied with a product, itjust creates its own.
Its store brand, Kirkland Signature, accountsfor about 25% of its annual sales and has a reputation for being high quality.
The other major ingredient to Costco’s successis the way it encourages high spending.
Because getting around the store is so confusing, you have no choice but to wander through most of the aisles.
The large quantities attract business owners, who makeup just over one third of its total members, but account for two-thirds of itssales.
The $60 up-front fee, meanwhile, selects foran affluent demographic, with an average household income of nearly $100, 000.
And that’s the genius of Costco: it turnsnearly every seeming obstacle into a competitive advantage.
Its membership fee should make acquiring newcustomers fatally difficult.
Instead, it creates loyal, deep-pocketed patronswho praise the company for its free samples, generous return policy, and, of course, lowprices.
Its cost-saving warehouse layout should confuseand annoy shoppers.
Instead, it makes them feel like deal-hunters, much the same way IKEA’s do-it-yourself model makes its customers proud of their work.
It’s a winning formula that’s now beingexported to 13 countries, including, as of this year, China.
Its grand opening in Shanghai was so busythat the store had to temporarily close for safety.
Ultimately, Costco will never be as big orexciting as Amazon, and that’s largely why it’s so adored.
Shareholders love it as a solid low-risk, predictable long-term investment.
And its customers can feel good about itslow prices knowing they don’t come at the expense of workers.
While Amazon ruthlessly sacrifices everythingfor lower prices, Costco sees its employees as a crucial ingredient to its success.
The average wage of all 245, 000 workers is$21 an hour, double the U.
It also gives better health insurance andretirement benefits, which Costco is rewarded for with employees three times more productive.
In an era of overvalued startups, recklessdesire for growth, and questionable business practices, Costco is something else entirely:refreshingly boring.
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Thanks to Brilliant and to you for watchingthis video.