Adventures in Retailing Part IX:
Costco and Sam's Club
Ross M. Miller
Miller Risk Advisors
August 28, 2006
Ever since I began this perceptual series of
commentaries about the state of retailing in the world, I have received
periodic requests to write about Costco. Indeed, these requests have
outnumbered all other requests that I have received combined. I am not a
Costco member myself if only because the nearest store is over 100 miles
away. Few hedge managers, you see, make permanent residence in my part of
Upstate New York and those with second, third, fourth, and fifth homes up
here apparently do not shop at Costco. On a recent trip to Fairfield
County, Connecticut, where many hedge fund managers have their first
homes, I paid a brief visit to Costco
in an attempt to appease my audience such as it is.
The whole club-store scene is old hat to me. Somewhere
in a box in the attic is my circa 1972 Fedco card. I paid $1 for it and it
gave me a lifetime membership to Fedco, which in this case meant the
store's lifetime and not mine.
As a Caltech undergrad, I frequented the Pasadena Fedco
store on Colorado Boulevard. Once a week or so, the call would go out in
the Dabney House courtyard
for a mini-road-trip there. Fedco was like a normal discount store of the
day with several strange items thrown into the mix, especially in the
grocery section. The prices were lower than Safeway's and many of the same
items were available in the same size packages. In addition, they sold
cheap cooked hot dogs and other junk food in what was a precursor to the
modern food court. The store was multicultural long before multicultural
was even a concept.
Not just anyone could join Fedco. It started with postal
employees and grew from there. I qualified for membership as a student.
Fedco was a nonprofit organization; however, it could not compete in a
Wal-Mart world, so it went bankrupt in 1999 and the Pasadena store became
a Target. So it goes.
Post-Fedco, I would next set foot into a club store in
1986. I was presenting a paper at Western Finance Association meetings in
Colorado Springs and, when not otherwise engaged, I would drive around the
area in my rental car. There I discovered one of the first Sam's Clubs. I
got a free "lifetime" membership card (also somewhere in the
attic) as an inducement to join. It would be nearly ten years until Sam's
would venture into my neck of the woods. Soon after their first local
store opened, I marched into it with my lifetime membership club and they
looked at me as if I had printed it up myself. I boycotted Sam's Club for
the next five years, which had no effect on them and probably cost me
hundreds of dollars. I am now a super-duper gold business circle member of
Sam's Club in good standing. The checkout people, under penalty of death,
call me by name.
In theory, one needs a membership card to get into
Costco. As a former master of the art of "social engineering,"
getting into the store without a card posed no problem and was achieved
without violating any laws in the process. My first impression was that
Sam's Club did a good job of emulating Costco (or its predecessor store,
Price Club) except that within seconds of my entering, a guy in the main
aisle asked me if I wanted cell phone service. This is something that
never happened to me at Sam's. Later in my visit, I encountered another
hawker in the food section.
For readers outside the reach of Costco and Sam's Club,
a word of explanation is perhaps in order at this point. These are large
"warehouse" stores with high ceilings, exposed fixtures, and
goods stacked nearly to the ceiling in places. While some sections of the
store—electronics, books, videos, etc.—resemble a normal discount
store's selection—many items, especially food, are sold in special
warehouse size packages. While I may have been able to manage it without
gastrointestinal distress at some earlier point in my life, Sam's Club has
taught me that it is not a good idea to eat an entire 44-ounce bag of
bagel chips at a single sitting. I have also learned that five pounds of
peeled garlic makes an excellent medium for those wishing to grow mold.
(An obscure fact about me: I spent a good chunk of my sophomore year at
Caltech growing an orange bread mold, Neurospora crassa, in the biology
lab as part of a research project exploring the possibility that life
could exist under Martian conditions.)
Costco's claim to fame is that it carries high-ticket
items in a bargain-basement setting. I was able to confirm almost
immediately when I came across a Suzuki "mini grande" digital
piano selling for $1,999.99. I peruse the electronic instrument section of
Sam's Club on a regular basis and their comparable offering tops out at
around $500. I guess that if you catch the market on a good day, $1,999.99
plus Connecticut sales tax is not that much to pay for an impulse purchase
that can bring such joy. In general, Costco's electronics section had both
better merchandise and a better selection than Sam's Club; however,
nothing good enough to tempt me from my two primary electronics vendors:
Newegg.com and Amazon.com.
Still a Caltech student at heart, I went from the
electronics sections straight to the food. It definitely has more of a
"gourmet" tilt than Sam's and vastly better produce. Still, the
place shared a major deficiency with the Walton crew—no K-cups. And no
Keurig coffee makers either. A search for "Keurig" on Costco.com
yields nada. And if they did have one, I doubt that they could have beaten
the price that I got from Amazon.com on a day when they were doing their
$25 off major housewares sales. (Maybe the guy who replaces Bill Gates as
chief software architect at Microsoft can make it so that Word recognizes
that "housewares" is a word and does not suggest
"housewives" in its place even if it would improve the previous
While the Costco cult vastly outnumbers the Keurig
coffee cult, we are not to be trifled with. Back in the 1980s, David Bowie
and Jane Curtin used to do speedy (in the amphetamine sense) commercials
promoting the "young coffee achiever" lifestyle (or so I
imagined). Now, I not only love coffee, I have relatives in the business,
so I learned the way that the pros make freshly-ground coffee at any early
age, a process that is approximated by the use of a "French
press" device. There are two problems with this way of making coffee.
First, it requires multiple steps and takes a good bit of elapsed time.
Second, while unfiltered coffee is the only way to go for a genuine coffee
experience (are you listening, Starbucks?), there is growing evidence that
its negative health consequences may rival those of inhaling bagel chips.
The Keurig electric coffee device uses special sealed pods, called K-cups,
to make a drinkable filtered cup of coffee in a single step that takes
about 30 seconds and creates absolute no mess. There are other, similar
devices on the market, but because of freshness and messiness issues they
are not the same. The appeal of such a product to hedge fund managers and
other Fairfield County denizens should be obvious. (In case you are
wondering, I am writing this at 1:14 am and had my last cup of coffee for
the day over eleven hours ago—it is quite likely that if I had more than
two cups of coffee a day that I would never sleep.)
It is possible that neither Sam's Club nor Costco is
allowed to carry these precious pods because of exclusively issues;
nonetheless, my local Target and Bed, Bath, and Beyond both stock a hefty
supply of them and. they are available in bulk all over the Internet.
Since Costco flunked the Keurig test, there was no point
in lingering there any longer. The egress shared Sam's homey touch of
checking every shopper's receipt to make sure that he or she did not
smuggle a piano out of the store. Having neither purchased nor shoplifted
anything, I waltzed past the guard and into the daylight. Costco may one
day colonize my part of the world so that I can join in the fun, but I
should survive until then.
Copyright 2006 by Miller Risk Advisors. Permission
granted to forward by electronic means and to excerpt or broadcast 250
words or less provided a citation is made to www.millerrisk.com.