Adventures in Retailing Part IX:
Costco and Sam's Club

by

Ross M. Miller
Miller Risk Advisors
www.millerrisk.com
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 sentence greatly.)

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.