This is the second in series of Retail is Detail. The first post can be found here
If it takes 5 machines 5 minutes to make 5 widgets
How long would it take
100 machines to makes 100 widgets? 100 minutes or 5 minutes
In a lake, there is a patch of lily pads. Every day, the patch doubles in size.
If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?
24 days or 47 days
A group of 40 Princeton students were given this test. Half of them saw the questions in clear and legible fonts. And the rest half saw it in small fonts, washed out gray print.
90% of the students who saw the questions in clear prints made atleast 1 mistake.
ONLY 37% of the students who saw the questions in faded unreadable fonts made a mistake.
Whats happening here?
Kahnemann explains it by describing how bad ineligible fonts are inducing cognitive strain on our brain. We are taking extra effort to read it. We are furrowing our brows and making intelligent guesses about what a font can really mean. So what it does, is accidentally triggers our System 2- the more rational, intelligent, calculative part of our psyche on.
“accidentally triggers”– note the phrase ladies and gentlemen. Our rational, calculative brain is a slow guy. He doesn’t like to work unnecessarily.It can either be consciously prodded into working or accidentally triggered into it.
When fonts were difficult to understand, our System 2 swung into action and we got better answers.
The answers of the previous two questions are 5 minutes and 47 days respectively. I played a trick on you by bolding out the wrong ones.
What has it got to do with COSTCO?
COSTCO doesn’t give its customers too many choices. While others thrive on offerring 10-15 choices for one particular item, COSTCO limits itself to 5-6.
This lack of choice lowers people’s tendency to judge and think deep. This leads to its customers doing more impulsive shopping. And inflates the individual billing rate.
Costco goes one step ahead and does one better on WALMART. If you have read my thesis report on retailing ,I mentioned at one place:
A retailer is a dispenser of shopping experience. However a retailer can’t charge for that experience. She has to pass on the costs to the products and should reflect in its profit margins
Not WMT,not Target, not JC Penney or anyone else, no one can charge money for that experience. But COSTCO does. And COSTCO does it so well, that people pay to shop at COSTCO. This generates a tremendous amount of float for COSTCO.
From their 10-K:
Our membership format is designed to reinforce member loyalty and provide a continuing source of membership fee revenue. Members can utilize their membership at any Costco warehouse location in any country. We have two primary types of members: Business and Gold Star (individual). Our member renewal rate was approximately 89.7% in the U.S. and Canada, and approximately 86.4% on a worldwide basis in 2012, consistent with recent years. The renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Businesses, including individuals with a business license, retail sales license or other evidence of business existence, may become Business members. Business members generally pay an annual membership fee of approximately $55 for the primary card-holder, with add-on membership cards available for an annual fee of approximately $55 each. Many of our business members also shop at Costco for their personal needs. Gold Star memberships are also available for an annual fee of approximately $55 to individuals who may not qualify for a Business membership. All paid memberships include a free household card.
Can be found here
Effective November 1, 2011, for new members, and January 1, 2012, for renewing members, we increased our annual membership fee by $5 for U.S. Goldstar (individual), Business, Business Add-on and Canada Business members to $55. Our U.S. and Canada Executive Membership annual fee increased from $100 to $110 annually
So how do they recognise it in accounting?
Membership fee revenue represents annual membership fees paid by substantially all of the Company’s members. The Company accounts for membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue is recognized ratably over the one-year membership period.
So how does it get reflected in their financials?
So much so that, their liabilities more than make up their inventories, allowing them to operate in a close to zero current account as possible.
This is how they are inverting.
Munger gives another aspect of how
Jeremy Siegel James Sinegal went to use inverting the business model of COSTCO. He said Siegel Sinegal started by asking what kind of customers he wouldn’t want. The answer was easy. Those who park their vehicles for hours at end in the store’s parking lot, spend hours in the store and yet buy nothing. He wouldn’t want the penny pinching folks from whom he cant charge anything extra.
So he targets exclusively the upwardly mobile $100,000+ annual income population.
And boy, is he minting money!
WMT and COSTCO are different giants. They eat different food (read customers) and hence they are not straight away direct head to head customers. But their similarities are hard to ignore.
1. Both have fanatical management
2. Both have thrived by bringing people onto their “platform”- WMT by opening stores in a radius of 2 kms for an average JOE. COSTCO by bringing in membership cards to shop there.
3. Both have grown by laser sharp targeting. WMT grew on rural America, COSTCO growing on upwardly mobile America. WMT whenever it tried to move out of its base has paid. I am not aware of COSTCO making such mistakes. (Think: Sam’s Club)
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