Retail is Detail-II

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:

Membership Policy
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

From here

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.

From here.

So how does it get reflected in their financials?

Costco-1

 

 

 

Costco-2

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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Mastering the basics: the long hard way to mastery

I came across this book by Burger and Starbird named “The 5 Elements of Effective Thinking“, where the authors reflect deeply on how to bring efficacy in our thinking process.

Too much of our time is spent ignoring and underestimating the basics. Too much of our time is spent focussing on the clutter around the essence. And too much of our time is spent seeing things through a constant peephole of experience and knowledge.

If you can’t solve a problem, then there is an easier problem you can’t solve: find it.
—George Polya

Burger  and Starbird highlight this by narrating the story of Tony Plog, a renowned trumpet virtuoso. During a class of other extremely talented and trained soloists, he asked them to play their virtuoso piece. Each one of them played wonderfully. And then Plog asks them to play a very easy warm up exercise. In contrast they sound childish. The inherent synergy between the notes were absent. It sounded as remote from the previous piece, as the senses would allow.  The author narrates:

After they played the simple phrase, Tony, for the first time during the lesson, picked up the trumpet. He played that same phrase, but when he played it, it was not childish. It was exquisite. Each note was a rich, delightful sound. He gave the small phrase a delicate shape, revealing a flowing sense of dynamics that enabled us to hear meaning in those simple notes.

Deep work on simple, basic ideas helps to build true virtuosity—not just in music but in everything.

Burger and Starbird drive the point still harder by switching from arts to science.

“Today, when math teachers are asked what makes calculus so difficult to teach, most reply, “My students don’t know the basic mathematics that they saw in the eighth or ninth grade.

 

The authors comment taking the step ahead, that to really solve a problem one should focus on the very essence. Renowned masters like Pablo Picasso , Durer routinely think in this way. In his tour de force “The Bull”, Picasso showcased this idea.

From real to abstract- a tourde force in minimalism

From real to abstract- a tour de force in minimalism

 By systematically ignoring one distraction after another, you can turn your attention to more central (often initially invisible) themes. After you clear the clutter, what remains will clarify understanding and open the door to creating new ideas. Remember, you may not be able to see everything, but you can certainly ignore most things

Its a constant challenge in the modern world to actively identify and discourage bias. Today we have only facts and no insight. We have endless access to System 1 thinking and rare access to System 2 insight. This is because System 2 requires time, energy and strong desire. System 1 of our mind represents knee jerk reactionism.

In this aspect Munger commented that, we need mental models else we will be the proverbial “man with the hammer” seeing only nails to hit !

Whenever you “see” an issue or “understand” a concept, be conscious of the lens through which you’re viewing the subject. You should assume you’re introducing bias. The challenge remains to identify and let go of that bias or the assumptions you bring, and actively work to see and understand the subject anew