Costco vs. Walmart #86
Looking into what makes Costco different vs. Walmart, Bezos' last shareholder letter, the decline of the middle-class VC investor
Costco vs. Walmart
Business Breakdowns by Colossus (hosted by Patrick O'Shaughnessy) is a phenomenal resource for those who are looking for breakdowns into different businesses. So far, they've looked into Shopify, Chipotle, Alibaba, and Costco.
The breakdown on Costco really stood out to me. As far as retailers go, they don't get the same type of attention that other retailers (e.g. Walmart, Amazon) despite operating the 2nd largest chain in North America. Costco's long-term approach, operational discipline, and management style are significantly under-reported and I'm glad that there is a resource that shines some light on the business.
From my days of working at Walmart and trying to come up with ideas to reinvent the supercentre, there was a lot of dialogue on how to match Costco's productivity. In a lot of ways, Walmart's approach stood in direct conflict with the way Costco operates.
The key metric that really got everyone's attention internally was how far ahead Costco was in terms of square foot productivity (sales/sqft). Some of this was driven by Walmart's historical focus on general merchandise vs. fresh food - a blend that has now flipped to focus more on food.
However, the vast majority of these differences were driven by the complexities of having a significantly larger assortment of goods. By supporting a broader assortment, you introduce an incredible amount of complexities into the store's supply chain. While things may appear to be fine on paper, each store ends up providing an incredibly different experience.
On the flip side, Costco has a much easier time managing its assortment and is, therefore, able to have an extremely consistent experience between each store.
A rough heuristic that helps demonstrate this is the number of decisions that a store manager at Walmart would need to make vs. one that manages a Costco Warehouse.
Here’s a quick summary of the key differences between Walmart and Costco.
While Colossus' breakdown provides a number of resources into the story of Costco, I found this video featuring Costco's co-founder and long-time CEO - Jim Sinegal to be very illuminating.
Jeff Bezos' Last Shareholder Letter as CEO
This is a must-read. At a time when big tech companies are getting a lot of heat from regulators, Bezos' letter really dives into the value they've created for all stakeholders (not just shareholders). The scale that Amazon has achieved across all its business lines is remarkable.
His last point was probably the most important and applies to life in general.
"We all know that distinctiveness – originality – is valuable. We are all taught to “be yourself.” What I’m really asking you to do is to embrace and be realistic about how much energy it takes to maintain that distinctiveness. The world wants you to be typical – in a thousand ways, it pulls at you. Don’t let it happen.
You have to pay a price for your distinctiveness, and it’s worth it. The fairy tale version of “be yourself” is that all the pain stops as soon as you allow your distinctiveness to shine. That version is misleading. Being yourself is worth it, but don’t expect it to be easy or free. You’ll have to put energy into it continuously.
The world will always try to make Amazon more typical – to bring us into equilibrium with our environment. It will take continuous effort, but we can and must be better than that."
The Tiger Phenomenon
For those of you into tech investing, this is also a must-read. Great tech businesses continue to trade and earn valuations at an incredible premium. As a result, more money has flowed into the market, specifically from larger players (Tiger Global gets the most attention). This has created an environment where tech investors need to deploy more capital at a higher velocity or find other ways to provide value to founders.
So what does this mean? Just like everything else, the 'middle-class' of VC investors, in this case, will increasingly lose out on deals.
