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We have recently published a piece on Costco and are discussing the history of this business. Sol Price, who is somewhat of a legend, appears to be a focal point in your research. I noticed you've gone through his biography in great detail. It's an incredible book.

One interesting aspect of that book, before we delve into the research piece, is the realization that there are hardly any original ideas. This may not be news to many, but it's worth noting.

Sol Price was a pioneer in his field. The book, written by his son, reveals that he replicated the Fedco model. Fedco was the original model in the warehouse business, in the fifties, primarily selling to government employees. Price visited a Fedco store in Los Angeles, or somewhere similar, and was inspired to create something similar. Fedco, however, didn't want him to do that.

As a result, he opened FedMart, essentially copying the model. What's intriguing is that despite having a great idea and identifying a new market to replicate it in, it didn't work out. He ended up selling FedMart to a German family who essentially dismantled it. This demonstrates the power of focus, which he seemed to lose.

It makes you question how well he understood the power of the model. He must have understood it to some extent, as he later established Price Club. However, his history with FedMart suggests that he became too attracted to the real estate side of the business. He lost focus on operating the retail stores, which led to the sale of the business to the German family. They broke it up and a series of litigations followed.

He then started Price Club, but again lost focus. Jim Sinegal, on the other hand, recognized the power of the model and perhaps was more rigorous and focused. This highlights the importance of execution and focus. When you truly understand and have conviction in the power of a model, you shouldn't be distracted by other aspects, like real estate, for instance.

This lack of focus on Price's part led to Sinegal and Costco, or Price Costco as it was initially known, becoming more of Costco than Price Club. This could be because Price was either not as interested or not as focused as Jim in truly understanding the model. The philosophy of this model is to keep prices low, maximize margin, pass savings back to the customer, earn money from membership sales, maintain simple warehouses, and own the land.

In light of Sol Price's career history, the history of FedMart, and the history of Price Club, one cannot help but have a deep respect for Jim Sinegal and his remarkable ability for execution and execution at scale. The culture he created, which still seems unwavering to this day, is focused on a few foundational principles; the code of ethics, the rights of merchandising. So we've looked at that historically. We've published some material on Costco's culture and have been pretty interested in the transition from Jim to Craig's leadership and whether the formula is as alive as it ever was. That's a bit of another story. So we've just published on Costco's international business and specifically within that, the European growth opportunity. Why now?

I've been observing Costco for a long time, particularly their new store additions. I believe they added around 20 to 25 stores a year, with the majority still in the US and Canada. As of last year, they had approximately 840 stores, nearly 600 in the US and over a hundred in Canada. They're adding, let's say, 16 to 18 per year in those two regions. The long-term opportunity for Costco over the next 30 to 40 years is clearly international, hence the interest in exploring the markets they're in. They have about 150 stores internationally, with a rough mix of 40 in Mexico, 29 in the UK, 31 in Japan, around 30 in Taiwan and Korea, 13 in Australia, seven in Europe, and two in China.

What's always intrigued me is that, despite living in London, they haven't added a store here since 2016, in the UK. They have 29 stores in the UK and only seven in Europe, two in France, four in Spain, and one in Iceland. The GDP per capita and population density in Europe suggest a huge opportunity for store additions, including the UK. If you look at Aldi and Lidl, each with a thousand stores, although they have different formats and are mainly food-focused, the UK is a perfect demographic and GDP per capita market for Costco. However, they haven't added a store, and I've always wondered why.

Our team managed to find a great executive with 30 to 40 years of experience in this field, dating back to the FedMart days. I spent a lot of time interviewing executives who effectively ran the UK and Europe. This is a perfect example of the type of work we're looking to do on an enterprise level, which is very different from what we believe is out there in the industry. We're not experts on any one company. I'm certainly not an expert on Costco, even though I'm a member. But what we can do is source the best global executives and curate knowledge to gain insight into how these businesses really work. We're passionate about mastering the art of primary research to uncover these insights and ultimately invest in them.

We spent a lot of time with executives to answer questions like, why is the UK not growing? What is opportunity in the UK? What is the history of the business in the UK? Why is there only seven stores in Europe? It's a huge market. What is opportunity there? And how should we frame Costco's European opportunity relative to the US and Canada? And so that was the backdrop and kind of really the impetus of this piece.

There's a degree of serendipity here. We've been interested in these questions for some time. In our enterprise coverage, we've embarked on deeper research and built a system to undertake it. This expert emerged from a project we initiated with a simple brief. Let's find people that have been at Costco, let's find everyone we can that's been at this business for over 30 years.

There must be quite a few of them.

Indeed, there are a few. You've been showing interest and asking these questions for a while. When this executive came up, there was a clear alignment and opportunity. I recall pre-qualifying and onboarding him in February this year. I realized that we had found someone who was central to the European story.

I was quite excited and passed the baton to you for a proper dive in. I mention this because conducting this kind of work, doing proper fieldwork, requires working hypotheses and questions. It also requires patience to wait for the right person whose expertise aligns with the questions we're exploring.

It's easy to try to fit an executive into a structure that makes you feel like you're getting answers to your questions. However, the executive might only be the third or fourth most relevant person to speak to. In short, we found a couple of individuals, one of whom was the right person to delve into this with.

Part of the strategy, if you will, involves finding companies that we can study for a long time. We're constantly researching Costco and other great companies. Over the years, this not only builds our knowledge but also allows us to understand the people involved and their relationships, and to get referrals. Our aim, although it may sound trivial, is to build relationships with these companies.

We've been doing this for a while and have found several key individuals. One interesting aspect of our research was our desire to understand the history of the UK and the European market.

One insight from this research is the uniqueness of the UK. The planning guidelines, industrial and retail land use consent requirements that retailers and companies must comply with are very different. There are similarities with the original Price Club and even FedMart's business model from 40 to 50 years ago, which Costco, or Price Costco, moved away from as it was limiting their growth.

Interestingly, Costco now finds itself in a similar situation to the original Price Club. Our research covers the history of the UK, its differences from the US, the different planning, consent, and usage of industrial versus retail land, and comparisons with different markets.

This research also highlights the uniqueness of Costco. Costco, Price Club, and similar businesses started as wholesalers, selling to retail stores and business owners. However, this model didn't work until they opened up membership to a wider audience. When they dropped the qualification that you can only be a member if you are a government employee, NHS or whatever, military, etc, that's when it actually worked. Costco is a unique model that bridges wholesale and retail. It offers wholesale-priced merchandise to everyone on retail and industrial property in some markets. Despite being called Costco Wholesale, it's not a wholesaler anymore.

Part of what I learned from this research is the intricacies of specific market requirements around planning guidelines, consent, how food and non-food items can be sold, the size of the store required in certain markets, government structure, and how sales tax is used.

How does this differ in the UK versus the US, Taiwan, and Korea? Where does VAT go in the UK? How does this affect the attractiveness of having a Costco, a big box store, on retail or industrial land? All these intricacies define the opportunity in the UK and Europe, and somewhat explain why it's been difficult for Costco.

For the rest of the story, we invite people to read the piece itself.

We have analyzed the UK filings and specifically broken down Costco's data. One particularly interesting point is that we have access to the UK filings of Costco UK, which includes both online and offline sales, as well as gas. Costco's reporting structure includes the US, Canada, and international segments. The international segment includes 29 UK stores. Since we have the UK accounts, we can separate the UK data from the international segment. Consequently, we now present four different segments; US, Canada, UK and international, excluding UK.

I'm not certain if Costco would want to disclose how profitable some of their businesses are in Asia and other regions. It's fascinating to consider if these margins are accurate and stable, and if Costco's competitive position is sustainable internationally, excluding the UK.

If this is the case, it could potentially provide a significant boost for gross margins over the next 20 years. We might see Costco achieving a slightly higher return on invested capital over time, if these higher margins and higher sales per store prove to be sustainable internationally, outside the UK.

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