Costco's International Growth Opportunity

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I’ll start with Costco International margins. The international locations generate better margins than the US locations, which is very unusual. From what I could gather, some people have said to me, it’s lower wages or healthcare insurance costs which, apparently, makes a big difference. But I also guess those benefits will be offset by lower pricing internationally, versus the US. To me, it seems as if there is a missing element. Is it lower gas sales, potentially, because that is almost a loss leader? Would that make a difference in margins? In your experience, what makes the international profitability that much better?

There are times when they would have it declining so fast in cost that their margin would be increased because keeping up with that is difficult, as they don’t run the tanks empty. Conversely, on the increase, the same thing applies; they would get hurt on margin. But they do not use gas as a loss leader. Every item in Costco, including every gallon of gas, stands on its own and is sold at its associated cost, with a margin cap that is established by the company and strongly adhered to.

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I’ll start with Costco International margins. The international locations generate better margins than the US locations, which is very unusual. From what I could gather, some people have said to me, it’s lower wages or healthcare insurance costs which, apparently, makes a big difference. But I also guess those benefits will be offset by lower pricing internationally, versus the US. To me, it seems as if there is a missing element. Is it lower gas sales, potentially, because that is almost a loss leader? Would that make a difference in margins? In your experience, what makes the international profitability that much better?

To get to why do they make more margin, if you were to see foot traffic in some nations, other than America, you would see that the income or the membership is significantly higher in some nations because the populous and the sheer volume of foot traffic going through those buildings is a multiple of what you see in the US nation. That enhances margin. It goes straight to the bottom line. Reading the financial reports, you can often see that the margin on the goods may yield the company, as a net, approximately 1%, after everything is paid. All of the membership revenue, added as profit to the company, they may make somewhere between 2.5% to 3.5% net margin, depending on all the economic conditions that spin out from the current landscape.

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In terms of international expansion, Iceland was a huge runaway success, as was the first opening in China. Usually, international expansion is difficult and that was one of the problems that Walmart, in their early days, ran into. Their key competitive advantages of buying on massive scale, didn’t carry internationally because people demanded different products internationally. What makes Costco’s international execution so successful and what drives the ability to execute well when coming to a new country and opening new locations, internationally?

They opened with a tire shop and when they came to town, to open the tire shop, their pricing on their tires was so shocking to the new members and then the members who were telling all their friends who weren’t members yet about their tire prices. There had a been a local tire shop owner that had a business, in Iceland – I believe it was in Reykjavik – for three generations and their pricing was, I believe, approximately fivefold of what Costco was selling their tires for. They didn’t even lower their pricing immediately. People were starting to ask them questions as to why they were pricing so high. They suddenly did a big news blitz and lowered their pricing to match Costco. When people asked if they were concerned about going out of business they said, no, we can afford to do this.

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