The Pomp Podcast - #606 Why Costco Is One of the Best Businesses in the World

Episode Date: July 14, 2021

Alex Morris is the man behind The Science of Hitting, a new equity research offering. Alex has an MBA and CFA, but really cut his teeth by publishing his equity research publicly for everyone to scrutinize. You can subscribe to his equity research here: https://thescienceofhitting.substack.com/ In this conversation, we discuss the Costco story, membership model, scale efficiency, customer renewal rates, revenue per warehouse, international expansion, Amazon Prime, and the infamous hot dog story.  ======================= Circle is a global financial technology firm that enables businesses of all sizes to harness the power of stablecoins and public blockchains for payments, commerce and financial applications worldwide. Circle is also a principal developer of USD Coin (USDC), the fastest growing, fully reserved and regulated dollar stablecoin in the world. The free Circle Account and suite of platform API services bridge the gap between traditional payments and crypto for trading, DeFi, and NFT marketplaces. Create seamless, user-friendly, mainstream customer experiences with crypto-native infrastructure under the hood with Circle. Learn more at circle.com ======================= Exodus is an absolute game changer in the crypto wallet space, and we’ve teamed up to offer an exclusive discount for you, as listeners of the podcast. Sign up for Exodus today using my promo code Exodus.com/pomp. This is a no brainer for both newcomers and crypto heavyweights - go sign up today.  ======================= Public Rec is on a mission to make comfort look good. Their fan-favorite Flex Short is the ultimate crossover short you’ll need all summer long. From the beach to the gym, this quick-drying short has you covered. Comfort starts with a better fit. Free shipping. Free returns. Visit www.publicrec.com/pomp and use POMP at checkout for 10% off!

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Alex Morris is the man behind the science of hitting, a new equity research offering. Alex has an MBA and a CFA, but really cut his teeth by publishing his equity research publicly for everyone to scrutinize. You can subscribe to his equity research in the link in the description. In this conversation, we discussed the Costco story, the membership model, scale efficiencies, customer renewal rates, revenue per warehouse, international expansion, Amazon Prime, and the infamous hot dog story. I'm fascinated with Costco as a business,

and Alex did a great job breaking it down. I hope that you enjoyed this episode. Before we get into this episode, though, I want to quickly talk about our sponsors. First up are my friends over at Circle. Circle is a global financial technology firm that enables businesses of all sizes to harness the power of stable coins and public blockchains for payments, commerce, and financial applications worldwide. Circle is also a principal developer of USD coin, USDC, which is the fastest growing regulated, fully reserved dollar stable coin in the world. Now standing at more than $15 billion market cap and adding nearly $300 million of net new digital dollars in circulation every single week. The free Circle account and suite of platform

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the test. Again, Revolut.com slash Pomp to get that $15 reward. Go check it out and let me know what you think. All right, let's get into this episode with Alex. I hope you guys enjoyed this one. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I've got Alex here with me. I'm super excited to do this.

Thank you so much for jumping on. Yeah, thanks for having me. I'm excited to talk Costco. Great company. For sure. So I feel like you're like the Costco nerd now. You told me before you've been reading on it for like a week. I'm personally fascinated by the business. And the reason I wanted to have you come on was I was reading the recent book by William Green called Richer, Wiser, Happier. And in it, it seemed like a bunch of the investors kept saying one of their largest holdings was Costco. And so whether it was Munger, Nick Sleep, et cetera, they just kept talking about how it made up a double digit percentage of their net worth, which not exactly the stock that most people would think about. And so let's maybe just start with what is the Costco story or

how do we go over the last 60, 70 years to get to the business that they've built today? Yeah. So the story really starts in my mind. The story starts in the 1950s when Saul Price, who's now a legend in the retail industry, started something called FedMart. And funny enough, Jim Senegal, who went on to co-found Costco, worked at Fedmore. They said he was bagging groceries. Who knows if that's actually true or not. But so he worked there. Sol Price eventually sold that concept. And in the 70s, he started something called Price Club. And that's kind of considered the start of the membership warehouse club industry. So he ran that for a few years and it went public. And I think when it went public, a bunch of competitors saw just how good of a

businesses could be. So in 82, you had Costco launched, you had Sam's Club launched, which is owned by Walmart. Kmart launched a competitor, BJ's launched that year. So you had a bunch of competitors start that year. And funny enough, Saul Price, the guy who founded Price Club was asked later on by someone, you know, how does it feel to be the father of this industry? And his response to the reporter was, well, I should have wore a condom. So, so everybody, so a bunch of companies got started that year, jump forward a decade in 93, Price Club and Costco merge. So at that point, Jim Senegal, the guy who started his career bagging groceries for Sol Price now took over the leader of the warehouse club industry. So you jump forward

over the next... A lot happened in the 35 years after that, but that's the background on the industry. Got it. And so one, it's great to know that not only is he a great entrepreneur, but he's got a sense of humor as well. But in terms of the model, right? When you talk about kind of this warehouse model or this price discount model, the whole idea is, and I'm going to steal a quote that you put into this piece that you wrote. You basically said, this isn't a tricky business, right? And I think this is Senegal talking. He goes, we just try to sell high quality merchandise at a cost lower than everybody else. So high quality goods at the lowest price possible. Again, pretty simple, but it seemed like that was not exactly the way that

most retailers were acting at the time. Yeah. So I think there's a number of components that go into it. As we were prepping for this call, I was reading something from Nick Sleep, who's a famous investor who owned Costco for a long time. And he was kind of saying, what's Costco's advantage? And he basically said, it's the thousands of small things that they're doing every single day. So some of the things that jump out to me, one, the membership model, people pay to shop at their warehouses. Obviously, there's a component of once you pay for it, you have a reason to go back into the stores and spend money. Another thing, Costco has a very small number of SKUs. They only have about 3,700 SKUs per store compared to someone

like Walmart would have 140,000. So for Costco, that mix is 75% of those SKUs are stuff you'd see every day like peanut butter, eggs, or whatever. And the other quarter is kind of the treasure hunt products. So on those SKUs that are constantly in the stores, you can imagine, you know, if you're in a Walmart, there's going to be Skippy and there's going to be Jif peanut butter and there's going to be different sizes and there's going to be Walmart's brand. But in a Costco, they basically pit those two suppliers against one another and say, basically fight for this shelf space. If you want to be in our stores and be able to serve our customers, you need to give us the best price on your product. So obviously that naturally drives some competition

that is not as prevalent in kind of your typical retailers and then on top of that another huge part for for costco is kirkland signature their private label brand which you know kind of their goal there is to take the nationally branded products and have something that's at least 20 cheaper on comparable quality and over the course of obviously 30 plus years they've consistently met that promise to their cardholders and people have great regard for the brand now. So you see things like in K-Cups, for example, coffee, they spent a couple of years where they ensured the product was organic. They ensured it was free trade. They ensured the cups were recyclable. But also over that period, they cut the price by about 10% per unit. So if you look

at Costco now, a Kirkland K-Cup is going to be like 32 cents. If you want to buy the Starbucks K cup in Costco, where they negotiate a good price for it, it's going to be 40% more expensive. So they just done a fantastic job in terms of private label. So there's other stuff that goes into it, but those are some of the big things that jump out to me. So let's talk about the membership model, because I think that part of what people don't realize is when you look at the financials of the business, almost all the profit is just literally take the number of memberships times the membership cost. And like, that's the profit, right? Everything else is kind of a pass through and essentially at cost. And so this membership, how much does it cost on

an annual basis right now? So they have the two basic memberships are the $60 one, which is the gold star kind of basic level. Then they have an executive membership for 120. But as part of that 120, I think it's up to a thousand bucks of spend. You get 2% back. So if you spend money at Costco, it really makes sense to just do the executive membership. Got it. And if you are a member, I think that's the only way to get in the store, right? You can't actually get in if you're not not a member. But there's this famous story to really hammer home the point of, if you are a member here, we are going to give you the lowest price possible, is this hot dog story, which at this point is literally like folklore, right? But maybe tell us the story of the hot dog and

how seriously they take the price cutting. That's funny enough that you say it's folklore, because when I was writing my article, I wanted to make sure it was actually true. And I did a good amount of digging online. And it's somewhat like most things online. It gets said once and then it's shared a hundred different places, but I, I'm pretty sure it's true. But anyways, the story goes that, uh, Craig Jelinek, who's the current CEO one time, one time came to Senegal and said, you know, listen, we're, we're, we're losing good money here on this hotdog. We need to figure out a way to maybe increase the price by 25 cents or something for this hotdog and this soda. And Senegal turned to him, turned to him and said, if you raise the price, I'll F and kill you.

Um, and he said, figure it out, which subsequently they did Costco for a long time. Hebrew national was the supplier for that hot dog. They went out and built their own facility in LA. And then they eventually built a facility out in Chicago. So the price today is still a dollar 50, just like it's been since they introduced it in 1985. I mean, it's insane given the rise of pretty much every other good in the world. Right. And kind of, especially over the last 18 months with a lot of the monetary stimulus. But what to me is fascinating here is it's one thing to say you're going to have the lowest cost product. Do we have any sense of, do they lose money on some of these products or is it literally they still find a way to kind of break even? So they're not necessarily

making money, but they're also not losing money on whether it's the hot dog or some of these other products that seem just so egregiously underpriced compared to where you could go buy it somewhere else. From what I read, and obviously they would only know internally, but from what I read, they seem to consistently say we want to have a very comparable markup on every item. So a good example of this would be for about five years in Oregon, they stopped selling, I think it was sugar because there was kind of a competitive pressures in that market amongst a bunch of retailers and they were selling below cost. And Costco's perspective was basically, we're not going to sell something at a price where we're not adding value for our

customers because we don't want that to basically weigh negatively on our image. So I don't get the sense that they do a lot of loss leaders. They just price things very competitively across every category. Yeah. And is that low price? That's part of the competitive forces that you talked about where they just pit folks against each other. And then I'm assuming that folks that go to negotiate with them, that's kind of the reputation, right? It's just like, well, we got to give them the best price or we're not going to get into the store. And so naturally you almost get this like filter before people even start negotiating. They already know, you know, what's the lowest that we can sell this thing. Cause that's probably where we're going to end up.

I was reading through the Nick sleep letters and there was a quote that he attributed to Costco in the UK. And it seemed like something they had sent suppliers. And it basically says, if you ever show up to a meeting with us and you're not honest about giving us your best price, we probably won't ever do business with you again. So you better make sure when you come to the table, we're getting the best price. And when you think about it in terms of, you know, going back to the SKU discussion, you know, Walmart in the U S if you include the super centers and Sam's club is about three times larger than Costco is in the U S. But when you break that down on a SKU basis, the number, you know, by individual product line, Costco is selling about $30 million per SKU,

which is about 10 times higher than Walmart. So you can understand how, when they go into these negotiations, Costco is an incredibly important customer. So that's the reason why they can command pricing authority. Yeah. And what is the thought process behind having such fewer SKUs compared to a Walmart? Is it something to do with like the physical space? Is there some kind of strategic or competitive advantage or is it just literally that's what they've always done? And so why change something that works? I think it's just a big part of the business model. You know, I was thinking about it beforehand. Like if you want to, how would someone try to replicate this? Well, Walmart wants to sell everything. If you want to go in there and buy a fishing pool,

you want to be able to get line, you want to be able to get hooks, bait, everything. Costco's perspective is we're just going to sell maybe the one thing that we can sell there that we can really have the best price on. And I think a lot of it is just the entire business model of pitting suppliers and categories basically against one another and always ensuring that they're delivering really high quality merchandise. But you never have to worry that you're paying a bad price, basically. Yeah. It's fascinating to me when you start to think about so many people starting at the same exact time or around that same timeframe, but really having the discipline to stick with, this is the plan. This is how we're going to build this out. And obviously,

it ends up working. There's a third thing that you call out in the analysis that you did. You said that they have best-in-class customer service, employee satisfaction, merchandising, and brand equity. And so that's kind of a catch-all for a couple of different things there. But when you talk about best in class, how do you think about that? How do you measure that? And why is that so important to seeing them be successful? Yeah, I guess you can measure it a number of different ways. On something like employees, they give data, for example, that their employee attrition after year one is around 5%, which in retail, that's unheard of. It's hard to find specific data, but the numbers I've seen

from places like Barron's is probably north of 20% in the rest of retail. So they managed to get employees that want to be there for the long term. I think Jim Senegal likes to say, culture is not an important part of a business. It's the only part of a business. So they take stakeholder satisfaction very seriously and they kind of view shareholder success long-term as a residual from focusing on those other things. Other stuff, which is kind of inherent to the model, like shrink, for example, the amount of product that's stolen from the stores, it's much, much smaller than your average retailer. It's at 0.15% of sales, something like that versus one or 2% in most of retail. Well, obviously you have to have a card to get into the store. The product sizes

are much bigger, so they're harder to steal. Things like that make a difference. They don't really do any marketing. They send out a flyer or used to, I don't even know if they do a physical flyer anymore, but they do things like that. So again, coming back to the Nick Sleep thing, It's just doing so many things as well as you can. And even another example would be their supply chain. They have like crosstalk facilities, which means someone drops off the product and it basically immediately goes back out to stores as opposed to sitting in the distribution center for a long time.

So that helps with things like having low inventory and having high turnover. So there's just a ton of things that they do incredibly well that suits their model. And it all shows in the end result. What's up with the locations themselves? the actual retail location where it almost feels like they basically took their warehouse and just said, rather than take it from the warehouse into some sort of retail space, we're just going to open the doors and let people walk right through the warehouse and just pick everything from here. Again, strategic decision or any insight on that? Yeah. My sense would be that, I mean,

I've heard them talking about their real estate strategy in the past, not in much detail, but my sense would be it's a combination of high traffic areas, but also we can kind of put these wherever we want because people will come find us. And it seems to be working. Yeah. What's fascinating to me is you used the word or phrase earlier, treasure hunt, right? This idea that you're kind of walking into this huge place and you may be going in there because you want two or three items, but you're probably going to go look around a little bit, right? And it feels in almost some weird way that that's one of the last remaining defenses that physical retail has over online delivery, for example, is that kind of discovery or that ability to

have, you know, in some weird way, an experience by going into the store versus being able to just say, you know, hey, I need peanut butter. Let me just click a button on my computer and it'll be here this afternoon. Any other kind of thoughts you have around that treasure hunt style or kind of experience as you walk through the store and why that may contribute to their success? yeah i think it's tangentially related you know costco's e-commerce business has probably been one area where they've uh maybe gone a bit slower than others have over time but i think what they did recently in march 2020 they acquired a business called enovell which is now costco logistics they paid a billion dollars which which was the largest acquisition in their history and what that

business is really focused on is delivery and installation and holloway for big bulky items like appliances, you know, exercise equipment, things like that. And to me, it's just an interesting example of, you know, some of that stuff obviously falls into the treasure hunt type category. But to me, it's an example of Costco finding a way to play in e-commerce that is more difficult for other people to replicate it. It's really hard to get good at having people who can deliver product and install it and haul it away. You know, you can't just throw that into your Amazon supply chain, it's not as easy as that. So to me, it's just an example of Costco really playing to their strengths, which is what they always seem to be doing.

Yeah. They really understand who they are and who they're not, which I think you're kind of highlighting there. Kirkland Signature is that private label brand that they have. It feels like in some crazy way, they're one of the few private labels that still has an air of quality along with low cost, right? Usually there's some kind of trade-off between those two things. If you see something that's really low cost, yeah, it's probably not the best one. And so human psychology takes over and you almost go purchase kind of the middle price or higher price thing if you're looking for quality. When you start thinking about that Kirkland signature, do investors have any insight into why they choose certain items

to use the private label? Do they look at customer insights or customer behavior and then go after the most profitable items? Do they try to find the kind of highest volume or anything that we really can kind of uncover in terms of the thought process to what gets included in Kirkland Signature versus what doesn't? Yeah, my sense from what I've read over time

is that especially when they're talking with suppliers, when they see something like, for example, commodity prices are going down in the nuts category, if suppliers try to come to them and push for price increases, they are not, they are not very accepting of when things like that happen. And they really start trying to find a way to, to push their private label brand, you know, kind bars were incredibly successful a few years ago, and very popular all around the United States. And Costco looked at

that category pretty quickly and realized a big part of kind bar success was marketing and other things and that they could create a comparable, I guess you would call it energy bar for a much lower price. So I think they, they really just look all over for categories where they can add value by delivering comparable quality at much lower prices. You know, famous categories are like golf balls, for example, they sell this 24 pack of golf balls for 25 bucks that, that most people have said is comparable to like a pro V1. Well, two, two dozen pro V1s is going to cost you a hundred dollars. So it's 75% cheaper. I mean, it just crazy things like that. And it shows in the end result. So last year, Kirkland Signature revenues were $52 billion, more than 30% of

Costco's whole business. And as I tweeted, that's bigger than Best Buy's global revenues in last year from 11,000 stores or another comparable. Kraft Heinz, their revenues were $26 billion last year. So Kirkland Signature is twice as big as Kraft Heinz, which is not a small CPG company. So it's just crazy how much success they've had. I mean, those statistics are mind-blowing, right? In terms of Kraft Heinz being 50% the size of Kirkland. And yeah, sure, they've got distribution, but even if you've got the retail and the foot traffic,

people will stop buying the product if it's not high quality or it's not priced correctly, right? So it's not just good enough to have kind of a location where people are showing up because there's plenty of people who are going in Best Buy, But for the most part, Best Buy has a very different business model than what these guys have. And so it almost feels like there's two businesses operating within Costco, kind of the retail business, but then also this private label business. Do we get any sense of, is the goal eventually to hit like some kind of revenue mix target?

Like, do they want to get to 50-50? Is a third kind of where they feel comfortable? Do they give guidance on that? I think they said in, I'm going to misremember now, what they said in a shareholder probably five to 10 years ago that they were shooting for, I believe they said 25%. So they're already north of that. You know, one of the funny things when these conversations with stuff like private label, a lot of people think about it in a traditional retail sense, which is private label share goes up. That's an opportunity for the retailer to take margin. And you look at Costco over time,

and they've had other things like that, like shifts in the categories toward things like apparel that have higher margins. But you look at Costco's income statement over time, gross margins have barely budged. Operating margins have barely budged. They just give it all back. They don't keep any more of it for themselves above that, call it a 3% operating margin. So they just continue to run that same philosophy and the wheel just spins faster and faster. What's fascinating to me is as they've done this, it has not been like there has not had pressure in terms of people wanting them to expand margins, make more money, kind of all the short-term thinking, and they've just kind of held steady.

Is that a leadership just, hey, this is important to us and we're going to kind of not cave on it? Or is there some other reason why they've kind of been able to resist that pressure from investors and kind of analysts and things like that compared to maybe other businesses that eventually kind of capitulate and change that business? I think the answer is it's just so cultural for them. And it's the kind of thing where after you study them for a while and you look at what they've done over a long period of time, you just kind of look at it through a slightly different lens.

And Jim Sinegal used the example, a lot of retailers, they have something priced at 20, they want to figure out how to sell it at 21. Costco has something priced at 20, they want to figure out how to sell it at 19. And then once they get to 19, they want to sell it at 18. They're just constantly thinking about it in terms of that, the Nick Sleep Calm and scale efficiency shared. It's always about improving the pie for everybody else and then taking your fair little sliver at the end of the day. So my, uh, my next topic was going to be scale efficiencies, uh, shared

explain what that, uh, what that terminology means and kind of how Nick sleep used it to describe what a Costco is doing. Yeah. And my, in my mind, it essentially means, I mean, the most, the most telling example is what I was just saying about margins a moment ago. It's this idea of, of using the efficiencies and the benefits that you gain through things like scale or improve negotiating leverage with suppliers to then give most of those benefits back to your customers in most cases or other stakeholders like your employees. It's this idea of just becoming stronger through scale as opposed to using scale as an opportunity to take short-term profitability. And as they do this, you would think, oh, that's great because you're so customer-centric. You're

driving all this value to customers, the business must not be very impressive or doesn't have a ton of profit. But in your analysis, you broke down kind of the revenue per warehouse and you compared it not only to seeing it historically, right, in terms of it continue to grow, but also compared to competitors, it feels like there's a separation. They're actually pulling away from some of their competitors. Talk through some of the dynamics that you saw there when you analyzed that. yeah so the most notable competitor in my mind is sam's club which again is owned by walmart and walmart has had a new ceo since 2014 doug mcmillan who's a very capable and thoughtful executive he's run the business very well obviously it's a behemoth so it takes a long time to turn and

they have other areas to focus in like e-commerce but sam's club if you go back 10 or 20 years ago the average volumes on a Sam's Club were about 55% or 60% of the volumes at a Costco. Today, it's about half the volumes. A Costco does over $200 million per box, and a Sam's Club does right around $100 million. So they just have a massive, massive advantage in terms of the volume that's going through each of their warehouses. And again, it's an advantage that has widened over time, and it makes it incredibly difficult for someone like Sam's Club to compete with them. Yeah. It's fascinating to me to be able to have the comparisons of almost identical business models. Sometimes when you have these unique businesses that are really impressive, there's

not those comparisons, but obviously here we do. Another area I think that you've called out as very impressive is the customer renewal rate. And to me, this is like one of the ultimate measurements of, is it working, right? Are we actually delivering value to the customer? Basically, are they coming back? And so what'd you see there? yeah it's a funny thing to think about you i have to remind myself sometimes like people are paying to shop here it's like if you had the same you had the same model for a walgreens or a or a walmart how many people would pay to shop there i don't know if the numbers would be as high but yeah costco's renewal rates in the u.s and canada which accounts for more than 80 of their stores or

warehouses uh they're right around 90 so you know at the end of the year when when people have to make a decision about whether or not they're going to shell out another 60 or 120 bucks to keep shopping at Costco and eating those hot dogs, nine out of 10 say yes. So it's incredibly impressive. Yeah. I wonder if anyone's done an analysis in terms of just like, how much do you need to spend per year at Costco to make it profitable for you, right? On the membership. And my guess is that it's really not that much, right? In terms of maybe you make two, three trips a year. And if you're buying kind of a hundred dollars each time or something, you probably actually get the savings just based on their pricing? Yeah. I mean, so the average spend is it was

about 1900 bucks 20 years ago. Now it's about 2900 bucks per person. If you just did the simple math on your average run of the mill retailer probably has 25% gross margins. Cost goes closer to 10. So that 15 points of spread, you don't need to spend very much to make up the difference. Um, so yeah, most people are, uh, are doing a good job for themselves by spending a lot of money and making it worthwhile. Yeah. What's, uh, what's so funny. I've got a friend who, uh, who, um, uh, is a member at a, uh, a restaurant in Miami.

And so you can kind of similar model, right? You pay up front and then you get to go. And I think you get 10, 15% off the meals or whatever. And he's walking me through the math. He's like, I gotta eat a lot of food here to, to make this break even right. Costco, not necessarily the exact same thing. a little bit better, more attainable for, for the average person. Uh, one of the, one of the other things I want to talk about is you just said that 80% of the warehouses are in kind of North

America. I'll say, you know, United States and Canada. Um, it feels like they're starting to do a little bit of international expansion and that seems to be an area where you think, uh, some real growth could come from just walk me through kind of where they are today with domestic versus international and then kind of how you think this could play out moving forward. Yeah. So the, the business is still very much weighted to the U S Canada and Mexico as well. More than 80% of their stores in the U S and Canada. I think an interesting place to start the discussion of international is to look at someone like Walmart, which from 95 to 2015,

they increased their international store base 30 X. They went from like 200 stores to more than 6,000. And as I was mentioning a moment ago, Doug McMillan became CEO. And I think what they realized is that it basically wasn't a successful strategy. And you've seen them subsequently, they got out of Asda in the UK, which is a huge retailer. They've gotten out of Japan. So they've kind of pulled out of some markets where they found that adding a ton of stores, while helpful for revenues and earnings growth in the short term, wasn't really a sustainable

strategy. So Costco's basically done the exact opposite of that. They've always moved incredibly slowly in terms of their international expansion. Probably the most notable example is, and I didn't know this until today, I saw Jim Sinegal say that they actually got approval from the central government in China in the late 90s to become a retailer there. They opened their first store in 2019. So they opened their first store 20 years later.

They opened that store and within two months, they had 200,000 cardholders. To put that in context, they have about 70,000 per average warehouse now. And they disclosed recently it's at about 400,000. So 5x their average warehouse in terms of number of cardholders. And their response to that is, over the next 18 months, maybe we'll open two more. So after four years, they'll have three warehouses in the most populous country in the world, a place where obviously they're, at least early on, it's traveling well. So that gives you a good example of how they think about this.

They're just incredibly methodical, and they are very thoughtful about ensuring, obviously, that they're operating within the laws of a local country, but also ensuring that they have the right products mixed for the customers there and ensuring that they're truly adding value. And when they go to places like Australia or Taiwan or China, it works, but they're also very slow to get there in the first place. So as an investor, it's like, man, I really wish you guys could go quicker. But at the same time, you see the results and it makes you really confident that 10, 20, 30 years down the road, it's going to continue to work. So it's a balance as always. What do you think is driving 200,000, 400,000 cardholders in a location in China? Is it a

novelty factor? Like, hey, this is the first one. Is it just the model hasn't really been tested in the country? Is there maybe something else? Why such a big leap ahead of where maybe their average U.S. stores? Yeah, it's really interesting because, you know, there have been plenty of retailers, both U.S. retailers and European retailers that have had not had success in markets like China. So it's kind of interesting to think about Costco going there and being so incredibly successful. I think they built some brand equity before they got there by selling on places like Alibaba. So that may have in some ways built up their brand and maybe, you know, maybe the brand equity had traveled in other ways to kind of word of mouth type stuff.

I think they just do a very good job at consistently getting the message across to people that we have very high quality, attractively priced goods. And unsurprisingly, that's attractive to people all over the world. Absolutely. I'm looking at the stock price right now. I can't remember these numbers off the top of my head, but kind of mid 1982 stock was about a dollar today. It's at 400. So kind of 400 X, if you will. And then if you start to look into, even 2012, really. It's like a hundred bucks a share, right? I mean, we're talking about a business that in the last eight, nine years has still seen about a 4X in terms of its growth. And while there's plenty of high-flying tech stocks and kind of all this other stuff that

would sound like, oh, why are they not growing nearly as fast? If you look at the chart, I mean, it is literally what looks like a parabolic growth chart, right? From a stock price standpoint. And I think it's really appears to be at least when you look at something like that, given their strategy, the more long-term they think and kind of the more methodical they are, it seems to be paying off in terms of the financial performance of the business. Yeah. Over the last 20 years, they've increased EPS at just north of 10% annualized. They've been very conservatively financed the whole way. They've paid a significant amount in special dividends. They used to repurchase shares, but they've kind of pulled away from that practice.

they focus more now on special dividends, but those have added up over time as well. So yeah, it's, it's, it's kind of funny. Warren Buffett famously said in two at the 2000 Berkshire shareholder meeting, you know, Charlie Munger has been telling me to buy this and we missed it. And, you know, like a lot of stocks, obviously it ran into, into 2000. So it probably did move pretty aggressively, but it's just funny to think 20 years later, I mean, he, he didn't miss anything. There were plenty of opportunities over the ensuing 20 years to get back into this business. It is pretty impressive. One of the last things I want to talk to you about is the only modern comparison that I can think of, which is Amazon. And Amazon Prime now

has over 200 million subscribers to it. Not exactly the same in terms of, hey, pay us a subscription and we'll give you at cost. But definitely in spirit, this idea of pay us a subscription and you'll get a whole bunch of value behind that subscription. Any comparisons or differences that you see between those two businesses? And is it fair to kind of look at them as somewhat carbon copies of each other? Maybe do we think that those are two different types of consumers, kind of a digital type subscription versus something more physical in store? Could we see Amazon start to enter into this market and really kind of compete with Costco? Just how do you think about those two kind of subscription-based or membership-based

businesses. So funny enough, Costco is a Seattle, Washington, well, not Seattle, but close to Seattle, Washington company. And Amazon's obviously there too. I think Jeff Bezos has explicitly said that him and Senegal talked at one point and he basically tried to copy the model. I'm pretty sure that's been said before. I think they're very similar. And in my mind, obviously Costco or Amazon has very similar dynamics in terms of I pay for Prime and now I get free shipping, which you're kind of paying for up front to the extent that you pay a Prime membership fee. But I think their business is very similar in terms of something like gross margins and how they think about first party retailing. My sense is that they don't really try to make any money

from stuff like selling toilet paper through a Procter and Gamble or selling laundry detergent, things like that. I think the real focus of their business is being a marketplace and then making money through third-party sellers, doing things like fulfillment by Amazon and really having that complete e-commerce model. So I think there are a lot of similarities. And obviously even Costco has things like Costco travel or the ability to buy cars through them. It's kind of similar to the benefits that you get through a Prime membership. Yeah. It's fascinating to me to watch kind of a Bezos and Amazon Prime because they are giving different value to it. One of the things that, and I'm going to forget here, I don't think it's Costco, I think it might be BJ's

warehouse, but North Carolina where I grew up, gasoline came. And when they started to do gasoline, that was like a huge customer acquisition for them because literally there's a bunch of people I knew that didn't know or have subscription memberships to these places. And as soon as they had gasoline. Everyone I knew went and signed up. And so there almost feels like Amazon's done a very similar thing, right? Where there's certain categories where once they have onboarded it or been able to kind of really crack the code, it really drove a lot of customer acquisition. And so I had never heard the story about him potentially talking to them and really saying, hey, I just tried to copy what they did, which speaks more volume to what Costco has done over

the years. Yeah. Well, I can say as someone who likes saving money, waiting behind 40 cars to save a nickel on a gallon of gasoline is something I'm still not going to do. That's a bridge too far for me. I will say the lines are always long. The Yogi Berra quote, it's too busy, no one ever goes there anymore. Yeah, exactly. Awesome. So for those that don't know, you write a sub stack. Tell us a little bit about that. I'm really, really impressed with obviously with the Costco analysis, but kind of explain to us what you're doing with the sub-stack. You recently just started it. It's very, very good. I suggest people go subscribe, but kind of walk us through like what was the thought process and philosophy behind starting it? How often are you publishing

and kind of what can people expect from it? Sure. So just the really quick background is I've been an equity analyst at RIAs for the past 10 plus years. I decided to stop doing that. I've been writing online for a long time as well about investment related topics. I decided to go all in on the sub stack, which is essentially I give people all of the equity analysis that I do. And then any changes I ever make in my portfolio, I disclose them to subscribers before I do them. And I explain the specifics of the trade, what I'm buying, what I'm selling and why I'm doing that. So it's basically complete access to, to everything I think about and do as an investor. So it's been going since the start of April. And I think I've written probably 30 articles by now,

and the reception has been really good so far. So I'm excited to see where it goes. What was maybe your former colleagues or friends when you were like, hey, I'm going to go and I'm going to do this full time? Was it cheers or were they kind of like, oh, that seems a little weird or kind of how was it received given that this is something that's relatively new in terms of Substack? It helped that I'd been writing for a very long time. I can tell you my own reception was I was terrified because I was going from a salary to a job that at the start paid $0 an hour or $0 a year. So it was a little bit of a leap of faith. But the fact that I had written online for so long and have a good Twitter following, I got a pretty good jump right out of the gate. So

after a few days, I was a little bit less nervous. And the name, you got to explain where this came from. Yeah. So The Science of Hitting is a famous book by Ted Williams that Warren Buffett used to reference fairly frequently. And the idea of the book is Ted Williams would say, when a pitch is right into my sweet spot, I can, I can bat 400, but when it's, you know, a little bit outside of my sweet spot, I only bat two 30. So the key to success for me is to only swing at the pitches that are right down the sweet spot. And Warren Buffett's variation of that was in investing. There's no called strikes. You can just sit there and wait for that, that fat pitch. So that's where the inspiration for the science of hitting name came from.

I love that. That is a fantastic, uh, before I let you go ask everyone the same three questions You're going to get asked one, uh, and, uh, and then we'll wrap up. First one is what is the most important book that you've ever read? Oh gosh. Well, it's been a long time since I've read it, but I think the, the Buffett book by Lowenstein is one of, one of the first Buffett books I ever read. And it was, it was written a fairly long while ago now, but I think that book gave me insight into both investing, but also who Warren Buffett is and, and why he's someone that I look up to so much. So that's probably the book that has been most important to me. What do you think the biggest takeaway that you have from, let's say, a Buffett? Is it literally

just buy good assets at discounted prices? Something as simple as that or is there something else? Yeah, I think there's a long arc of his career. I think he started more in a traditional value investor kind of mindset. And you can see through some of the experiences that he lived through why that even as simple as not being the most enjoyable way to live your life um you know he found it's much more enjoyable to own these great businesses where they the decisions they have to make are much easier than should we close these stores and fire all these people so even if it's not the best investment strategy it's just a much more enjoyable way to live which is pretty important to me so uh so that's that's one component of it all another component of it

all is how much he dedicated a huge portion of his life to this, which may be a lesson that people can learn from in a different way. I don't, I don't need to be worth a hundred billion dollars one day is maybe a different way to say that. I'm there with you, man. Absolutely. The second question is about sleep schedule. So I used to sleep like five or six hours was really bad about it. And then I started sleeping on a eight sleep mattress and just, I'd make it cold as hell. I sleep now like eight or nine hours. And it was so life-changing that I really begged the founders to let me invest in the business. What is your sleep schedule? And then how has that improved or declined? Let's say maybe before April. And then since you started.

In general, I think it's pretty good. The problem now is when I release articles on Mondays and Thursdays, I put them out at 6.30 Eastern time, because I want people to be able to read them early if they're on the Eastern, the East coast. So that means I'm usually up by about 5.30 or 6, you know, terrified that I messed something up rereading it for the 10th time. So, uh, Sunday night and Wednesday night sleeps are not that good, but the rest of the time it's, it's pretty, it's pretty good. Listen, that's not a, that's not a bad situation to be in, right? If, uh, if you can get the good night every other night, other than those two nights, then, uh, you're better than most. Uh, last question you get to ask me one is, uh, aliens. Are you a believer

or a non-believer oh man i'm gonna say believer all right why what is the the rationale or logic behind it just the vastness of the universe it's it it seems like an easier bet yeah i'm with you i'm there i i completely agree so i get to ask you one now let's do it well it's a little this a little more serious than aliens what is your you you as someone who's only observed you from the outside up until today, you seem to be doing a lot. What is your, what is your vision for where you want to be in five to 10 years? Or is it just continuing to do all the things you appear to be doing now? It's just be happy. That's, that's literally it. Um, and you know, people listen to the podcast, heard me talk about this a million times. Uh, I think that, um, we live in this like

weird society where, uh, some people are chasing like material goods. Some people are chasing, uh, kind of some like a weird financial goal or like achievement or something. And one of the things that, uh, very early on in my life, uh, I had the, uh, the fortunate, um, kind of realization of, uh, was although morbid, we're all going to die, right? Like you, like you have some finite time here. Um, and so, uh, there's this movie, uh, that I talk about all the time called in time, which Justin Timberlake, uh, is in, uh, and I never thought that a Justin Timberlake movie would be the movie that i'd be like i should go watch this uh right but the concept is literally you know uh the folks in the movie have like a clock in their arm and uh when they go to work

uh rather than get paid in currency they literally put their arm underneath like a bar gives them time they can then live and if they ever get to zero on the clock then uh basically they expire they die right and so it's like this weird kind of sci-fi-ish type of movie but i think that concept of just, you know, time is money, money is time. And we do have this finite ability for it. What it does is it shifts your priorities, right? It goes from all of those kind of financial goals or achievements and all that stuff. But, you know, look, there is a feeling of like fulfillment or purpose. But really, it makes you just want to spend more time with your family, with your friends, and almost measure like the quality of the time spent rather than

with the output or the capital that you get for the time. So I think it's, you know, maybe a cheesy answer, but this really kind of, I think about it's just try to be happy. No, I completely agree. I would just add family, friends, and talking with random people online about Costco. You forgot that part. Listen, I was telling you beforehand, when I was reading the book, everyone kept talking about Costco, all these investors. And I was like, man, I know it's a good stock. You know, I know this model is interesting, but I haven't heard somebody really kind of do a deep dive. And then I literally saw you tweet about it.

And I was like, all right, that is like a sign. If I've ever seen a sign, I got to get them on the podcast. So I appreciate you jumping on and doing this. Where can we send people to follow you on Twitter or to subscribe to the Substack? Yeah, my handle on Twitter is TSOH underscore investing, or just search the science of hitting. And then, yeah, you can find my Substack through there. It's just the science of hitting investment research service, TSOH.

Well, listen, I really appreciate you taking the time to do this. I think people are really going to enjoy it. Maybe we'll go get a little, a few more Costco members out of this now that everyone knows how to save money and we'll definitely have to do it again in the future. I really appreciate it. I had a great time.