Costco moats, and the Differences from Other Competitors

costco moats

This post will discuss Costco moats and the differences between Costco and other retail competitors. Please read the first the article I wrote a few days ago about Costco, “How does Costco make money?“.

Related content in my book

I have introduced the company Costco in my two books, and the content in the book will not be repeated. Investors are invited to refer to the special section in my book:

  • In the 5-4 subsections of the book “The Rules of 10 Baggers“, pages 233-238: This entire subsection has a special introduction to the company Costco.
  • In section 2-3 of the book “The Rules of Super Growth Stocks Investing“, page 128; and in section 2-3, page 124-126; this entire section has a special introduction to the company Costco.

Costco Moats (Competitive advantages)

Customers first

Every company will put the phrase “customer-oriented” on the lips and write it in the annual report submitted to the Securities Regulatory Commission. However, there are very few companies that can be implemented and can be clearly felt by customers, and Costco is definitely one of them.

All consumers must join the membership and pay the annual fee for shopping; and the annual fee from the membership accounts for 2/3 of the company’s revenue. Without the annual fee of the member, the company will immediately lose money. This unique business model is actually rare in the business world, but Costco has been very successful.

Costco has even restricted the gross profit margin of the products sold to be below 13%. Wal-Mart in the same industry (ticker: WMT) is 24%, and Target (ticker: TGT) is 29%.

Efficieny take first priority

The entire Costco company believes in the no-frills policy, focusing on bringing value to customers. On average, only 3,700 ∼ 4,000 products will be sold, while Wal-Mart has 120,000 ∼ 140,000 products, and Amazon has as many as 600 million items sold. Costco first screens customers for unnecessary or poorly-selling products, so that similar products will almost only leave the best-selling items.

Fewer items have many advantages: less supplier management, easy arrangement of store displays, larger discounts when negotiating prices with suppliers, reducing the speed of customer purchase decisions and increasing purchase willingness, and improving inventory turnover rate.

Please note that Costco’s original name is Costco Warehouse, because it directly puts the entire package of goods purchased by the supplier on the shelves, and its store is a warehouse with air-conditioning and checkout counters, which can save storage costs. You don’t have to worry about the layout of the store, unpacking, and sub-packaging when entering and shipping; and it can stimulate sales.

Private label Kirkland Signature

After filtering, Costco will only sell only 3,000 to 4,000 items in the store, while WalMart has 120,000 to 140,000 items and Amazon (ticker: AMZN) has as many as 600 million items. Even if the products of the manufacturers on the market are not of good value or quality, Costco will simply launch its own brand Kirkland Signature products to replace; the price of Kirkland brand products is more than 20% lower than similar products in the market , And the current revenue of Kirkland brand products has accounted for 1/3 of the revenue of the good market for many years, which proves that these private label Kirkland products are very popular.

With this description, you may still have no idea how successful Kirkland, a Costco-owned private label, has been. The Costco brand, Kirkland Signature, which sells mostly in Costco’s own malls, sells everything from nuts to shirts and generates $25 billion in annual sales. This figure is higher than the 23 billion of Coca-Cola (ticker: KO), higher than Budweiser (ticker: BUD), Nestle (ticker: NSRGY), Gillette (ticker: PG) and a series of famous consumer brand.

Celebrities’ endoresement

Munger and Costco

Talking about Costco reminds me of Chrlie Munger, a famous shareholder of this company. It has been a member of the board of directors since 1997. There are only three stocks in his personal portfolio, and Costco is one of them. Munger does not conceal his preference for Costco, and has repeatedly publicly recommended investors to buy more Costco stocks.

He also has a famous saying, “Good stocks are not cheap.” In fact, he refers to Costco. The financial media really went to investigate whetherhe was consistent with his words and deeds, and found that he would continue to buy small amounts to increase the stocks of Costco. As of the end of 2020, he personally owns 186,000 shares of Costco.

Munger once said that Costco has a unique element that Amazon doesn’t have–the company culture. “It’s quite important,” Munger said in response to a later inquiry over the importance of evaluating a company’s culture in making investment decisions.

“Part of the success of a company like Costco — and it’s been amazing that one little company, starting up not all that many decades ago could become as big as Costco did as fast as Costco did. And part of the reason for that was cultural. They have created a strong culture of fanaticism about cost and quality and so forth, and efficiency and honor, all the good things. And of course, it’s all worked. And so, of course culture is very important.”

Lei Jun’s comments on Costco

Xiaomi (Xiaomi, Hong Kong stock code: 1810) founder Lei Jun once commented on Costco with emotion on a forum: “Credit card revenue accounts for 1/3 of total profits, and nearly 70% of operating profits come from membership fees, the gross profit margin is only 6.5%.” And he admitted that he has benefited a lot from the company’s business philosophy. In fact, among the well-known entrepreneurs in China, not only Lei Jun, but also many people admitted that they have studied Costco and applied it to their own enterprises, and expressed their admiration for Costco’s strong competitiveness and customer loyalty.

Greater China

Costco Taiwan

It has been 25 years since it entered Taiwan in 1997. It currently has 14 warehouses in Taiwan, from north to south. I went to the Neihu warehouse more than 20 years ago. At that time, there were a lot of people, but it’s not like going to Costco now, which is a national sport of young couples. On holidays, Costco all over Taiwan are not easy to get into, and it’s the same in all warehouse. No wonder the Neihu warehouse used to be the number 2 position of Costco’s global single store sales list (and once the champion) for a long time, but now this laurel is replaced by Costco’s Taichung warehouse.

This phenomenon also occurred at McDonald’s (ticker: MCD). McDonald’s Minsheng East Road store in Taipei was once the first place of global single store sales of McDonald’s for many years. It didn’t change until McDonald’s entered China. But the problem is that what is happening in Costco’s Taichung store is right now, not history! This is why Costco open its North Taichung warehouse in 2020.

In fiscal year 2020, the revenue of Costco’s “Taiwan Branch” has approached the NT$100 billion mark, which can rank about 50 listed companies in Taiwan stocks. The year 2000 annual revenue of ASE Semiconductor (ticker: ASX) is NT$103.3 billion, which is just ranked 50th in Taiwan stock market. Among the nearly 800 warehouses of Costco around the world, the Taichung store is the most profitable “store king”. According to the information released by Costco in 2020, the key operating information of the Taiwan branch is as follows:

  • 3.2 million card members
  • Membership renewal rate 95%
  • Annual revenue in 2019 is NT$84 billion, an annual increase of 20%
  • Gross profit margin is 10%
  • Revenue has grown for 23 consecutive years, with losses in the first five years
  • The average order is NT$3,000 per customer transaction, three times that of the industry peer
  • Imported goods account for more than 50%
  • Three warehouse in Taiwan are listed in the top ten sales list of Costco in the world, including Neihu warehouse, Zhonghe warehouse, and Taichung warehouse


I once reminded investment friends in Section 4-1 of my book “The Rules of Super Growth Stocks Investing” that the Chinese market is one of the main factors driving the stock prices of listed companies in the US stock market. A considerable proportion of Tesla’s (ticker: TSLA) share price is due to its successful entry into China and the establishment of the company’s most efficient Shanghai Giga factory. There is no other reason; except for the irreplaceability of product production and supply chains (the United States has been working with its allies to get rid if China since the Trump era for six years, which has proved infeasible, which is a fact).

No matter how big the US market is, the US is an extremely mature market with limited growth. But China will soon become the world’s largest market. Few US-listed companies will abandon this market, and the chief executives are even more cautious about offending the vast number of consumers in China. The most recent example is James Dimon, CEO of JPMorgan Chase (ticker: JPM), who just made a joke on China, and immediately apologized and admitted his mistake the next day; everyone should know that JPMorgan Chase is not an ordinary company or bank, CEO James Dimon is one of the most recognized leaders in contemporary American financial industry.

U.S.-listed companies are deeply afraid of losing the the Chinese market, , a golden goose and the world #2 marekt. No one will deny this. Unless a very small number of companies decide to abandon this market due to its own special business or cannot enter this market, there should be only single-digit companies in the S&P 500. For example, Facebook (ticker: META) failed to enter China because of his long-term efforts. CEO Mark Zuckerberg believed that his company would never be able to enter China, so he dared to attack China publicly when he testified before Congress. Of course, he also had to pay the price.

Costco’s name in China is different from Taiwan, but the management teams are all from Taiwan Costco. Obviously, the head office hopes to replicate the successful experience of Taiwan Costco. It has opened its first warehouse in China in 2019 in Shanghai, and the second warehouse has been finalized in Suzhou. It is under construction and will open soon.

costco moats
credit: AmCham-Taiwan

It is currently planning a third warehouse. With the popularity of Costco’s first warehouse, its prospects in China are exciting. In the few days that Costco’s Shanghai branch opened, Costco’s stock price rose by more than 3% for several consecutive days. (Regardless of the price of Costco or the retail industry, it is rare that the stock price of the retail industry has risen by more than 3% every day for many days). Tesla is another example; you can check Tesla’s stock price chart. Without the Chinese market and the Shanghai giga facroty, there would be no Tesla today.

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3 thoughts on “Costco moats, and the Differences from Other Competitors”

  1. Any views for Costco’s success in China while Walmart and Tesco failed to make headway?

    1. Hi David,
      Glad to have your feedback.
      I plan to talk about this in my future post “Amazon vs Alibaba”. As far as I know, all foreign big retailers shutdown operation in China except Walmart. Walmart keeps shrink their operation in China these years. Unless there is any miricle, Walmart will be the next retailer exit China.
      – Carrefour will retreat from China (2019)
      – Metro China sold to WU Mart(2019)
      – Auchan exit China in 2018, brand changed to RT-Mart China (2021)
      – RT-Mart China sold to Alibaba (2017)
      – Tesco exit China officially (2012)
      – Home Depot close China operation (2012)
      – Walmart
      – Sold online-sales business in China (2016)
      – Closed 80 stores in past 6 years
      – Amazon
      – Closed its China domestic operation (2019)

      You highlight a good point. Costco needs to duplicate its success story in Taiwan, or it will follow these peers. My guess Costco management trust Richard Chang (the ex-CEO of Costco Taiwan, now Asia Pacific VP). To tell the truth, retail industry in Taiwan is same as China, most foreign retailers almost can’t survive here. Althouth Carrefour is the only one alive now, but rumour keep ciculating Carrefour plan to sell to Taiwanese peer. Personally I believe Carrefour will exit Taiwan soon.

      My second thought is based on history. Think about Starbuks, McDonald, Coke, Pepsico and KFC, these well-known big food and retailers gained ground and was all popular in Taiwan 2-3 decads ago, Starbuks, Costco, KFC have their #1 sale stores in Taiwan 20 years ago. All these brands are still popular here although total revenue is less than China. The point I want to say is “there are many similarity including culture, tast, operation model, preference” I belive Costco managment has done some homework on this as well (you might say they find the retailer receipt to success in Taiwan and China should not be same as in US or Europe, and they have it in the hands)

      1. Andy, I share your view about the importance of having a Management team that understands local culture. not familiar about Richard Chang. But read that Former Yum China chairman and CEO Sam Sun was pivotal in the company’s expansion into China.

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