What we think about Costco (COST)

Costco in Three Words: Steady Retail Giant

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Background

Costco sells memberships that give consumers access to its retail warehouses. It’s a two-tiered system where members can pay $65 for access to the clubs or $130 for an “Executive” membership that comes with 2% cash back on nearly every purchase up to $1,000.

It’s a simple model predicated on offering a limited selection of goods at very low prices. Members are paying to join because Costco pledges to keep prices low — something it has a very successful track record of doing.

Costco sells a very limited selection of products compared to most big box or grocery stores. It won’t have much selection on any given item. If you want cereal, for example, there may only be a few brands sold in packages with two boxes. If you need Tylenol, it might only be offered by the 200 pill-per-bottle variety.

Offering a limited selection helps the company keep its prices low. That keeps its members happy which keeps them renewing. It also has Costco members serving as advocates for the chain, basically making its happy customers a cheap form of advertising.

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