Costco be playing mind games...
Japanese adult diapers, reCAPTCHA trains AI models, and Costco's behavioral economics strat
Hi everyone, it’s been raining in New Haven for two weeks, and I just need spring to come. The thawing is nearrrr i can feel it. Highlight of this week was having one too many drinks on Weds evening during society interviews and teaching my Danceworks choreography to my dancers tipsy - like yeah right left right...?
Today’s main kiki is a deep dive on Costco and their psychology-powered-strategy to entice and retain customers.
SNIPPETS
Addressing Japan’s aging demographic, Japanese paper company Oji Holdings is halting its production of baby diapers and focusing on adult diaper sales instead, which have been outpacing baby diapers since 2011. This is in line with 2023 stats of 758,631 births vs 1,590,503 deaths in Japan.
There was a mini earthquake in CT this Friday? The earthquake’s epicenter was in NJ, but surrounding areas trembled. My friends said that classroom and office tables shook but I was in a car when it happened - so props to the driver bc I didn’t feel a thing.
A reader (shoutout Jeff) reached out to me on my inventory story last week and plugged this company called Ghost which helps companies offload (loss-making) excess inventory. They just raised a $30 million Series B led by Cathay Innovation. So cool!!!
I am taking a class about big tech and this week we discussed Google as the antithesis of corporate culture. Google’s California headquarters (“Googleplex”) is essentially a massive adult playground - they have a 12-acre campus, multi-color bikes to go from building to building, sand volleyball courts, sculptures and art installations, an outdoor cross-fit gym, in-house massage therapists, and the Google Cafe where employees eat 3x a day. I’ve seen their offices glorified by many employees in “day in my life” tiktoks. Buttt amidst tech lay-offs (12,000 employees in 2022 alone), they closed their Mountain View childcare facility, are rolling back perks including tech replacements, office food, and most tragically, eliminating masseuses.
On the topic of Google, you know those reCAPTCHA tests that make you select traffic lights or cars or bikes? I thought those were checking for whether you are a bot, but it is actually Google training its AI model!!! Was I the only one who didn’t know this? reCAPTCHA has evolved over time - it used to help digitize books by giving pictures of scanned text and making the user type in the associated words (see photo). Through this project, Google managed to digitize the entire New York Times archive.
American Airlines has updated its pet policy to allow passengers to bring their pets into the cabin along with either a regular carry-on bag or a personal item. WIN
THE MAIN KIKI - COSTCO’S MIND GAMES😵💫🧪🔮
During sophomore year, my friend asked me if I wanted him to pick up anything for me during his Costco run. I told him a 1/2 gallon of milk for my dorm-room mini fridge. He laughed and told me that’s not how it works.
As there are no Costco’s in Brussels (my hometown), I never experienced this famous bulk-shopping experience. So, for myself and for readers unfamiliar, a quick primer:
Costco is a membership-only warehouse chain - which means that only customers who pay for membership can shop there. They have two tiers: $60/year business membership or $120/year executive membership, with the latter getting an extra 2% reward on qualifying purchases, lower prices and (drum roll) a monthly copy of The Costco Connection Magazine.
Costco offers goods in larger quantities/multi-packs at discounted prices – buying in bulk, the store can match/undercut competitor wholesale and retail prices.
With 871 warehouses worldwide, Costco has presence in the US, Canada, Mexico, Japan, Taiwan, China, UK, France, Iceland, and others.
They are well known for the private label brand - Kirkland Signature - which produces low-cost high quality consumer items like groceries, health & beauty, home & kitchen, pet food, and even branded clothing, luggage, and handbags.
Three main reasons I love the Costco business model:
Membership accounts for majority of their profit: I reviewed Costco’s income statement and noticed that they charge a mere ~10% retail markup on their products vis a vis their competitors who mark up by 30-40%. While many companies try to pass on cost increases to customers, Costco is passing on savings and value. But the reason Costco can price lower is because their annual membership fee not only offsets a significant portion of their operating costs – but it also converts to their profitability. What’s great about this model is its revenue safety net. Since memberships are paid at the beginning of the year, Costco locks in predictable revenue early, and then collects its retail margin selling items for the rest of the year. Last year Costco generated $4.6B in membership fees representing 72% of the company’s profit. This is why I think Costco is really in the membership (not grocery) business. This is also an exclusivity play model – Costco hype is generated because it’s exclusive to members - and you always want what you can’t have right? This organic fanfare saves Costco on marketing spend - another way they boost profitability.
Barebones yet ‘spicy’ space: Costco prides itself on its simple warehouses where products are displayed on pallets in plastic-wrapped shipping containers. This spares Costco from extra worker expense to arrange items and investment on shopping aisle aesthetics. Compared to other supermarkets that carry on average 30,000 SKUs (stock-keeping-units), Costco is inventory lean, carrying only 4,000 SKUs, which simplifies choice selection for shoppers and gives Costco unparalleled negotiating power with suppliers. Re ‘spicy’ space, Costco supposedly shuffles the location of their items frequently to create a ‘treasure hunt effect’ in their warehouses. By gamifying the grocery experience, consumers feel like it’s a win when they find their items, not to mention increased average basket size as customers find more products when perusing aisles during their ‘treasure hunt’.
Winning with ‘loss leaders’: Costco’s two iconic items are their $1.50 hotdog and soda combo (price hasn’t changed since 1985) and their $4.99 rotisserie chicken. While both are intentional “loss leaders”, meaning that Costco loses money selling these items, the hot dog-soda combo draws shoppers to Costco and keeps shoppers longer in the warehouse. Costco loses $40 million a year selling rotisserie chicken (their highest loss-making item), but this is intentional! They strategically place chickens at the back of the warehouse so that shoppers must first walk by aisles with the higher-margin products, filling their basket before getting their $4.99 chicken deal. This reminds me of grocery psychology tactics like ‘cereal aisle psychology’ which entails putting more colorful boxes on lower aisles to appeal to children, while the higher shelves carry bland boxes of organic unsweetened cereal. Researchers have also found that the characters on cereal boxes placed at ‘eye contact’ level with consumers leads to higher conversion.
Genius Costco… I’m no psych major, but their mind games works. Also, what I find fascinating is the international Costco hype. There is craze in China over Costco, so much so that tour agencies organize “Costco-centered vacation packages” including five-star hotel accommodation(!). The Shenzhen location opened in early 2024 has already seen 140,000 customers, with 10,000 customers on opening day alone. Hong Kong residents are crossing the border to shop there seeking a more affordable option.
THINGS I’M LOVING RIGHT NOW
Peggy Gou is releasing her debut album coming out June 7!!! WE NEEDED THIS.
This Bratz Cowboy Carter doll. Not that this is a fair comparison but it reminds me of my legendary Ed Sheeran bobblehead.
My fave April Fools’ prank was from my friend Liam who made me think he posted a picture for me on his story, just to find out he got me good… also if you see @fpl_liam today, wish him a happy birthday!!!❤️
That’s letter 4! Lmk your thoughts by replying to this or commenting. For this week’s comic, I have my two dogs (Kaia and Luna - the cutest to ever be) negotiating with American Airlines. Ciao and see u in the next letter <3
The Ed Sheeran doll is legendary.. also very cool to learn about the psych of Costco
As usual, I have learned a lot from this newsletter! I have been shopping at Costco forever and did not know all of this about their business model. Fascinating! I also had NO idea that those reCAPTCHA tests are Google training their AI! I thought it was to make sure I was not a bot too. You choose the most interesting topics to write about AND I love all the visuals. Thank you for keeping me informed!