Costco: A Bulk Buyer's Playground

From a maze of nondescript beige cubicles in the company's headquarters just outside Seattle, Costco's buyers go forth around the globe searching for merchandise and then return to decide what should make the final list of 4,000 items that the store sells.

Shannon West, who oversees apparel for the store, says that only about 15 percent of what the buyers bring back actually makes it onto the floor.

She admitted there is pressure to choose the right item, because if you get it wrong the mistake is magnified. But she's stoic about it. "That's kind of our life that we deal with, and I've been here 24 years, and so I don't know a different way," she said.

Choosing so few items is almost easier, she said. "I'm not used to buying like a department store would buy, where they're buying whole collections of, you know, different lines or whatever."

Size Matters

The Costco way was honed by Jim Sinegal, who founded the company a quarter century ago. As the number of stores increased to more than 529 stores in seven countries, he tries to visit every one, every year.

A few weeks ago at company headquarters, he was checking out the patio furniture for sale in 2009 and explained why, at Costco, you have to buy so much of something, using Advil pain medication as an example.

"We sell it for about $15," he said -- "325 pills in a bottle."

That's a lot, he admits, but went on to say, "We could probably sell it in 25s, 50s, 100s," but the company doesn't because it sees something different.

"We look at it from the standpoint that if 10 customers come in and they're looking to buy Advil, the fact that we have 325 maybe turns off one of those customers, but nine of them will buy that large size of Advil."

Buying such big quantities of products can lead to Costco practically dominating certain products. For one variety of large cashew, Costco is among the biggest buyers on earth.

The other tenet Sinegal insists Costco follow is that it never sells anything at more than 14 percent above cost. If a hypothetical pair of socks cost them a dollar, they sell it for $1.14. Not a cent more.

"If you study the retail business you will find all sorts of examples of people who thought that they could charge another dollar for an item, and another dollar here, and they could cut the wages on their employees, and the net result is that you have lots of companies that wind up going out of business," Sinegal said.

The point is to stay in business and make the right decisions on what makes the list of 4,000 products. Costco's profits come largely from their customers' membership fees.

That explains why Sinegal was examining patio furniture for next year. Costco buyers from around the world had met to review the furniture finalists. It is still deciding which sets will make the final cut. And as long as it's not another Opus, the company is on track to keep ringing up healthy sales.

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