Fact-based journalism that sparks the Canadian conversation

Articles Business Environment Health Politics Arts & Culture Society

Special Series Hope You’re Well For the Love of the Game Living Rooms In Other Worlds: A Space Exploration Terra Cognita More special series >

For the Love of the Game

In Other Worlds: A Space Exploration

More special series >

Events The Walrus Talks The Walrus Video Room The Walrus Leadership Roundtables The Walrus Leadership Forums Article Club

The Walrus Video Room

The Walrus Leadership Roundtables

The Walrus Leadership Forums

Subscribe Renew your subscription Change your address Magazine Issues Newsletters Podcasts

Renew your subscription

The Walrus Lab Hire The Walrus Lab Amazon First Novel Award

Amazon First Novel Award

Costco Is the Anti-Amazon and It’s Thriving

Its model defies the prevailing wisdom about retail. Why does it work?

We are in a new age of logistical prowess, led by the dynamism of Amazon as it strives to carry out dizzyingly complex forms of order fulfillment and delivery. With the age of agentic commerce just around the corner—think of going to ChatGPT and having an artificial intelligence agent scour every website for the cheapest offering of the specific dog food you buy—there is an expectation that the future of retail is near infinite assortment and ultra-fast delivery. Consumers want the exact flavour of the exact thing that they’re looking for, and they want it at their doorstep now. It seems sometimes that we are testing the bounds of infrastructural capacity and automation in logistics to fulfill this dream.

This story was originally published as “The Anti-Amazon” by our friends at Phenomenal World. It has been reprinted here with permission.

There are a few things wrong with this dream, however, and the first, as I’ll review in a moment, is simply that it might not be so desirable. Even if you think it is preferable at an individual level, there are good reasons to question the social value of the logistical complexity that it necessitates. Home delivery of single-packaged items entails an entirely different cost structure than freight trucks driving to consumer-facing warehouses delivering entire pallets of goods to be driven home by customers themselves. Two companies have emerged with ideal-type business models that dramatize the different economies at each end of this spectrum: Amazon and Costco. Late to the e-commerce game, minimally invested in their distribution network, and committed as ever to an artificially limited assortment, Costco is the anti-Amazon. It embodies the precise opposite of everything imagined by the e-commerce futurists—and yet, somehow, its revenue has grown by an average of more than 10 percent every year for the last five years.

In some cases, consumers might want access to full product assortment: when, for instance, there’s a spot in the home that only fits a furnishing of certain dimensions or when making a major electronics purchase. But in general, scrolling through options and reading through reviews online for every consumption choice is overwhelming and anxiety producing: “infinite, meaningless options can result in something like a consumer fugue state,” The Atlantic once argued.

One brilliant feature of the Costco experience is, paradoxically, the constraint: as opposed to Amazon, with its near infinite assortment, or even Walmart, which has approximately 130,000 SKUs (stock keeping units, or distinct items) in the average Supercentre, any given Costco will only hold 4,000 SKUs to choose from. While most retailers today assume that consumers want ever greater assortment, Costco’s popularity speaks to a countervailing desire for less choice. Indeed, the pre-selection of items for sale in their warehouses is part of the value proposition: not only are you going to get a lot of a particular thing for a good price but you also won’t have to deliberate over microdifferences in a more robust assortment.

In other words, winnowing selection is a service, not a limitation—especially with Costco’s product catalogue. Costco is not known for having the cheapest goods, but it is known for having the cheapest price on its goods, and that is because its buying team has closer relationships with suppliers than any other big retailer. Such scrutiny and communication point away from low-road suppliers. This is a structural effect of Costco’s conscious choice to offer a low SKU count: fewer products to investigate means more time to investigate each product and a natural gravitation away from the bargain basement. That its member customers have come to expect a certain quality of everything in their stores reinforces this dynamic.

The low SKU count also allows Costco naturally to do something that Amazon does by squeezing suppliers: a low or even negative cash conversion cycle (CCC). The CCC is a corporate finance measure of how long it takes to turn inventory into cash through sales. Amazon often negotiates delayed payment terms with suppliers, leaning on them to allow payment windows longer than the thirty-day industry norm. Meanwhile, given the speed of its e-commerce business, Amazon is often receiving payment from consumers way before it has to pay suppliers, essentially giving the retailer interest-free cash. Costco enjoys the same benefit of a short or negative CCC, but without having to anger suppliers simply because fewer SKUs........

© The Walrus