Atanu Dey On India's Development

I Heart Costco

I have been shopping at warehouse retail stores for over 20 years, starting at the Price Club in Sunnyvale. In those days, you had to have some union membership to have access to those stores. I was a member of the HP Credit Union and felt privileged to shop at Price Club. Costco later entered the market as a competitor to Price Club and as it happened Costco bought Price Club to become Price-Costo and then it was simply Costco. I have had a Costco membership since forever.

I think about 90 percent of my purchases have been at Costco for decades. Everything that I need, I buy at Costco — food, clothing, shoes, toiletries, cameras, furniture, gas (petrol), tires, car batteries, engine oil, roasted chicken, cereals, sun glasses, candy, basmati rice, laptops, wine . . . the list goes on. I have never bought a car at Costco nor did I ever buy a speedboat or an SUV. But I could have. I have often noticed that everything that was on me was bought at Costco — sneakers, socks, underwear, jeans, shirt, and cologne. As I often say, if you cannot find it at Costco, you can do without it. Every visitor, whether domestic or foreign, I would drag them to a Costco shopping spree. There is something magical about going to a Costco that defies description.

One of the best ways to spend an afternoon was to go to a Costco and have lunch for free. Scattered throughout the stores are “food product demonstration stations.” They give you samples of products that are on offer — fish fingers, salads, Dove ice cream bars, Thai noodles, Mexican enchiladas, you name it — and just walking around sampling the fare is enough to give you a decent lunch. Those were the days when a visit or two to Costco was part of the ritual of the preparation to visit India. You had to stock up on the candy and shampoo to be distributed to family and friends.

I think that there is something quintessentially American about Costco. It has something to do with the American spirit of entrepreneurship, freedom and private enterprise. As an economist, I see how the Costco model makes sense. The most important thing about Costco is that it makes the market more efficient. That warms the cockles of an economist’s heart. Here’s why.

When you buy stuff at Costco, you are protected by a simple guarantee: if you don’t like what you purchased, for whatever reason, you can return it for a full refund. Period. And you have thirty days to do so, and on some items the full refund policy gives you six months. It is good if you have a receipt but even if you don’t, they will take it back without insisting that you justify your return. So when you see something on the shelves that you are not sure that you actually would like, you don’t hesitate to buy it. You check it out fully knowing that you risk very little. You can always bring it back for a refund the next time you visit. This allows the market to discover what is of value. The customer finds out if something is worth buying; and the retailer discovers whether something deserves to be on the shelves. Too many returns signals that fact that the product is shoddy and should be removed from the store.

Not often but occasionally I have returned food stuff that I didn’t care for, or maybe a pair of shoes that did not appear to fit after a couple of weeks of wearing. (State law prohibits the refund of alcoholic beverages, however.) The other favorite store of mine is Trader Joe’s. Again the same return policy: don’t like it, return the unused portion for a full refund.

India is missing efficient retailers. That is because the Indian economy is a sellers’ market, not a buyers’ market. Decades of socialism has maintained shortages which result in sellers dictating the terms. Consumers are the supplicants and the retailers are the king. This may change but I think it will be a few decades. Socialism dies hard.

For an informative story on Costco, check out this NY Times article.

  • http://occamsrazr.com Ike

    Sadly, a great majority of Americans wouldn’t understand what you are talking about. They take their economic freedoms for granted, and don’t see the unintended consequences of trying to improve things centrally.

    (Also – be prepared for the bias to weigh in. “Sam’s Club is evil and wrong, even when they do the same things CostCo does.”)

  • http://blog.amanthan.com Venkatesh

    Well Said.

    When I discuss with my Indian friends about how it would be good to have a costco or Wallmart to come to India, they retort, what about the poor resellers ?

    I have noticed how these “poor resellers” exploit the even poorer customers they have. How the small shop owners sell inferior product at jacked up prices or have exorbitant interest rates for credit at their stores.

    The cost of in-efficiency of retail is always to be paid by the end customer and in country like India, its the poorest strata of society which gets affected the most. I don’t think its even socialistic to support the in-efficiency and dishonesty of resellers. The don’t add any value and only introduce in-efficiency.

    Even in Rupee terms, shopping in Walmart is cheaper than shopping in a corner shop in India. The moniker “Country of Shop-keepers” has to be shed, because the shop-keeper adds absolutely no value to the society other than to himself. They are dishonest, they cheat and discriminate with impunity.

  • http://occamsrazr.com Ike

    Venkatesh – there are some estimates that Walmart alone saves “poor” American families some $200-billion a year in extra buying power. (“poor” being a relative term, referring to those in the bottom quintile of income only.)

  • Pavan

    “Sam’s Club is evil and wrong, even when they do the same things CostCo does.”

    CostCo underpays their workers whist driving all other retailers in the area out of business through predatory pricing?

  • http://blog.amanthan.com Venkatesh

    Pavan,

    I feel lot of Indians are blind till they come to the US. You notice “under payment” but don’t notice child labor ?

    Even if Costco underpays, most of the corner shop in India I know of exploit child labor with impunity. They don’t pay sales tax, they don’t report their income, they routinely do “milavat”. The list is just endless. Can you ever return a product you didn’t like to any of the traditional shop keepers.

    All in all, underpaying employer is better than and employer who is hiring child labour.

  • http://blog.amanthan.com Venkatesh

    Ike,

    People from US are not able to appreciate efficiency of discount stores like walmart/costco. It has it side effects but its efficiency is passed on to the customer , which is better than paying for that in-efficiency.

  • Mayuresh Gaikwad

    Maybe I am missing a point here, but I do not quite understand what under-paying means. If it means that I pay my employees less than the market rate, I guess they are free to quit and pursue other options. If they do not have other options, what I pay them is essentially the market rate. Probably the said under-payment refers to payment below the minimum labour charge (I think is USD 5/hr) and that would be illegal. However, in a market dictated by demand and supply of labour, the price should adjust itself, so there would essentially be no “exploitation”

  • http://www.worldisgreen.com Suhit Anantula

    Pavan:

    You should check out this piece by Bryan Caplan on Predatory pricing.

    http://cafehayek.typepad.com/hayek/2007/07/why-i-dont-fear.html

    Cheers,
    Suhit

  • http://palscape.wordpress.com bongopondit

    Another Costco lover !! We joke that Costco is our ‘weekly pilgrimage’!

    Btw, Costco return policy used to be one of the most generous. Although officially you were supposed to return stuff within a month, they always accepted returns with a smile even 4-5 months later, and with few questions asked.

    Unfortunately, too many customers began scamming the system by purchasing laptop computers, wide screen TVs etc and then return them after 2 years (yes true stories) for a new one. For a long time Costco put up with this – only recently have they put restrictions. Computer and electronic items now can returned only within the first month (Costco is still one of the few retailer that dont charge restocking fees for computers) – however they come with a 2year replacement warranty. This is still an extremely generous offer and Costco was almost apologetic while rolling out this policy.

    To me Costco defines a near-perfect customer service in the retail sector.

    Btw, Costco actually pays and looks after their employees pretty well with generous health insurance etc. Apparently they have a very low turn-over rate with their employees.

  • http://occamsrazr.com Ike

    Walmart gets a bad rap on the pay and insurance issues, but many of those studies are skewed by location. Walmart is in a lot of smaller markets with lower costs of living, so the wages appear smaller than they are.

    Nobody forces workers to take a job for less than prevailing wage. With unemployment rates so low, the market really is working.

    I don’t want this to become a Walmart v. Costco thread, because we’re really talking about two different cliente bases and corporate models. Walmart generally benefits from economies of scale, state of the art inventory management, and vertical integration. Costco plays more of a niche, with a much more limited inventory, and a greater focus on customer experience.

  • dodo

    “CostCo underpays their workers whist driving all other retailers in the area out of business through predatory pricing?”

    Pavan, please tell me ONE indian corner shop wallah, who decently pay his/her employees. I am asking for One only.

  • Pavan

    Why are we comparing WalMart retailers in America with random small shopholders in the land of corrupt regulators and worthless buerocracies again? I really don’t see the parallel.

    Did I say WalMart was better than Indian store-owners? No. I said WalMart isn’t good. Don’t try to distract from the point with red herrings.

    WalMart has become large enough in the USA to exercise monopsonist policies with regard to both its suppliers and it’s employees as well as monopolistic policies with regards to its products. This is not healthy for an economy, it’s every bit as bad a practice as India’s state-sanctioned license Raj. The only reason the outcomes aren’t as totally awful is because enough America’s retail market is developed enough to be able to compete with WalMart on quality by moving up-market. But among low-income shoppers WalMart has the market on lock-down and simultaneously reduces the number of jobs in the city, increases traffic, and lowers property values because of the crime and pollution that they frequently bring behind them.

    It’s not at all a poster-child for socially responsible business practice.

  • Mo

    Phew..I was waiting for Pavan to blame Wal-Mart for Katrina Hurricane, the Gujarat Earthquake and the Indonesian Tsunami.

    Care to site some sources or studies about all those accusations?

    By the way, I love Costco too, I bought my Lexus via their Auto Program.