The economics of Costco

Speaker 1 Boom. It's Ava Speaker 2 here and Gretchen and Welcome to our podcast today. We are going to be discussing the economics of Costco and how Speaker 3 it relates to several factors of the economic world. Speaker 2 This includes connections to the categories of scarcity opportunity cost trade-offs supply and demand efficiency, a marginal analysis, and the circular flow model. Whoa, that's pretty overwhelming. Let's just start off with scarcity. So what is scarcity? Well, economics as Speaker 3 a whole focus is on the terminology and scarcity of choices that individuals make underneath this wide umbrella of scarcity. Speaker 2 Okay? Okay. But you still haven't answered my question. Speaker 3 Well, scarcity exists. If we desire more of something than we can have people face scarcity on a daily basis, whether it's businesses, facing scarcity of the materials and products they use to sell Speaker 2 Miss facing scarcity of tax dollars Speaker 3 or countries facing the scarcity of energy sources. Speaker 2 Oh, interesting. So just to reiterate what you're saying, scared of City exists everywhere and is a significantly emphasize Topic in the economic world today. Speaker 3 Exactly. Time and food or also scarce in today's world, but let's just focus on the scarcity of businesses products. Specifically the popular Costco industry that is well known across this country. Now let's show Speaker 2 back to the beginning of covid, which you Like forever ago and discuss the scarcity of toilet paper paper, towels, and water toilet paper and paper towels are Speaker 3 certainly a basic need in today's society, along with water, which is most definitely a need. Speaker 2 I would most definitely agree according to McDonald's, consensus and 2020. At the peak of covid, toilet paper, face the shipping delay and members, who purchase it online were recently told by the company that their orders would take a little while to process because of increased demand a purchase, some it was actually placed on toilet paper. Back in August with members saying they were only able to buy one pack each trip. Speaker 3 That's definitely controversial. And this relates along with the scarcity impact of other key paper products that were virtually impossible to find when the pandemic started as McDonald further explained that members were only allowed to buy one or two packs at a time, which may mean fewer paper towels because the Kirkland brand option was downsized at the time and Speaker 2 back to the scarcity of water, that's it. Definitely problematic and will call for thirsty Speaker 1 economy. Speaker 2 Last July Costco, memories posted, pictures Speaker 3 of Speaker 2 social media, out signs in front of the water options. Showing the product limit of five cases of any brand per member. The sign alludes to the shipping. Delays that galante spoke about it says we are currently out of water. There is not yet an estimated time of arrival for our next delivery. We apologize for the inconvenience when there is a major shortage of important goods and other necessary Goods. Such as computer ships, cleaning supplies, and oil. Yes, it definitely puts individuals at a risky state. So our next topic is opportunity costs. Speaker 3 What are those again? Speaker 2 An opportunity Speaker 3 cost is the loss of potential gain from another alternative. When one alternative is chosen, Speaker 2 okay? And how does that relate to the economics of Casco? Speaker 3 Well, one way we see, Costco is with their gas prices with people with memberships. Are the only ones allowed to purchase Casco gas, and it's decently cheaper than your regular gas. And guess Speaker 2 so they have to choose whether it's worth it or not to buy the Costco membership for the gas to be cheaper in the long term, right? Speaker 3 Yes, people could choose to buy a Costco membership and get cheap gas when it Costco or not to have a membership and by pricier gasps where they live Speaker 2 decisions decisions. Yes. In fact, at the same time inside of Costco Speaker 3 people are choosing between multiple similar products in realizing the benefits of them. Once Speaker 2 purchase Costco has samples. So you're able to make decisions about what products you like, the most, And many people switch up, every time they shop Costco organizes its store, almost like a maze. So people get lost looking for their needed products and are more likely to buy products. They weren't planning on Speaker 3 buying one time. I walked in needing milk and walked out with a whole cake, a new iPad, and a sled Costco tries to organize their products differently every time people shop. So people buy and try new things and make lots of choices. Yeah, one video I Speaker 2 saw one video I watched it. That there were so many decisions happening and Costco, some people spend more time than they want deciding which deals are right for them. Yeah. Do you spend time waiting in the line for the rotisserie chicken in the deli? Speaker 3 Or should you be using your time to get a great deal on the newest? IPad, Speaker 2 I would have to go with that chicken. It's so good, but the newest iPad will be amazing as well. Just like you said, there's so many decisions that Costco at least 10 different Speaker 3 brands, of coffee grounds exist in one aisle, people have to make the And for which one they're going to buy in which brand they are going to give up. And Speaker 2 this is a great example of opportunity cost because the coffee brand that is giving up is the opportunity Speaker 3 cost. Yes, because it is the alternative item to the coffee that you're going to buy. Most Costco's are a Speaker 2 whopping one hundred and forty six thousand square feet. While other grocery stores, tend to be a lot smaller around 15,000 square Speaker 3 feet. Great example of how size of Costco does affects decisions, people get and have to Make while shopping there. Speaker 2 Now, trade-offs are similar and different to opportunity cost in a few ways. Yep. The definition of a trade-off is Speaker 3 balanced achieve between 220 but incompatible features like a compromise. Speaker 2 Ah, so in an also involves choices but between different items. Yep. The word incompatible refers to two things. So opposed and character, as to be incapable of existing together. Yeah, so basically, they are just different products. So, basically the trade-off, F is the action of what you're choosing in the opportunity. Costs are the effect. After you make the, your decision Speaker 3 Quick question, what is the key to Costco? Success, Costco Speaker 2 wants you to buy membership, they don't actually care. What you buy, Speaker 3 you get caught up in the adrenaline of Costco, but you aren't making the most rational decisions, you might just buy something because it's such a good deal and you didn't actually need it. Exactly. Speaker 2 This next topic. Perfectly relates to the past two years because of Speaker 3 covid. Last spring when covid began to get bad, many people bought out stores in the banded more than the stores had supplied. Yeah. Speaker 2 Yep. Getting just the basics was hard because everyone bought what they could get their hands Speaker 3 on particularly toilet. Paper was a main product that was high at high demand in March, 20, 20, Speaker 2 like we said about scarcity before many Costco sold out of toilet paper or limited to one pack per customer. Speaker 3 Yes, as the covid, waves. Pushed up demand Costco limited purchases of toilet paper and all ER, Staples such as Speaker 2 water, many store shelves, such as Costco were left bare because of the little Supply in the high demand of these Speaker 3 items. The New York Times article says the retailer Costco which is known for its Bargains On bark, bulk food, and cleaning supplies confirmed in a fourth quarter, earnings call on Thursday, that it was putting some limitations on key items such as toilet paper cleaning products and Kirkland Signature Speaker 2 water. Now, with the Delta variant Costco is trying hard to prevent a repeat of those bare shelves from last year. Speaker 3 Along with the rising demand for these items due to covid many retailers. See, a shortage in deliveries because of high freight costs? Speaker 2 How does that affect the supply of items at Costco and other large retailers? Speaker 3 Well, because of Costco's extremely large, and bulky items, that can be challenging to schedule deliveries, and keep up with customers demand in expectations for these Speaker 2 products. That's why Costco gradually Rising the prices. It's actually better for is actually for the better so that they They are less shortages of important products Speaker 3 on March 5th 2020. The Los Angeles Times stated the sheriff's. Deputies were called to a Costco in Chino Hills on Thursday when a crowd of customers became unruly after finding that items such as water, paper towels and toilet paper were out of stock presumably because of the coronavirus inspired buying Authority said Speaker 2 wow everything was so uncertain about what was happening. People went all out purchasing, Costco's items and they just couldn't keep up with it in the man. So they put limits on popular items. Speaker 3 Yep. And these supplies sort of Jews are back in. 2021, in fact, 60% of Americans reported being unable to get a certain product, they needed in the summer. Speaker 2 Holy Supply Speaker 1 problems. Speaker 3 Tell me about it Speaker 2 this year their problems revolve around the changes covid made to the world and economy. Speaker 3 Really what caused the shortage is this summer, Speaker 2 shipping containers. Oh yeah, because of the pandemic shipping containers have Speaker 3 ended up in the wrong places, sitting empty where there's no product to fill them Speaker 2 in there, aren't in the port's where we do need them. Oof Speaker 3 the second problem is some of the decisions made during the pandemic. Speaker 2 Yep. Big electronics and Chip makers Focus their energy on. Speaker 3 Onyx, all of a sudden everyone Wanted cars. And then there were no Speaker 2 semiconductor chips for cars and great example of how quickly people demand something and Supply needs to change in order to produce it and product for the Speaker 3 consumers. Now, let's talk about the holiday season, which we are approaching right now. Speaker 2 Whoo-hoo great idea every year it seems that there's are shortages on items near the holidays, because lots of people are shopping for gifts and food, Speaker 3 consumers will be paying popular, 10% more. This holiday season due to previous shortages around the world. Speaker 2 So why should I say The post says, two months out from the peak holiday shopping season. Consumers are encountering, empty store shelves, Rising prices and shipping delays that seemed to stretch into Oblivion. So it seems Speaker 3 like shipping delays play into the supply of holiday items as well. Speaker 2 The nation also assured on truck drivers and warehouse workers. Speaker 3 No, wonder my packages are taking so long to come. Speaker 2 Yes. Now, let to finish off this topic. How does this relate to Costco? Well, like we Speaker 3 talked about earlier, all of these problems happen for most retailers that have large shipments from far away, Speaker 2 right? And any stores that have Holly supplies will likely to be raising their prices as Speaker 3 well as long as Costco keeps their samples, I think, I'll be, okay, spending a little extra on their products due to Consumers, high demand the past year Speaker 1 or two Speaker 2 Hey Gretchen Gina what margin Speaker 3 analysis home? I might need a Speaker 2 refresher. Well, think of marginalize, the cost or benefit of one more of something Speaker 3 like what benefit I would get from buying two chickens from Costco, instead of one, Speaker 2 exactly. Yes, Marshall analysis is an examination of additional benefits of an activity compared to the additional cost incurred by that same activity. The word marginal means one additional, so like one more of something. Yes. We make decisions in the margin. Meaning one at a time, I get it. Let's come up with an Speaker 3 example. How about the Speaker 2 chickens? Sure. So why do you buy a rotisserie chickens at Costco? Gretchen they Speaker 3 taste good. They're cheap and it means they don't took a good home. Speaker 2 Okay? Good solid answer. So what is the marginal benefit now? What is the cost of eating this chicken? Speaker 3 I will not be hungry anymore. I will have more calories and I bought the chicken instead of making it at home, Speaker 2 great. So that is what the cost of buying chicken and eat. In it is cool. So let's say, you are really hungry about to classical chickens. What would be different? Well, the second one wouldn't taste as good as the first exactly. Speaker 3 Now, what if we compared the cost of the chicken to the Speaker 2 benefit? That's right. Is it worth it? Speaker 3 Well, even if I got unlimited free chickens from Costco, I'm unlikely to buy them, get them every day and continue to eat them. Speaker 2 Why? It doesn't seem that bad Speaker 3 because even though I'm not physically paying for the chickens, there's still a Cause Guest and that is the lines. I would have to wait in them and the same taste every day when I ate the chicken. Therefore, I'm not benefiting from the chicken. Speaker 2 So comparing the benefit of the chickens at the cost of the chicken is marginal analysis. Yep. Yeah. Then maybe I would get sick of the same chicken every day even if it was free, it just want to taste as good as the second or third time. Alrighty, if you are enjoying our educational pockets and want to learn more about economics, listen to Josie and Lanes Speaker 3 podcast about the economics of the Speaker 2 Olympics. It began streaming, December 22nd. Hope you enjoy. Yep. Okay. But Gretchen, I have a question for you, go for it. It's Costco efficient. Like, I know that efficiency is achieved a maximum wasted effort, or Speaker 3 expense. Yeah. So how exactly is Costco using their resources efficiently and is everything, if everything is somewhat all over the Speaker 2 place? Well, according to Nasser Costco has very skilled Merchants. That usually have been employed there for a very long time. This means that they are good at providing products that they know Castle. Consumers will like likely want a drizzle Speaker 3 prices yet. Costco does a limited number of items but these items has got to be pretty Speaker 2 precise as now. So explains Costco has to think about giving space to a product in a different way that states Annex what, and if the product doesn't sell, it is a media limited which is somewhat of a standard, very Cutthroat efficient method of Speaker 3 providing products. Well, according to the Wall Street Journal, the average Costco warehouse talks about 3700 products at any given time, but less than 1/10 of most supermarkets stock up to 40 to 50 thousand items. So we see, Do we do see this major differentiation not? Nevertheless even though Costco stocks fewer items. The items they do start have a serious reputation. Speaker 2 Let's just look at Costco's. Private label brand Kirkland, according to Noster Kirkland, is a Costco's. Go to Brian brand when they want to offer something at a certain price, they don't feel a manufacturer can can supply it. So the rule of themselves. Yep. According to the Wall Speaker 3 Street Journal, since it was launched in 1995 Kirkland, has built a reputation for quality and low prices on everyday items in March, 20 21 Kirkland's products made up a quarter of Costco's 166 billion dollars, in annual annual sales. Speaker 2 Wow, that really is an efficient use of resources is in Speaker 3 production. Sure is. But even when you ask customers about this overruling Kirkland, efficient brand, the brand, And is high quality and at a lower price and you don't even need to be afraid of it as NASCAR concludes. So I bet that this customer Laura today in a sense would have certainly helped Costco during the pandemic. Exactly Costco has been efficiently thriving through the pandemic, despite the popularity of online shopping. Wow. Speaker 2 All right, let's talk about the circular flow model and related to specific current event in Costco. What is the circular flow model again, while the circular flow It was an economic model that shows how money flows through the economy. It goes to certain sectors and repeats and illustrates the significant interactions between key players in the economy. Speaker 3 So the first sector of the circular flow model is households households meaning like you mean you right? Yeah exactly. As we buy our goods and services for firms or businesses such as Costco and as we provide the firms with land, labor and capital and Entrepreneurship, we in return receive Revenue Ooh, or money income in form of wages, rents interest in profits. That makes us a significant part of the circular flow model in our economy. Speaker 2 Oh, I see in another significant sector section of the Speaker 3 circular flow model in our economy, is the factor market, right? Yep. This is where we all see these factors of production sold to. Now, the factor market links back to the businesses or firms because the firm's actually buy these factors of production from Factor market, and in return, the factor market receives Factor payments. Speaker 2 Well, that was a lot of information to retain but tell me more, Speaker 3 well, lastly there is the product Market here, businesses like Costco, sell products and forms of goods, and services to the product market and the businesses, therefore receive Revenue. Speaker 2 So how does this link back to Speaker 3 us? Well, finally, the households buy these Goods in these and services from the product market and in return receive consumption exponential's. Speaker 2 Okay, well I think we've exhausted this topic. Speaker 3 Yeah. So how does this relate to Costco Speaker 2 exactly? Well, we've been pretty much talking about this. All along from 12:00 to covid shopping the circular flow model is intertwined throughout our daily life. Speaker 3 Well, that's truly amazing. I'm gonna go get some Costco samples. Now, Speaker 2 wait for me.