Superstore staff in Alberta vote in favour of strike action

[iggy_oi]

Originally Posted by Slava

Are you just plain skipping the post between with the figures from the corporation’s financials? It’s spelled right out for you there.

Not skipping it at all. I just think it’s silly to compare the margins of a company that only operates in one jurisdiction to the overall margins of a company operating across multiple jurisdictions. Particularly when a direct comparison of the two jurisdictions in isolation is available. Fair enough?

But regardless, who cares about Costco and their margins.

Well Vlad brought them up, so if I had to guess…

You already said that Superstore pays its employees among the highest in the business and this is about things other than money.

Having the highest hourly rate does not mean you will earn more overall than someone working at another company at a lower rate of pay. It also doesn’t mean you’ll have the same expectations at work. You seem to be trying to imply that people working at different chains have the exact same expectations which couldn’t be further from the truth.

[Snuffleupagus]

Originally Posted by GGG

How do you assess someone’s value versus their wage?

Difficulty of work and importance to society are high on my list, sadly a lot of these jobs make the worst wages.

[Knightslayer]

Originally Posted by bizaro86

It isn't necessary to discuss this as a hypothetical, they publish financials. For the last pre-pandemic year (2019) they did 149.3 billion in revenue. They sold 3.352 billion in revenue from memberships, and had net income of 3.659 billion.

So the vast majority of their income came from membership sales. After removing membership revenues net income was 307 million on sales of 149.3 billion. That is 0.2% net margins.

So while you're right they do make money on their goods, it isn't much as a percentage of sales.

Edited to add: their sales were up a bunch in fiscal 2020 due to the pandemic, so their net income margins after deducting membership revenues were a bit higher. 0.28% of revenue. Less than 1% of revenue seems pretty skinny to me.

Don't forget they have the cafeterias which they lose money on. Gas stations are also a loss leader. also other money loss ventures. You cant just take the revenue from memberships and assume every dollar above that in total revenue is strictly from products. You need to subtract the money they lose as well.

They sell way too much stuff at high prices to say they don't make money on their products. They want people to believe that. Anything that costco has that Wal-Mart also sells you can find at Wal-mart for close to same price or cheaper.

[jayswin]

Yeah, Costco not making margins on their products is news to me and seems weird considering their cut throat business style with vendors.

[jayswin]

A lot of these vendors have to sell their products at near break even for the "opportunity" to be sold in costco and then after a few months or a year costco suddenly dumps them and moves onto another vendor.

[CliffFletcher]

Originally Posted by jayswin

Yeah, Costco not making margins on their products is news to me and seems weird considering their cut throat business style with vendors.

Clearly the biggest beneficiary of Costco’s business model is the consumer. Maybe our sense of entitlement to extremely cheap goods is the problem here.

[GGG]

Originally Posted by Snuffleupagus

Difficulty of work and importance to society are high on my list, sadly a lot of these jobs make the worst wages.

Interesting, I see it a little differently.

I look at scarcity of people who can do the job and the consequences to society if a role is screwed up.

[bizaro86]

Originally Posted by Knightslayer

Don't forget they have the cafeterias which they lose money on. Gas stations are also a loss leader. also other money loss ventures. You cant just take the revenue from memberships and assume every dollar above that in total revenue is strictly from products. You need to subtract the money they lose as well.

They sell way too much stuff at high prices to say they don't make money on their products. They want people to believe that. Anything that costco has that Wal-Mart also sells you can find at Wal-mart for close to same price or cheaper.

In aggregate on everything they sell other than memberships their net income margins are 0.2% to 0.3%. That isn't an argument, its math from their audited financial statements.

I agree their gross margins are different among different products, with gas being less than clothes and housewares, but that isn't relevant to the overall demonstrable fact that Costco makes very little money on anything other than selling memberships.

They do grind their suppliers, and operate with very few SKUs in a huge box format, and put out goods directly in shipping boxes. Nearly all of those savings are distributed to consumers in the form of lower prices and employees in the form of higher wages.

[bizaro86]

Originally Posted by jayswin

Yeah, Costco not making margins on their products is news to me and seems weird considering their cut throat business style with vendors.

You are maybe confusing gross and net margins? They earn gross margins of ~11% on average. That is very low for a retailer. Then they spend about 10.8% of their revenue (nearly all their gross margins) on operating expenses (wages, utilities, property taxes, etc). So their net margins on their sales come out at about 0.2%.

Most of thr money they save from strong arming vendors goes to consumers, and some goes to employees.

[opendoor]

Originally Posted by bizaro86

In aggregate on everything they sell other than memberships their net income margins are 0.2% to 0.3%. That isn't an argument, its math from their audited financial statements.

I agree their gross margins are different among different products, with gas being less than clothes and housewares, but that isn't relevant to the overall demonstrable fact that Costco makes very little money on anything other than selling memberships.

They do grind their suppliers, and operate with very few SKUs in a huge box format, and put out goods directly in shipping boxes. Nearly all of those savings are distributed to consumers in the form of lower prices and employees in the form of higher wages.

You can't just take membership revenue and assume it's 100% profit. There are costs involved with that system which reduce the net profit from memberships. The biggest one is the fact that all Executive Members get 2% of their spending refunded. So if someone with an Executive Membership spends $10K in a year, they get $200 back. And based on how they report their income, that would show as $120 revenue from their memberships and a $200 loss on their sales revenue. And that's not a small factor, as about 40% of Costco members have Executive Memberships.

Then there are the promotions that they're always running for memberships, often giving you $50 off of $100 (or $100 off $250) in spending if you buy a $60/$120 membership. Again, that will show up as $60/$120 in membership revenue on their Income Statement, but achieving that meant $50/$100 is cut out of sales revenue.

And of course there are the marginal costs of running the membership system (staff time, infrastructure, etc.).

[bizaro86]

Originally Posted by opendoor

You can't just take membership revenue and assume it's 100% profit. There are costs involved with that system which reduce the net profit from memberships. The biggest one is the fact that all Executive Members get 2% of their spending refunded. So if someone with an Executive Membership spends $10K in a year, they get $200 back. And based on how they report their income, that would show as $120 revenue from their memberships and a $200 loss on their sales revenue. And that's not a small factor, as about 40% of Costco members have Executive Memberships.

Then there are the promotions that they're always running for memberships, often giving you $50 off of $100 (or $100 off $250) in spending if you buy a $60/$120 membership. Again, that will show up as $60/$120 in membership revenue on their Income Statement, but achieving that meant $50/$100 is cut out of sales revenue.

And of course there are the marginal costs of running the membership system (staff time, infrastructure, etc.).

Sure, but the point of the business is to collect membership revenues, not really to sell stuff at a profit. If you buy the regular membership, you get a discount off shopping other places. If you buy the executive membership, you get an extra 2% off.

If costco wasn't collecting membership revenues (which have gross margins in the 95-98% range) the rest of their business at 11% gross margins doesn't work at all.

So while you are correct that was a simplifying assumption, that still doesn't take their net income margins on the products they sell above 1%. Aka very low

[opendoor]

Originally Posted by bizaro86

Sure, but the point of the business is to collect membership revenues, not really to sell stuff at a profit. If you buy the regular membership, you get a discount off shopping other places. If you buy the executive membership, you get an extra 2% off.

If costco wasn't collecting membership revenues (which have gross margins in the 95-98% range) the rest of their business at 11% gross margins doesn't work at all.

So while you are correct that was a simplifying assumption, that still doesn't take their net income margins on the products they sell above 1%. Aka very low

With 40% of their membership getting 2% back, and with executive memberships generally spending more, I don't think it's a stretch to assume that 50-60% of their revenue is rebated back at 2%, which is ~$1.5-2B. That alone takes a pretty big chunk out of their membership revenue.

It's still a high-margin part of their business and allows them to succeed with lower margins on what they sell, but my point was more that you cannot take the numbers from their Income Statement at face value. They say right in their annual report that the rebates to executive members are deducted off gross revenue. So when you conflate their membership revenue with pure profit, you're ignoring a significant amount of money spent to achieve that membership revenue. No one's paying $60 extra for an executive membership without the 2% return.

It would theoretically be possible for them to lose money on their memberships (if rebates were higher than membership revenue) but does that mean the company's profits would disappear (or even be significantly reduced) if that happened? No, because they still make money on their normal sales.

[iggy_oi]

Originally Posted by Pizza

you can bet the strike will be called days before Canadian Thanksgiving.

It's no coincidence that their vote comes before the 2nd highest shopping period of the year, putting more pressure on Loblaw's execs

If that’s the plan we should know by today. Hopefully it’s a positive sign if they don’t serve notice because you’re right that it would make sense to go out this weekend from a leverage perspective

[Dion]

Originally Posted by iggy_oi

If that’s the plan we should know by today. Hopefully it’s a positive sign if they don’t serve notice because you’re right that it would make sense to go out this weekend from a leverage perspective

How can it be a leverage position when other grocery stores are open? Customers will shop elsewher for their Thanksgiving needs.

[Red Potato Standing By]

Originally Posted by Dion

How can it be a leverage position when other grocery stores are open? Customers will shop elsewher for their Thanksgiving needs.

You just answered your own question, it is a leverage point because shoppers would have to go elsewhere, meaning they would not be spending money there.

[you&me]

Originally Posted by Dion

How can it be a leverage position when other grocery stores are open? Customers will shop elsewher for their Thanksgiving needs.

They employees threatening to strike aren't looking to leverage consumers, but Loblaws executives that won't want to lose revenue from one of the busiest weekends of the year.

[DoubleF]

Originally Posted by opendoor

You can't just take membership revenue and assume it's 100% profit. There are costs involved with that system which reduce the net profit from memberships. The biggest one is the fact that all Executive Members get 2% of their spending refunded. So if someone with an Executive Membership spends $10K in a year, they get $200 back. And based on how they report their income, that would show as $120 revenue from their memberships and a $200 loss on their sales revenue. And that's not a small factor, as about 40% of Costco members have Executive Memberships.

Then there are the promotions that they're always running for memberships, often giving you $50 off of $100 (or $100 off $250) in spending if you buy a $60/$120 membership. Again, that will show up as $60/$120 in membership revenue on their Income Statement, but achieving that meant $50/$100 is cut out of sales revenue.

And of course there are the marginal costs of running the membership system (staff time, infrastructure, etc.).

I think what people are alluding to is that the costs associated with the membership income is relatively negligible and it is the absolute bulk of the revenue Costco earns.

https://www.investorschronicle.co.uk...n-of-strength/

If you look at the 2019 chart:

Profit before membership fees = $1,471 vs Net sales of $149,351 or less than 1%.

Membership fees are slightly more than double the profit before membership fees and the admin costs and cash back are likely significantly lower than the overall costs for running a warehouse.

Overall operating profit is around 3.17% and that ratio is pretty consistent year over year almost like clockwork which in honesty is pretty damn low for companies of that size (albeit it's better than losses).


Semantically, there's a bit of confusion going on. It is not that Costco has zero margins on their product sales. Some are higher and some are lower and the argument is that typically they mark it up around 14-15% which is pretty low. But when you take into account the pool of product sales, cost of product and cost of sales/warehousing, it's nearly break even margins. That's what people are hinting at when they say there's no margin on the products you buy on Costco. Then when you look at the membership fees, even if it was 50% in cash back and admin costs, infrastructure costs overall, at 50%, that's significantly higher than basically break even on actual product sales.

This is in a nutshell how many business course case studies on Costco attempt to break it down.

[opendoor]

Originally Posted by DoubleF

I think what people are alluding to is that the costs associated with the membership income is relatively negligible and it is the absolute bulk of the revenue Costco earns.

https://www.investorschronicle.co.uk...n-of-strength/

If you look at the 2019 chart:

Profit before membership fees = $1,471 vs Net sales of $149,351 or less than 1%.

Membership fees are slightly more than double the profit before membership fees and the admin costs and cash back are likely significantly lower than the overall costs for running a warehouse.

Overall operating profit is around 3.17% and that ratio is pretty consistent year over year almost like clockwork which in honesty is pretty damn low for companies of that size (albeit it's better than losses).

Semantically, there's a bit of confusion going on. It is not that Costco has zero margins on their product sales. Some are higher and some are lower and the argument is that typically they mark it up around 14-15% which is pretty low. But when you take into account the pool of product sales, cost of product and cost of sales/warehousing, it's nearly break even margins. That's what people are hinting at when they say there's no margin on the products you buy on Costco. Then when you look at the membership fees, even if it was 50% in cash back and admin costs, infrastructure costs overall, at 50%, that's significantly higher than basically break even on actual product sales.

This is in a nutshell how many business course case studies on Costco attempt to break it down.

Yeah, if someone says half of Costco's profit comes from membership fees, that's fine. I'm just taking issue with the idea that because the membership revenue is roughly equal to their operating profit, that that means that their membership revenue is the source of basically 100% of their profits and they make no money on their sales, which is what these posts were suggesting:

Originally Posted by VladtheImpaler

Costco doesn't make anything on products. The profit comes from the membership sales.

Originally Posted by bizaro86

It isn't necessary to discuss this as a hypothetical, they publish financials. For the last pre-pandemic year (2019) they did 149.3 billion in revenue. They sold 3.352 billion in revenue from memberships, and had net income of 3.659 billion.

So the vast majority of their income came from membership sales. After removing membership revenues net income was 307 million on sales of 149.3 billion. That is 0.2% net margins.

If their Income Statement had a line item for $4B in hot dog sales, but the costs of selling them were buried in the "Cost of Sales" line item, we wouldn't try to argue that hot dogs were the sole source of their profits because we'd be ignoring the expenses relating to them. But that's what's happening with membership revenue. The 2% rebate that is returned back to executive members is deducted from their Net Sales line item on their Income Statement, and that's likely in the $1.5-2B range. So if you exclude membership revenue/expenses, it would be more like $151B in Net Sales with $3-3.5B in Profit Before Membership Fees, which is about 2.1%.

[bizaro86]

You could look at the 2% rebate as a cost of the membership revenues, but that isn't how the company, generally accepted accounting principles, or I look at it. There is a reason rebates are always recorded as reductions in revenues and not a cost.

Also, its probable the 2% incentivizes additional purchases by exec members, so logically speaking the gross margin on those additional purchases would be a full offset against the rebates even if you did decide to make your own accounting rules.

If you think something in the 90% contribution margins for memberships is more appropriate (to account for payment processing and the minimal staff time to sell memberships) great, whatever, doesn't really make a differencr. The business exists to collect membership fees, not earn margins on sales. Anyway, we're way off topic for a superstore thread here so I'm probably done, and you're welcome to have the last word on the matter.

[Ducay]

Came for the strike action updates, stayed for the forensic debate about Costco's membership structure and profit contributions