How Costco hacked the American shopping psyche

ANCHORAGE, Alaska — When it opened in 1984, the Costco on West Dimond Boulevard in Anchorage, Alaska, did not seem like the future of food. A glorified shed the color of stale coffee, the warehouse offered the sort of products and deals Alaskans go crazy for: mammoth quantities of staples such as peanut butter and tomato sauce, along with local favorites such as caribou sausage. The state’s extreme environment and the need to travel hours or even days for groceries made it a hit right off the bat.

Today the parking lot, full of jacked-up, Thuled-out 4x4s on studded tires and mobile homes that look more like mobile fortresses, has a bit of an edge for a grocery store. There’s something edgy about the inventory, too: neoprene survival suits, meat grinders, gun safes.

Inside the vast store, overloaded shopping carts seemingly pilot themselves down the aisles. One was pushed by Gabriella Pelesasa, a teenager who was buying, among other things, a pair of whole pigs, at 45 pounds each.

As her sister sat on the cart eating a Costco hot dog, Pelesasa reported simply, “They have bigger versions of what we want.”

Though the Anchorage location, one of the retailer’s first, once seemed like a survivalist outlier, today it shows how visionary Costco was.

“In 2020, about one-quarter of the population stockpiled nonperishable foods,” said Jennifer Mapes-Christ of the market research firm Packaged Facts. Today, more than half do. Mapes-Christ said that while the pandemic was an accelerant, the trend began before that, driven by anxieties about climate change and economic instability.

A Costco store in Anchorage. The average size of a warehouse is 147,000 square feet. *Kerry Tasker / The New York Times*

In 2019, one-quarter of U.S. consumers shopped at Costco. Today it is nearly one-third. Costco is the third-largest retailer in the world, behind only Amazon and Walmart.

But the success of Costco goes far beyond hoarding. The company has hacked the psyche of the American consumer, appealing to both the responsible-shopping superego (“Twelve cans of tuna for $18!”) and the buy-it-now id (“I deserve that 98-inch flat screen”).

Ostensibly, Costco is a discount store, a place to save money and stretch your grocery dollar, but it is also an aspirational shopping experience, feeding that most American of appetites: conspicuous consumption.

Few companies have greater influence over what we eat (or wear, or fuel our cars with, or use for personal hygiene). Costco dominates multiple categories of the food supply — beef, poultry, organic produce, even fine wine from Bordeaux, which it sells more of than any retailer in the world. It is the arbiter of survival for millions of producers, including more than 1 million cashew farmers in Africa alone. (Costco sells half the world’s cashews.) Its private label, Kirkland, generates more revenue than towering brands like Nike and Coca-Cola.

The Anchorage location, Warehouse No. 10, opened in 1984. *Kerry Tasker / The New York Times*

For all its success, the company is not well understood. The top brass are insular and secretive. And beyond quarterly reports, Costco rarely discloses anything of its inner workings.

But to Charlie Munger, the billionaire investor and Warren Buffett’s right hand at Berkshire Hathaway, the balance sheet speaks for itself. In one of his last interviews before he died last year, he was succinct: “It is a perfect damn company.”

‘Everything was about trust’

Costco has often been likened to a cult, in part because once members — 134 million worldwide — enter the fold, they rarely leave.

Indeed, devotion to the brand is so avid it has inspired tributes on social media, bits on late-night shows by celebrities hoping to seem relatable and even a book, “The Joy of Costco.”

At a time when Americans increasingly view big brands as predatory monopolies or fumbling, broken-down legacies, Costco is revered for its high wages, attentive customer service and “deep commitment to integrity,” said Jeremy Smith, the president of Launchpad, an Oregon-based food brand incubator that specializes in placing products at Costco.

Whether Costco is a cult or not, its founder was a Bronx-born lawyer with utopian ideals and strict morals.

Sol Price, born in 1916, was the son of garment workers from Minsk, Poland, and belonged to the generation of displaced Jews and other Europeans who thrived in New York’s small businesses — the delis, candy shops and pawnshops of the Depression and postwar years. In the 1920s, the family moved to San Diego, where he went to high school.

After law school at the University of Southern California, Price started his career representing grocers and other merchants. With the temperament of a shopkeeper who obsesses over his customers and fusses over the smallest of details, in the 1950s Price began converting empty San Diego warehouses into members-only bazaars where for a small fee, shoppers could get everything from hosiery to cigarettes at wholesale prices. The key to the business, called FedMart, was simple: keep members renewing year after year.

In 2003, Price described his philosophy to Fortune magazine as “How do we sell stuff at the lowest markup?” The overriding goal, he said, was “to look at everything from the standpoint of, is it really being honest with the customer?”

Price had a gift for connecting with shoppers at a time of exploding prosperity and social change, but paradoxically, one of his rules was not making too much money.

“He grew up in a family of socialists. He was a capitalist. He liked to make money, but he was pro-union, pro-labor, pro-little guy,” said David Schwartz, who co-wrote “The Joy of Costco” with his wife, Susan. “Everything was about trust. He would rather lose your business than your trust.”

Through a series of mergers over the years, Sol Price’s FedMart became what we know as Costco in the 1990s. To an uncanny degree for a modern corporation, the company, now headquartered in Issaquah, Washington, has remained true to Price’s vision. It is still relationship-minded, and members seem satisfied, renewing at a rate of 93%. Last quarter, the membership fees accounted for $1.12 billion, about two-thirds of Costco’s $1.68 billion total net income. The dependence, in other words, remains mutual.

Wall Street also likes what Costco does, especially the dependable cash flow that comes from membership. Occasionally, shareholders feel neglected — in 2004, an analyst with Deutsche Bank complained that Costco was “overly generous” with its employee benefits, saying, “Public companies need to care for shareholders first.” But few complain about the returns.

“I did the calculation once,” Schwartz said. “The stock price has grown 17% annually since the founding.”

‘A giant ecosystem’

Four thousand miles south of Anchorage, in Sugar Land, Texas, no one flies in by bush plane to shop. But in this swampy Houston suburb, life orbits around Costco just the same.

The site of a former prison farm for the sugar industry, Sugar Land has transformed in recent years into an interlocking complex of master-planned communities. In June, Costco opened Warehouse No. 882, its third in the area, on a prime piece of land.

On opening day, the al-Abadi family stood at the entrance, trailed by a long line of members waiting since dawn, despite the punishing heat.

Shariah al-Abadi, who came with a shopping list in mind (“butter, oil, the essentials”) and the intention to stick to it, epitomized one type of Costco member. Her teenage daughter Fatima typified another: She was there for the possibility of surprise. For months, as the new warehouse rose from the mud, so had Fatima’s anticipation. After an hour shopping in the new store, mother and daughter checked out with a cart barely containing the day’s haul, including a six-foot-tall teddy bear.

“We’ll be back,” sighed Shariah al-Abadi, who said she goes to Costco “twice a week. Sometimes more.”

Like Anchorage, Sugar Land is home to a rapidly growing Asian American population (largely Indian and Pakistani American in Sugar Land), which Costco is eager to serve, despite the challenge of operating across a nation of wildly varying local tastes and traditions.

“Costco knows what’s going on in Texas because they have an office there,” Smith said. “It’s very astute. They’re one of the few retailers that will allow a brand to go into just one building and test their product.”

As a result, Costco is able to pick up on trends and send intel back to Issaquah. “It’s a giant ecosystem,” said Smith, if also one dependent on human capital — the expertise of warehouse managers. Costco tends to promote from within, inculcating personnel with the company’s idiosyncratic culture for decades, if not entire careers. Many of the company’s top employees began as baggers or food handlers.

That limited Costco’s expansion in the past. For many years the company declined to open new warehouses at the rate Wall Street wanted, because of management concerns that the facilities were too challenging to operate.