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Too Many Bananas: How Costco Figured Out Bulk Sizing

Anyone who has ever been to Costco (Nasdaq: COST  ) knows the dilemma of the wholesale consumer: Can you eat the bulk-size bananas before they go bad?

It’s a problem Costco founder, chairman, and former longtime CEO Jim Sinegal recognized. Last month, The Motley Fool’s own founder and CEO, Tom Gardner, ventured to a Costco warehouse in Florida for a conversation with Sinegal on business, leadership, and company culture. In the video below, see which bulk items were problematic, and how Costco developed its commitment to bulk sizing. (A transcript is provided below; running time: 2:33.)

Tom Gardner: Next question comes from Ellen. It reads, “I bought 200 shares of Costco in 1984 at the IPO. My 200 shares have grown to over 1,650 shares, with one sale and one purchase along the way. Lately I’ve noticed some products are less bulk size, and more what you might describe as a sensible size. Is that a deliberate strategy, and if it is, will it draw more members?”

Jim Sinegal: Well, one of the things that we’ve discovered in terms of our sizing is that on occasion, we’ve had a tendency to take it too big. The issue becomes something like bananas, as an example. We kind of downsized the bananas because we were getting ourselves into a position where the customer couldn’t eat all the bananas.

Gardner: What was the max number of bananas in bulk?

Sinegal: At one time we had them in a five-pound package, and then we eventually got it into a four-pound, and the three-pound package ... The same thing happened with ground beef. We were making our chubs of ground beef in seven- and eight-pound sizes, and we’ve reduced it to something between five-and-a-half and six-and-a-half pounds, so we’ve kind of moderated somewhat relative to the sizes, but we still like to buy the bigger sizes. That’s not to move away from those, even though you might suggest they’re more sensible.

Gardner: Well just explain to a newcomer to Costco, somebody who’s watching who may have just started a membership or is not yet a member. Why in bulk at all? What is the benefit to a member and what is the benefit to the organization?

Sinegal: The larger sizes almost always create a better savings for the consumer. It’s very rare when it doesn’t create a significant savings, and so we view it from that standpoint. If we could find a size that was smaller that was a better value than the bulk size, we would get into that size immediately, but that doesn’t turn out to be the case; very, very rarely unless there’s some anomaly in the marketplace.

Gardner: How frequently is a product in Costco sold for below the wholesale price? Does that ever happen? A company wants the exposure enough, or is that just extremely rare?

Sinegal: No, there are instances where in the years that we’ve been open where our prices, our wholesale prices, were lower than the traditional wholesale prices on products. No, that’s not an uncommon occurrence at all. Now one of the things that we don’t do is sell goods below cost. We never sell below our acquisition cost, unless we made a very serious mistake, in which case we’re clearing the merchandise out and have to mark it down, but we try not to get into that trap. 

The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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10/25/2016 3:33 PM
COST $150.91 Down -1.21 -0.80%
Costco Wholesale CAPS Rating: ****