Halls of Shrewd'm / US Policy
No. of Recommendations: 13
Extracted from a recent post in response to a question about brokerages:
I am very fond of this 'cost-plus' model, both as a client and as an investor, since I think it makes for good long-term relationships with clients. I still kick myself for not buying Costco 20 years ago (because it cost 30x earnings; the shares are up 20x since then), and I like this feature in other investments that have a similar philosophy. I'm thinking of Carmax, in car dealerships, where they basically target a $2000 margin which covers all their costs and a small profit, dand don't try to take advantage of you in a million other small ways.) I would be very interested in hearing suggestions about other examples of this kind of business strategy...
Since my question was buried in a post about a brokerage subject that many people may have skipped over, I am repeating it here in a new post. I am very curious to hear if anyone has thoughts about other businesses that use something one could describe as a cost-plus strategy: not aiming for huge profit margins, but aiming at market share gains and customer loyalty by charging prices as low as possible while aiming for a small profit.
Thinking about this, another company that has pursued something similar, with great success, is Amazon. They don't skimp on customer service, they try to keep costs low, and importantly, they seem to have adopted a strategy of passing most of these savings along to their customers. Just like I almost take for granted that I am getting a great price at Costco, I do the same for online purchases at Amazon, and for brokerage activity with Interactive Brokers. I have no personal experience with Carmax, but I get the impression that they pursue a similar strategy. And as a result, the first 3 have built tremendous loyalty for this particular customer, and have also experienced a lot of growth, reinforcing their ability to obtain low costs. And it is probably not a coincidence that all of these have been great investments.
Can anyone think of other companies that seem to follow the same approach?
TIA, DTB
No. of Recommendations: 2
GEICO and Progressive
No. of Recommendations: 1
Speaking of GEICO & Progressive….todays article by Rational Walk compares the two,
https://newsletter.rationalwalk.com/p/progressive-...Including this interesting comment on the AR,
“I am less concerned about the rail and utility businesses compared to many Berkshire shareholders. However, I have concerns about GEICO’s performance that have not been widely discussed in the financial media.”
ciao
No. of Recommendations: 0
GEICO and Progressive
Ok, I'll buy that. Auto insurance is very competitive, so I don't know if anyone has much choice about where they set premiums, but both are definitely low-cost providers and gaining market share by passing along a lot of those savings. I no longer own Berkshire, but I have a small stake in Progressive, that really should have been much bigger, and that I would certainly increase if the price dropped a bit. And thinking of my experience with Costco, I should probably just go ahead and buy more, even if the price seems high.
So so far, we have COST,IBKR,KMX,AMZN,PGR,parts of Berkshire probably, ... 10% of my portfolio in all (mostly from IBKR), but I'd love to hear about some more candidates for the list.
dtb
No. of Recommendations: 0
I have no personal experience with Carmax, but I get the impression that they pursue a similar strategy.
I get the impression that Carmax do not pursue such a strategy. Do they claim to?
No. of Recommendations: 1
I get the impression that Carmax do not pursue such a strategy. Do they claim to?
No, not as far as I know. But I say that that is their strategy because they seem to have a constant $2000 pre-tax margin on every vehicle, no matter where car prices go. They also have a fixed-price, no-haggle policy that means that the price that they set is pretty much the price the car gets sold at. And so I hypothesize that this is their undeclared strategy, and has allowed them to consistently gradually increase their market share. I could be wrong.
No. of Recommendations: 1
COST and AMZN have more of a membership model, no? Pay a fee to be part of the club to buy your things. I'd say Walmart was more of a cost model, until they tried to follow COST and AMZN into membership. Though they did have Sam's Club which was membership model maybe.
Does Carmax shoot for a $2k profit model on a $120k car?
No. of Recommendations: 3
ALDI and LIDL
No. of Recommendations: 0
COST and AMZN have more of a membership model, no? Pay a fee to be part of the club to buy your things. I'd say Walmart was more of a cost model, until they tried to follow COST and AMZN into membership. Though they did have Sam's Club which was membership model maybe.
Yes, a valuation metric I looked at was using a (very high) multiple on their membership revenue, and essentially zero on the rest of their sales (which they essentially make very little profit on). My premise was that memberships would grow quickly as they opened new stores and they had good pricing flexibility here.
tecmo
...
No. of Recommendations: 0
I'd add Trader Joe into that category. Though not purely cost-plus.
No. of Recommendations: 2
unsure cost+ has any particular magic.
a. significant survivor bias on names listed here.
b. a lot of profitable companies have no interest in sharing with consumers (and many with other owners\shareholders if they can help it!)....the majority am sure.
c. theoretically, there should be a limit on new entrants entering into a profit-capped niches. however, we have been in a long era of capital funding never profitable enterprises. that is hard to squash near market highs.
based on conversation here, i does not appear even these paragons are very explicit on exactly how much current and future savings will be passed on.
No. of Recommendations: 1
Can anyone think of other companies that seem to follow the same approach?
Ryanair. Ticker RYAAY. One of the few airlines that makes money without frequent bailouts or bankruptcies.
Low ticket prices but you get no frills with that. You pay for everything extra.
StevnFool
