The Business Strategies Behind Costco, Starbucks, Chick-fil-A and More | WSJ The Economics Of

from a fried chicken sandwich and coffee to beauty and Retail we uncover the surprising stories behind the world's most successful companies their profits how they've expanded and how they've navigated a changing economic climate our first story is about America's favorite chicken fast food company Chick-fil-A a business based on a secret recipe this is the Chick-fil-A chicken sandwich which according to multiple industry surveys is America's favorite fast food visit a Chick-fil-A anywhere in the United States and you're likely to see a long line of customers patiently waiting to order the restaurant's Flagship menu item there you guys go thank you so much my pleasure y'all have a great rest of your day in part thanks to its famous chicken today Chick-fil-A is the third largest U.S restaurant chain by domestic sales we're still seeing tremendous growth in our business so far this year we're up about 20 percent so how did this private atlanta-based fast food chain become one of the most popular restaurants in America this is the economics of Chick-fil-A Chick-fil-A has long had a unique approach to business that the company credits with its success from the beginning Chick-fil-A's business was built on a recipe after testing hundreds of methods restaurateur Truett Kathy developed a faster way to cook boneless chicken using a pressure cooker and peanut oil it's perfect and so we've kept that locked away in a vault and we'll continue to use that same recipe none of the employees have access to it so it is still shrouded in a lot of mystery there are recipe sites where you can try to recreate it but they have never put it out officially the original chicken sandwich is the same today as in 1967. a breaded breast of chicken two pickles both placed on a buttered Toasted Bun [Music] Chick-fil-A has long taken Pride for its commitment to selling high quality product in fact Chick-fil-A's name is a take on chicken filet with a capital A at the end symbolizing top quality while other fast food chains tend to expand their menu offerings over time to attract new customers Chick-fil-A's business model has always been to maintain a small menu focused on chicken sandwiches they like to say it's simple so they want to keep customers knowing what's on that menu to be able to easily decipher what they want we think about the way that we serve guests that consistency is really important that we get hot sandwiches cold salads and just tasty products customers seem to agree since its Creation in 2015 the American customer satisfaction index has been dominated by Chick-fil-A Chick-fil-A often rates very high even though the service and the drive-through can be slower people are very happy with the quality of the service they get in general today many Chick-fil-A restaurants use a practice known as Upstream ordering where an associate will take a customer's order while they're still waiting in line to start before the the pandemic but has really proved very important to the pandemic when they closed their dining rooms which really meant the drive-through is the major channel of sales so if you go to a Chick-fil-A now in many locations you will see workers out in the drive-through with tablets and so instead of speaking into a speaker box and kind of mumbling your order and it may be getting screwed up you're telling this person directly next to your car or what you want to ensure that quality in every one of its locations Chick-fil-A uses a different franchise model than most other fast food chains unlike most chains where the franchisee covers most of the costs of opening the restaurant Chick-fil-A owns every one of its locations the company also selects the locations and builds the restaurants we really think that that's a key differentiator in the way that we operate we're not looking for a financial investor or people that want to buy a big market and open a bunch of stores Chick-fil-A States on their website franchising is not an opportunity for Passive Financial investment working from the sideline lines or adding to a portfolio of business ventures franchisees are called operators and each operator is hand-picked by Chick-fil-A after a rigorous interview process Chick-fil-A likes to say it's about like going to Harvard MBA it can take anywhere from 12 months 24 months so you really have to want to do this and be willing to go through the initial paperwork but then extensive interviews out of the more than 8 000 applicants Chick-fil-A receives annually the company only selects about 130 new operators a year that's an acceptance rate lower than Stanford one of the skills that we really look for is somebody that's really good at developing people a lot of the stores have over 100 employees they've got to be really really good at pouring in and developing people in teams and Leadership teams if selected Chick-Fil-A franchisees need only an initial investment of ten thousand dollars which covers the franchise fee to become an operator that's much lower than the startup cost for a McDonald's franchise which requires a 45 five thousand dollar franchise fee as well as 1.3 to 2.3 million dollars of additional investment if they're paid 10 or 15 locations it's hard to have that market presence and to really know their team members and the communities that we serve and we've got a lot of interest to become operators and feel like that model is going to be really important it's what's gotten us to where we are Chick-fil-A credits this Hands-On approach with the success of its restaurants which on average make far more off of each location than their competition for years Chick-fil-A's footprint was mostly in the Southeast but today they can be found across the country they have about 2 600 restaurants throughout the country they're also located in Canada and they are opening in Puerto Rico we're opening about 100 stores a year right now and we've got a lot of growth potential here just domestically in the United States but we're also looking at International as well since 2007 Chick-fil-A has nearly doubled its restaurant count to 2598. compared to a lot of other chains that's still slow like a Chipotle is opening 200 of restaurants a year no matter which Chick-fil-A location you eat at the company says its values are reflected in its day-to-day operations very close culture they're also invested in its values which they do say are based on judeo-christian values which you don't have to be a Christian to work there but they do you know take some of these basic values of humility and generosity and and if you want to go to a prayer service while you're there you certainly can from its Inception founder Truett Kathy's Christian faith played a major role in the company's business strategy it's why Chick-fil-As are never open on Sunday not just so workers can attend church but also so they can rest in general we feel like we make up for the sales in the Monday through Saturday and that anticipation of ah I can't get Chick-fil-A today so I want to make sure to go first thing Monday morning it's also the reason the company has never gone public I don't think we will ever actually I know we'll never go public and there's not a real benefit for us to do that we've grown conservatively and so we don't need a lot of investors or extra cash to go and to build new stores or new businesses part of Kathy's values are reflected in how employees are treated and how they're expected to treat customers thank you pleasure you have a great day although you won't see it in restaurants where the employees are massed up Chick-fil-A has long asked employees to greet customers warmly with a smile even if it's just on a very small interaction you can share a lot by just the smile that team member has with guests is just a small little thing that we can do that makes a difference occasionally Chick-fil-A's values have attracted scrutiny especially when the company's foundation donates to conservative groups or causes there's been some groups perceived as anti-gay and this is a you know attracted attention from Progressive groups the company's foundation in the last year has focused its charitable giving on three different areas homelessness hunger and education I think the most important thing for us being in the restaurant business is that we serve everybody my grandfather I love how he talked about it with politics he would say I'm not right wing or left-wing I'm the whole chicken when you go to headquarters in Atlanta there is this rock with a quote from Truitt that is just played prominently that says what Chick-fil-A's corporate purpose it says to glorify God by being a faithful Steward of all that is entrusted to us to have a positive influence on all who come in contact with Chick-fil-A I do think that reflects this very higher Noble sense of company self they have they believe they do more than just serve chicken sandwiches thank you so much pleasure have a nice one if you've ever shopped at Costco you may have noticed that it's a little different Costco is not engineered for a quick shopping trip it is exactly the opposite this is the economics of Costco it's not a grocery store it's not a small corner store it's huge it's cavernous the ceiling is high goods are literally stacked on pallets up to this almost the ceiling that's all part of the model and the experience I gotta cost okay first thing we got is a five dozen of eggs then we got salmon for you unlike most stores there are no aisle signs or in-store maps to help direct shoppers instead aisles are simply numbered what's more Costco constantly moves some of its products and Cycles in new products so what gives why are Costco's stores designed this way and how has it helped the company grow into the retail Behemoth that it is today Costco is a big fan of using treasure hunt retail psychology to draw you in which is basically having items on the shelf that are at a like wow price because they're such a good discount or they're just really interesting and they're not going to be there forever the big idea behind Costco's treasure hunt strategy is that by encouraging customers to explore and ensuring that there's always a new batch of interesting deals customers end up shopping longer and buying more products today I went to Costco thinking I'm just going to get a few items but I ended up with a whole entire when you go into the store it doesn't feel the same as the last time you were there so you have a sense of urgency about purchasing and also just a sense of wanting to come back right and check out what's going on if it was the same every time you might not come as often today Costco is one of the world's largest retailers boasting over 803 locations and 275 000 employees Costco was part of sort of this early Warehouse Club concept which was really about instead of like go to the store buy a single item come to the store pay a membership and maybe your small business and we'll offer you wholesale prices basically lower prices most members pay an annual fee of 60 for the basic plan but customers can upgrade to the executive membership which is more perks for 120 dollars a year membership dues are also how Costco makes most of its money I think Costco's Management's main goal is always this ethos of can we offer more exciting items at a better price to keep memberships growing the model is make money on the membership sell things as cheaply as possible they can't just raise the price on something to increase the profit that's against the internal code and so that also includes things like let's save money and how much time we spend putting products on shelves so that's part of the reason why you see these pallets of goods stacked up to the ceiling is there's not a lot of time spent taking apart those pellets putting each individual product on the Shelf if they eliminate that there's a little bit of Labor savings there's some time savings because they're just putting all that stuff out on a pallet and you take it Costco says that an average item in the store is only marked up 11 percent compared to the 25 to 50 percent often seen in retail this commitment to low prices hasn't just kept customers loyal it has also helped spread the brand there's a psychology to finding a deal that's very satisfying for people and people enjoy the product selection at Costco they have very skilled Merchants that usually have been employed there for a very long time and really know what a Costco customer likely would want and they're good at getting good prices on those products I got your protein flavored vanilla and that sort of creates a certain frenzy around finding those things I got the Kirkland brand microwave popcorn I got two packs of bottled water most retailers might assume the Shoppers want more choices not less they sell a limited number of items so that means they have to be pretty precise they think about like giving space to a product in their store differently than a Walmart would and if that product doesn't sell like it's out of there it's very Cutthroat if you're a product on the Shelf you have to earn your place the average Costco Warehouse stocks about 3 700 products at any given time less than one tenth of most supermarkets 40 to 50 000 items but even though Costco stocks fewer items the items they do stock have a reputation I see you've noticed me rolling up the sleeves on my new Kirkland Signature quarters that my mother got me for the holidays Kirkland is Costco's you know private label brand it's their store brand it's a brand that when they want to offer something at a certain price that they don't feel uh manufacturer A supplier can do it they build it themselves since it was launched in 1995 the in-house brand has built a reputation for quality and low prices on everyday items today Kirkland products make up a quarter of Costco's 166 billion dollars in annual sales but when you talk to customers I think they generally feel that it doesn't necessarily need to be fancy because they've already bought into this Costco pitch which is this is high quality and it's a lower price and you don't need to be afraid of it that Customer Loyalty helped Costco remain strong during the pandemic Costco is certainly a model that has not only survived the pandemic but has really thrived in the pandemic despite the increased popularity of online shopping Costco has leaned into its strategy of driving members to its stores it's it's really interesting to me because for years people have questioned Costco you know Amazon's going to get you you got to get bigger online and that really hasn't played out yet they've said explicitly we prefer people to come into the store and Shop we want impulse buys we want people to come in and see what we have and buy more we work better that way and it's cheaper [Music] if you've ever ordered something at Starbucks you've probably loaded one of these Starbucks between October and December is set something like three billion dollars of value is loaded onto these cards I mean that's a lot of money so much money in fact that if Starbucks was a bank it would rank as the 385th biggest in the country and it's money that Starbucks gets to use up front as Revenue before a single product is even purchased eventually it is a liability if someone chooses to use it and you will find that in lots of gift card programs they're planning people who never use it so how important is Starbucks's mobile app and gift cards to its bottom line and what role does technology play in its continued evolution this is the economics of Starbucks in 1971 the first Starbucks a small unassuming Cafe opened in Seattle's downtown fast forward 50 years and that store is still in operation but Starbucks is a global coffee giant only McDonald's is bigger than Starbucks when it comes to market caps so they are really a Powerhouse when it comes to really the whole restaurant industry in its early years of operation Starbucks expanded slowly and only within Seattle it wasn't until 1987 when the original owners sold the company to its then marketing director Howard Schultz that the Starbucks that we know today took root Schultz began expanding Starbucks outside of the city and introduced Americans to what was then a little-known Italian drink the espresso they were really founded on this coffee house culture that they make each beverage by hand according to order as Starbucks has grown that has gotten more complicated today Starbucks says they make more than 100 170 000 different varieties of drinks these beverages can be very complex they can take a while they can take many different ingredients and so it's good for Starbucks and that these tend to be higher priced beverages but for workers the Baristas they can be very complicated the company's early investment in espresso has transformed to many different signature drinks from the creation of the Frappuccino to the launch of the pumpkin spice latte pumpkin spice latte High private they really didn't know that it would take off like it did but clearly it is formed quite a phenomenon all around the world really we introduced pumpkin to spice us here Starbucks one additional thing in Starbucks evolution is cold beverages have become much more important to the company whether it's just an iced coffee or a Nitro iced coffee or all these cold foam and cold brewed increasingly this is so important to their revenue the company's gone through periods where Frappuccino sales have softened but they've come up with more cold drinks to keep people interested in keep people ordering in part due to the company's Seattle founding technology has played a large role in the change dominance a key moment of that was the founding of its mobile app in 2009 which was very early for one of these kind of apps and they really saw this as a digital flywheel at the end of 2021 mobile orders accounted for nearly a quarter of all Starbucks transactions in the U.S many of those purchased through a virtual Starbucks gift card which was previously the only way a customer could order on their phone today a little under one half or 44 percent of all transactions at Starbucks are done with a Starbucks card in fact so many Starbucks customers use a Starbucks card or the Starbucks mobile app to purchase items that Starbucks says it holds about 2.4 billion dollars in cash that was uploaded by customers to be used later that number exceeds the deposits at many American Banks Starbucks also gets a lot of data from that they own a lot of that data in a way that many companies don't because they have created this whole ecosystem where people are you know using the Starbucks app their mobile ordering and they're hooked into that Starbucks unique proprietary system as mobile payments rise Starbucks's business priorities have shifted prior to the pandemic approximately 80 percent of U.S Starbucks transactions were on the go either as drive-through or mobile order Starbucks starred in cities but really has spread all around the country including suburbs and a lot of that is through drive-throughs these alternate pickup options are becoming increasingly important to the company's bottom line especially during the pandemic I mean these stores have been a Lifeline to Starbucks because they kept running and people could easily queue up and go and not have to enter an actual Cafe Starbucks has long said that it remains committed to a set of values established early in the company's existence Starbucks is very committed to trying to create a connection between its Baristas and its customers even in its drive through they talk about this on earnings calls that there are these customer connection scores they want to make sure that everyone is feeling good about their Starbucks experience which is getting increasingly challenging when you're ordering through a drive-through or a mobile app you're trying to get in and out Starbucks says those values also appear in the manner in which their stores are designed the items you will find in the store they really choreograph that down to where the basket of waters is placed into a store they want this all to feel very similar Starbucks is long touted its internal culture which it says is built on a strong relationship between management and employees the workers at its stores are not called workers or Baristas they're called partners and this is very Central to the company's ideology part of that is that all these Partners do get shares in the company it's called Beanstalk that relationship may look different going forward for some Starbucks locations after two of three buffalo stores voted in favor of unionization since then Starbucks has thrown a huge amount of energy and resources into this issue and Executives have traveled to Buffalo extensively to meet with workers to try to understand their concerns according to the company they want to maintain this direct relationship with their workers they call unions in intermediary they do not want that relationship to be severed but according to these workers they who support the union they want a more direct relationship with the company in a statement to the Wall Street Journal Starbucks said Starbucks's success past present and future is built on how we partner together always with our mission and values at our core from the beginning we've been clear in our belief that we are better together as partners without a union between us at Starbucks and that conviction has not changed they are the world's biggest coffee chain they are very dominant when it comes to Coffee sales and they are really synonymous with coffee house culture in a lot of ways but they do face increasing pressures [Music] you know they don't tell you don't lay on the bed you're supposed to lay on the bed if you've ever visited an Ikea you've likely encountered their stores endlessly winding floor plan this layout can be confusing that is by Design Ikea may be the biggest Furniture retailer on the planet but it's certainly not conventional the Swedish Furniture giant asks its customers to build their own products and its stores and distributes those products in minimalist flat packed boxes so how of these retail strategies as well as their famous Swedish meatballs contributed to the company's runaway success this is the economics of Ikea a look at the innovative business practices that have transformed Modern Life when you step into an Ikea you immediately sort of are put A's like path IKEA store layout is a fixed path design which means there's a designated road that all customers must follow that guides you through the store in One Direction it's not a grab a carton of milk and get out kind of store it's it's the opposite of that it's very much set up to spend a day think about rooms you know dream about what you really want your bedroom to look like a floor plan of most Ikea stores resembles a maze the curves about every 50 feet to keep customers curious about what comes next since an average IKEA store is around 300 000 square feet or five American football fields that means a lot of walking an Ikea is to some frustratingly winding but really it's laid out as an experience to get you to buy more Ikea is famous for putting its customers to work unlike most Furniture retailers that sell products pre-assembled many of Ikea's pieces have to be built by their customers but why as many couples and their therapists well know building your own IKEA cabinet can be challenging the big idea behind the Ikea effect is consumers are more attached to have more positive feelings towards objects or things that we've put effort into and that we actually think that they're more valuable because of that foreign Ikea effect was first coined in 2011 by researchers who noticed a similar phenomena in other products and businesses when instant cake mixes were first introduced in the 1950s they didn't sell well and then they said let's add a fresh egg it was this idea that we want to feel like we're just participating enough to not feel guilty about taking a shortcut when you make a cake from a mix which do you want a fresh egg cake or a cake made with dried eggs for higher lighter tastier cake why fresh eggs of course the idea that we should love building products isn't necessarily what Ikea intended if you've ever shopped at one of Ikea's massive warehouse stores you're likely aware of the unconventional product names but what you may not realize is that in creating these items Ikea sometimes comes up with a price tag first sort of a classic example that they could talk about all the time is the one one dollar light bulb if they had this idea that a one dollar LED light bulb you know this new type of light bulb would be hard to achieve but if they could achieve it lots of people would buy LED light bulbs so they just sort of designed backward from the prep with the price point in mind that obsession with low prices is a large part of why Ikea is the world's largest Furniture retailer today Ikea has 445 stores operating in 52 countries you know obviously if you go into a student dorm room you're going to find a lot of Ikea but you'll also find some Ikea products in a wealthy person's home and that's really what they're going for today Ikea is the very definition of mass Market appeal but when the company first began as a Swedish mail order business in 1943 well-designed Furniture tended to be expensive and as a result Out Of Reach for most were seen as a serious long-term investment ingvar comprad who founded the company as a teenager pushed forward the idea that furniture could be flat packed to massively reduce the cost of shipping and transportation so flat packing is really the largest arguably Ikea invention that really led to the company's growth and the idea is that instead of buying you know a piece of furniture all put together it's deconstructed into a flat pack you can fit more in a truck you can fit more in the Ikea warehouse and you can also get it in your car and the trade-off is you know you put it together at the end flat packing is a practical aspect of the philosophy that has long guided Ikea's success called Democratic design it's this idea that everything is in Balance both price form function the aesthetic the sustainability this Vision to create a better everyday life for the many people was sent forth more than 30 years ago by comprod in a Manifesto now presented to every Ikea employee and they talk about it almost religiously and fundamentally it's this idea that when designing a product they think about it can't just be really cool looking it can't just be functional it has to be all those things so despite the long shopping trips and the DIY customers can't seem to get enough of Ikea perhaps it's as simple as labor leaves to love they are so cute and they even smell like the cereal y'all Crocs the colorful shoe that first became popular in the early 2000s hit its peak in 2021 the company reported a record annual revenue of 2.3 billion dollars in 2021 up over 60 percent from the previous year and its stock reached record highs the past few years for Crocs has been this moment of heavy collaboration constant releases they're really trying to put themselves in front of people that might not have considered a Crocs prior the company's success coincided with the pandemic leading some to credit the shoe's popularity to timing especially as its stock price has been dropping since the pandemic boom has waned but other comfortable Footwear Brands didn't take off the way Crocs did so how did Crocs make a name for itself during the pandemic and how did it find success as one of Fashion's most divisive shoes this is the economics of Crocs the company was founded in 2002 the same year it debuted its classic clog the name Crocs was inspired by crocodiles who live on land and in water when cracks were first released they were intended for a consumer that was looking at them as a functional thing so probably gardeners people that you know were on boats people that worked all day on their feet people that worked on a line in the kitchen part of what makes them so functional is the material a proprietary closed cell resin called crosslight that's slip resistant lightweight and easy to clean producing a molded shoe is certainly simpler in a lot of ways than assembling a sneaker the most underrated Advantage they have over the marketplace is that it's clear that they're able to kind of do things that other companies would not be able to do because of their scale and because of their production capabilities Crocs sales took off in the first three quarters of 2005 it sold 4.4 million shoes hitting a revenue of 75 million dollars part of the reason for its initial success was that the shoe was easy to get it was available at retail stores gift shops and mall kiosks in 2006 Crocs purchased gibbets a company that made small plastic shoe charms that same year the company went public and became the largest ever U.S footwear IPO at the time but in 2008 in the midst of the financial crash the company suffered a net income loss of 185 million dollars though the initial crates had simmered the brand still managed to hang on to a relatively large customer base over the next few years thanks to its Global presence in 2014 Crocs started making major changes to its business model closing dozens of stores shifting away from malls and turning to online sellers like Amazon Crocs announcing today it will eliminate nearly 200 jobs and close a number of retail stores as part of a restructuring effort the company also cut back on the number of styles it sold by between 30 and 40 percent and refocused on the classic clog that made it famous the following year Crocs invested in a Global Marketing push to relaunch its brand image despite its efforts the company's stock held steady until 2020 when the global pandemic hit prior to people working from home and you know not wearing their dress shoes not wearing their heels there was already this Rising wave of comfort-minded comfort first Footwear that was really becoming more popular of course that accelerated during the pandemic the Comfort aspect is what many call the key to crox's success but another important factor is how easy it is to customize the shoe with gibbets you move them to different Crocs over time as you've got a green pair a camo pair or a pink pair that like the gibbets would stay with you and they were yours they were almost like uh the way a keychain on a backpack was at a certain point this idea of individuality and self-expression is one that the brand emphasizes through its marketing campaign and on social media the uniqueness of the shoe's design has sparked debate even going back to Croc's early days there were two warring factions of Crocs are ugly and they're a blade on society and we need to get rid of them I don't care how comfortable they are they're ugly and then there were people that said no they're cute and they're kind of doughy and they're fun look how freaking to you these are Crocs leaned into this polarization partnering with celebrities and well-known Brands to create limited edition versions of the classic clog I think that's probably the biggest shift within the Fashion World of the past decade is that people truly seem to design for Instagram because you want to stop people from scrolling and certainly a shoe plastered with fried chicken does that in 2018 Crocs says it's Balenciaga clog an 850 4-inch platform shoe sold out within hours and in 2021 Crocs says it partnered with more than two dozen Brands artists and creators through collaborations and license programs sometimes it was through gibbets but sometimes it was like these kind of crazy revamping of what their clog was constantly releasing new collaborations has not only kept Crocs in the Press but it has also helped it break into new markets there are like Croc collectors that go after every model Penny I am overflowing with Crocs the same way that Nike's resell on websites like stockx and eBay Crocs are now reselling Crocs and other comfortable shoes may have peaked with the pandemic as people begin to migrate back into work and consider more traditionalist Footwear but many others are still prioritizing Comfort we're seeing that with a lot of doughy running sneakers that people are wearing we're seeing that certainly with the growth of slides is a huge business in the luxury Market crox's stock has dropped around 60 percent since its November 2021 High I think the Market's nervous about the short term right so we're definitely seeing um Supply constraints um in the first quarter but the company says its fourth straight year of Revenue growth was fueled by continued Global demand and it expects revenues to grow to over 5 billion dollars by 2026. I think that the tow at a certain point you can only reach so many consumers but I think for now they have been able to convince enough consumers that they deserve space within their closet and they gotta have the two fingers Dollar General's business model it's a retailer that can make a lot of money selling very cheap Goods to a relatively small number of people if you've ever shopped at a Dollar General you might have found the store on a remote Road like this one it has every appearance of being in the middle of nowhere but this is a meticulously planned very well thought through strategy a strategy that's been key to Dollar General success in Rural America the company is Bucking current retail Trends by expanding rapidly and opening stores away from population centers Dollar Generals go where Walmarts aren't but it's not just the Strategic locations far away from big box stores Dollar General employs a number of tactics to keep operating costs down including leasing stores paying employees low wages and selling limited products and yes that includes stuff that isn't really a dollar dollar general is almost something unto itself it kind of takes pieces from a lot of different retailing models this is the economics of Dollar General after more than 30 consecutive years of sales growth Dollar General has become one of the most profitable and fastest growing retailers in the US last year the company brought in more than 30 billion dollars in sales so how has a store that sells products at rock bottom prices manage such extreme growth they add about two and a half stores every day in the United States just for for scope there's more than four times as many Dollar Generals as there are Walmarts there's more Dollar Generals than there are McDonald's in the United States there are currently more than seventeen thousand Dollar Generals in the US but if you don't live in Rural America you might not have ever even stepped foot inside the store where would you typically find a Dollar General you'd you'd think of a two-lane road think of you know places where the houses are far apart farmlands kind of lower income communities you might find them by a post office or a church or at an important intersection this is often a deliberate decision the company has formulas for identifying locations to open stores often the Dollar General will be down the road miles away from the nearest town and Walmart areas with limited shopping options three quarters of Dollar General stores serve communities of twenty thousand people or less according to the company it looks for need first and foremost so it's going to look for a place that we might call a food desert where there are not there's not a grocery store there's not a big box store it's kind of Target demographic is households uh with people making forty thousand dollars or less and it looks for a place where it can get inexpensive real estate to keep costs down Dollar General tends to lease their properties rather than buy them and inside the stores it has a limited selection of products that it buys in bulk which gives the company more buying power with suppliers most Dollar General stores don't offer fresh produce and compared to grocery stores have less perishable items which have a shorter shelf life and bring in lower margins you walk into a Dollar General you're gonna see metal shelves it's going to be quite Bare Bones I think linoleum think you know think bright lighting you won't see a lot of people working there by paying low wages to a minimal often part-time staff the company keeps labor costs low the median annual income for employees is just over sixteen thousand dollars according to Dollar General Dollar General says they employ more than a hundred and fifty seven thousand individuals and that they offer employees competitive wages and benefits these stores are staffed at minimum levels so there's not there aren't many employees they pay closer to a gas station attendant than even a Walmart employee so it's people that much like their customer base people who live in an area where there aren't a ton of other options despite the name not everything costs a dollar but prices are extremely cheap and often significantly lower than Grocery and drugstores critics say Dollar General strategies harm local communities by not providing healthy food options and potentially hurting the local small business economy Dollar General says that they are not a grocery store and that they are serving customers that would otherwise not have access to an affordable retail option ultimately the low prices and the convenience for Rural customers is what keeps people coming back some Shoppers have even found items for under a dollar Penny shopping at Dollar General let's go the first store I found Propel water for one cent at least is the Dollar General app scan and verify it's a penny before heading to the register Dollar General is on Pace to continue growing the company grew 16 during the pandemic a time where other retailers saw growth in e-commerce not in-person shopping Dollar General plans to open about a thousand stores this year and when you have a business model that involves small footprint stores without a lot of embellishments or bells and whistles a company can do that quickly and they can do it cheaply Dollar General is also branching out and going in New Directions it's been experimenting with stocking more fresh and refrigerated food and moving towards Urban centers it plans to expand pop shelf a new chain aimed at higher income Suburban customers pop shelf in addition to being located in different places it'll aim to sell things that are more think of more fun so not not as much Staples that you need to get by day to day but things like decorations party supplies a little bit more fun than necessary Dollar General says the new expansion isn't necessarily a shift from their overall growth strategy they say they can serve a diverse customer base with stores in urban Rural and Suburban locations yet even as Dollar General expands its offerings and Target demographics the company expects that its core customers will continue to be Shoppers in small towns without other options there really is a before and after Sephora when it comes to the makeup industry until about 20 years ago this is how most Americans shop for luxury makeup a sales representative of the brand would stand behind the makeup counter and help customers make a purchase that completely changed with Sephora now it's a free-for-all people walk in the stores they test whatever they want nothing is behind the glass so how did this French retailer come to dominate the global personal care and beauty product industry and what business practices helped make it the industry leader that it is today this is the economics of Sephora today the beauty retailer employs over 36 000 people in more than 2 700 stores in over 35 countries those stores carry over 250 Beauty Brands at this point Sephora is like kind of my second home the Sephora that we know today has its roots in a small perfume shop that opened in 1969 in Limoges France at that time the perfume and cosmetics Market was dominated by a service-based retail model in which staff typically received commissions based on sales instead Sephora used the assisted self-service model in which customers are free to test products in the store we have a full station where you can just like literally grab whatever and you can try on the lipsticks you can try in the eyeshadows I always leave looking like a literal different person than I arrived Sephora customers can still request help from a sales associate who Sephora calls a beauty advisor there's a little bit more trust with the sales representatives in this Forest store because they're brand agnostic so they can tell you maybe you should buy them mascara from this brand but you should buy the blush from a different brand Sephora also bucked convention in the manner in which it displayed its products so makeup items are next to each other whereas from the same brand a fragrance would be in the fragrance aisle and the same brand a skin care product will be in the skincare aisle then in 1997 founder Dominic Montano sold Sephora to the large luxury retail conglomerate lvmh one of the advantages of being owned by a conglomerate like lmh is that the company can jump very quickly on Trends and actually several of the brands that are sold in Sephora stores are owned by lvmh one of the popular brands owned by lvmh is Fenty Beauty by Rihanna and then Fenty of course has a huge section the whole row of Fenty we got the lip glosses up front Sephora's success also stems from its exclusive line of products there's a little bit of attention in the relationship between a store and a brand because Sephora is such a hot store for makeup brands to sell their products in Sephora ends up having a lot more leverage in that relationship the Sephora collection the challenge for high-end Beauty Brands these days is that they're really facing a conundrum they've become increasingly dependent on Sephora for sales growth but because alvia Mage also produces Beauty Brands and there's an element of competition there and more brands are coming out constantly the shelves brace is shrinking five Sephora products you need to try part 10. in part due to that product exclusivity Sephora boasts a loyal customer base here are five Sephora products you need to buy tonight sorry I don't make the rules you just have to so what you'll find oftentimes on Instagram or Tick Tock is that people have these haul videos where they're showing all the products that they bought on Sephora and they're going one by one talking about them this is the closest tinted face oil and it's 42. I recommend this product to everyone and they're always like I'm paying 42 dollars for a face oil yes you are many faithful customers are members of Sephora's Beauty Insider program which has three different tiers and more than 25 million members the lowest here is the beauty Insider later the next level up is Vib or very important Beauty Insider which users must spend 350 dollars in a calendar year to unlock the top level is called Rouge which customers can access after spending at least a thousand dollars in a calendar year benefits like savings increase with each tier I'm Rouge don't judge me I know I spend a lot of money okay I get it but the real Advantage for Sephora for the beauty Rewards program is that every time a customer goes in there and Sephora knows exactly what they bought and that is very valuable information for the company to understand who the customer is what they're purchasing and then down the road to be able to Market in a very personalized way to that customer yet as much as the company profits on exclusivity with its products when it comes to Sephora's consumer base the retailer takes inclusivity seriously one of the ways that Sephora has tried to become more inclusive is by featuring a larger number of brands in their stores they made an effort to include black owned Brands and then also so by pushing Brands to expand their product lines and offer products that appeal to people from different racial groups different ethnicities in 2021 Sephora relaunched color IQ a skin tone matching technology that the company offers to assist customers in selecting the most natural products for their skin tone and Sephora is still expanding in December 2020 the company announced a partnership with the Department chain Kohl's to install 850 shops inside coal stores by 2023 since opening 200 Kohl's locations this summer Sephora has added 200 000 new Beauty insiders in a statement to the Wall Street Journal a Sephora spokesperson said we want to be an unequivocal Global leader in the prestige Beauty space and a purpose-driven brand that is a transformative opportunity for Everyone We Touch they continued by outlining three main areas customers Brands and teams sometimes when customers step out say the Sephora store they will have splotches of makeup all over their arms and that really showcases what they've been doing in the store walk into a Target anywhere in the U.S and you're likely to find Sleek mannequins elaborate displays and fancy lighting Target is very focused on the Aesthetics of their stores their products that is what they hope makes it feel like an elevated Discount Store experience this elevated experience which has led some to nickname the store Target is part of the company's strategy to differentiate itself from competitors and draw customers through the door but what's happening in the front of a Target store is only a portion of the retailer secret to success this is the economics of Target Target to me is so interesting because really they're a department store that became a discount store and they were always going after sort of a higher end Discount Store image and that's remained true to today Target positions itself as the option for cheap yet Chic items and customers can see the two ideas combined when walking around the store in certain areas like apparel home goods and electronics Target stages items with lavish lighting and displays but just across the way you'll still find the standard merchandise aisles with uniform fluorescent lights target has always tried to sort of meld these like visual expectations that we have from a department store like the mannequins and the good lighting and like a display for Cosmetics with a discount model they also want you to feel like you're getting a good deal and I think you see that as they iterate on store designs they still strive for that combination according to a study by hawk incentives when a customer feels like they're getting a good deal it can make them feel smart and in turn increase sales don't get distracted to Target don't get distracted at Target don't get this to oh I need that retailers always are looking for this balance of things that bring you to the store that you need like a gallon of milk and the things that you might buy in a whim that they actually make more money off of Target store design is one of several factors that have helped the retailer expand in recent years the business has grown more than 35 percent in the last two years Crossing 100 billion dollars in annual revenue driven in large part by the pandemic and a decision Target made five years ago to invest in its stores you know lots of retailers said hey Amazon is here let's stop building stores let's remodel what we have let's develop an e-commerce model let's invest in other things target has continued adding stores some of them tend to be smaller stores different types of formats while they've invested in e-commerce but they haven't completely pulled back on expanding their store account the retailer has over 1900 locations in the U.S which is smaller than Walmart but bigger than Costco around 75 percent of the US population lives within 10 miles of one of these stores so Target like lots of retailer established retailers big retailers has this huge benefit right now which is they have the stores already and you probably live pretty close to one and that's enabled them to say offer things online for pickup in the store parking lot which has been wildly successful for them during the pandemic because they have that store for you to go and pick up your online order at the majority of operations like in-store and curbside pickup and fulfillment for online orders get started in the back room of the stores it's been so interesting because they started to say like we're going to use our stores we're not going to build big you know e-commerce warehouses we're going to use our stores several years ago and there was a little bit of skepticism in the market because it didn't seem like you could really be that efficient in that model but in the end they say they've saved a lot of money because a they're not building a huge Warehouse which costs a lot of money up front and you know they already have the trucks coming to their stores with their goods and they're just using those stores to the maximum possibility last year Target's brick and mortar locations handled more than 95 percent of over 100 billion dollars in sales so walk around any Target and you're likely to see this operation in action workers move carts throughout the store Gathering and scanning items While others watch for cars pulling up and deliver their orders in effect Target hires workers specifically for its fulfillment operations the company calls this role a fulfillment expert they're either out on the floor collecting Goods off the shelves just like a shopper whether in the back room packing up things into boxes getting them labeled appropriately they're really more like warehouse workers and now the company is taking this a step further in an effort to bridge the gap between its stores and its delivery location doing these things called certation centers which allow them to basically have or orders from stores that are being packed up by fulfillment workers sent to that more central location but still kind of close to stores and then picked up and sent out from there Target success is also strongly dependent on the items in its stores at any given time about one-third of Target's inventory is exclusive to the retailer through private labels similarly designers will often partner with Target for a limited time capsule collection these capsule collections for Target are sort of marketing right it's a way to say hey we're High design big designers are interested in working with us so it gives them a little bit of that cachet these collections are nearly as fundamental to Target as its Bullseye logo in the late 90s top makeup artist Sonia kashik partnered with Target to create a professional makeup line at affordable prices 16 years later Target bought the line and today this line is only one of Target's more than 45 private labels they have become huge brands for Target and they've added more and more and now it's a pretty significant percentage of their sales and private label like at all companies can be lower price for the consumer but more profitable for the retailer so there's a big interest for any retailer going in that direction according to a report by CB insights retailers can earn 25 to 30 percent higher gross margins on private labels compared to manufacturer Brands target has yet to share the precise margin on its private labels but currently 11 of its brands are worth at least one billion dollars with four brand fans crossing the 2 billion mark while target has transitioned through many iterations since it got its start in 1962. changing store designs many times and acquiring businesses within its larger brand the company continues to evolve with the ever-changing customer they tend to kind of change strategy quickly when things aren't working and I think we see them in the middle of potentially another version of that because the consumer is changing so much right now but even as the company evolves some aspects remain the same I think the most consistent thing for target has been this image this idea that they're an elevated brand they're different than their competitors they have stuck with that since the beginning and they still really lean on it today this is a tiny home on Airbnb so far this year this listing has brought in over twenty thousand dollars for its host the typical U.S host in 2021 earned over thirteen thousand eight hundred dollars according to the company the tiny home doesn't cost a lot to build and yet it could charge hundreds of dollars a night Airbnb posted a profit in its second quarter as guests booked a record number of stays and experiences and hosts increase prices for rentals amid High inflation but people didn't book as much as analysts had projected and the company's summer bookings forecast fell short of expectations obviously it's an incredibly Dynamic period of time but I'm still expecting an incredibly strong period of travel even if people pull back spending some so how did the largest Home Sharing platform in the U.S navigate its biggest crises and could it borrow those lessons to weather fears of a recession this is the economics of Airbnb Airbnb started around the time of the 2008 financial crisis this was a time when people were really hard hit by the recession and they were looking for a way to make an extra buck in 2016 the company launched Airbnb experiences which led Travelers book classes tours and outings Airbnb also spent more as it grew the CEO branched out into all kinds of things like he wanted to have a media Studios he wanted to Branch into transportation and then the pandemic hit business was down 80 percent forcing Airbnb to take on two billion dollars in debt and pause all non-essential projects I hope I never do a side project again in my life I learned a lesson I think the lesson is when you try to do new things the side things they don't work summer of 2020 was a turning point for Airbnb people started quarantining with their families friends started taking staycations while they could work remote so that's something that definitely benefited Airbnb local travel became its strong hold and people started using the platform for longer stays the company was one of the hottest public listings of 2020 though its stock price has fallen since then amid a broad Market cool off in August Airbnb projected record third quarter revenue on the back of higher rental prices and said it expects to post its first full-year profit this year a lot of businesses have lucky moments but there's something to be said about getting lucky and also being able to ride that wave and capitalize on it that's what Airbnb says it has done from the start back then in 2008 a lot of people turned to hosting because they were losing their homes housing prices and a lot of people because they didn't have as much money were looking for more affordable ways to travel than ever before that really helped them bring a lot of people who were looking for ways to make up for lost income onto the platform and you can really see them capitalize on timing during the pandemic as well Airbnb redesigned its app and website to focus on local stays during the pandemic last summer it launched a flexible search feature which curates trips for people who don't know where they want to go the pandemic and remote work gave us that flexibility you know we could travel during the week and still work remote so Airbnb starts noticing this trend and it says oh my God we can you know we can sort of utilize on this and they do in May Airbnb launched another redesign of its Search tool that split homes into more than 50 categories as a way to steer people to places they wouldn't otherwise have picked so what they're trying to do is they're trying to fill existing homes instead of adding more and more homes some analysts say this is key to the company's future growth since Global occupancy rates are low when it comes to addressing safety issues on its platform some cities have complained that Airbnb has been too hands off they're not actively monitoring these properties because frankly they can't they don't own them so that's really where a lot of their problems stem from four people killed another fur heard all of it happening in a house rented out on Airbnb after a 2019 Halloween shooting the company announced safety measures including a 24 7 neighborhood hotline to field complaints we've banned all parties globally on Airbnb we have a risky reservation queue where we're looking at any suspicious activity and we have a pretty Hands-On team that's using some pretty Advanced like machine learning technology to essentially identify anything we think is suspicious if it is we'll continue to seek more information the company says the number of Party complaints have dropped 44 percent in the last two years Airbnb has also been trying to reduce that rate further by doing things like blocking one or two night stays on New Year's Eve and Halloween for guests without a history of positive review use but instance keep happening earlier this year we had a shooting in Pittsburgh and again you know people were injured City officials have also blamed Airbnb for ruining the long-term rental market in some small communities what's happened is a lot of people are just snapping up properties and renting them and as a result locals don't have enough properties to rent long term Airbnb doesn't think that it's actually affected the long-term rental market but you know if you ask uh City officials they have a different story for example in 2020 the mayor of Sedona Arizona a tourist hotspot said that the demand for Airbnb rentals worsened the shortage of affordable housing and demolished the long-term rental market if we are you know part of the problem we are going to work with cities we've that's why we've done numerous agreements of cities to create restrictions we actually do want Airbnb to get more and more into long-term housing we want people to really feel invested in Community one of the things that Airbnb is doing now is it's trying to direct people to areas where it has Supply and that sort of also takes the load off of certain places that that everyone might go to and that might get sort of overburdened in April Airbnb announced that its employees can work from almost anywhere without a pay cut so if more businesses do follow airbnb's lead Airbnb stands to gain in its home rental business because that would mean more digital Nomads more people traveling and likely booking more airbnbs but some Travelers are concerned about Rising nightly rates and some analysts believe that hotel chains and competitors like Expedia group stand to gain as business travel picks up this year so the question is can Airbnb keep up the momentum we're an incredibly lean company we've already been preparing for a storm that what we thought was inevitable for years to come Airbnb dramatically cut costs during the pandemic and analysts have credited the company for keeping those down even as travel rebounded while a potential economic downturn could decrease demand Airbnb says it could also bring more hosts to the platform as the economy is going to be slowing down I think more and more people are going to be interested in saving money and I think they're also going to be interested in new ways to make money and unlike hotels with fixed fixed lighting properties that serve Travelers changing needs like it did during the switch to local travel I think even as we're entering recession people have been kind of isolated for years and they're yearning to get out and the one thing I think you're going to see them spend money on is they're going to continue to travel if you've ever seen a commercial for the Home Depot you might be familiar with this tune it's a good time to be a doer Home Depot and its theme song have inspired a wave of videos on social media revealing its cultural status as the go-to Home Improvement store for many during the pandemic Home Depot is the world's largest Home Improvement retailer with over 2 300 stores across North America what we've seen is home price appreciation and housing activity at unprecedented levels and what we know is that when homes become more valuable those homeowners are more willing to spend on them with its 2021 fiscal year sales larger than both Lowe's and Ace Hardware combined one of Home Depot's biggest advantages is its foothold in the professional customer space that is electricians remodelers plumbers and other Home professionals that place more lucrative orders so how exactly has Home Depot attracted more professional customers and what other strategies have helped it become a leader in the Home Improvement retail industry this is the economics of Home Depot walk into a Home Depot you'll see a huge floor space dozens of long aisles with everything from screws and other Hardware to tools to major appliances garden supplies doors windows toilets really anything you need for a home improvement project a typical Home Depot store stocks about thirty thousand to forty thousand items throughout the year most locations are around one hundred four thousand square feet the scale of the store gives customers the opportunity to buy raw materials in bulk and pick up items quickly they try to be somewhere that you can go if you're just an individual trying to fix up something in your kitchen they also try to be a place that you can go if you're a contractor trying to buy lumber to help renovate somebody's home or if you're a plumber that needs all kinds of pipe fittings so they really try to be a good source on both sides of that equation Home Depot began when co-founders Bernie Marcus and Arthur Blank were fired from a home improvement company called handy dance they wanted to launch a store that would be significantly bigger and cheaper than competitors in 1979 they opened their first two Home Depot locations in Atlanta the Home Depot the founders had a vision for a home improvement retailer that could be a One-Stop shop for the DIY or do do-it-yourself customer you've never seen anything like it the Home Improvement customer to us is unique they're a doer that's where that word comes from since its founding Home Depot has grown into a multi-billion dollar company that increasingly caters to the professional contractor as well as the DIY consumer while many Industries like service and Hospitality took a hit during the pandemic Home Depot's Revenue continued to grow the pandemic fueled a boom in the Home Improvement industry as people spent more time and money on remodeling projects but between middle of 2020 in the middle of 2021 there were four straight quarters where Home Depot grew its sales by more than 20 percent year over year which is a very fast pace for a large established company Home Depot says they are seeing increasing demand for professional projects as people feel comfortable inviting contractors back into their homes there's been this buildup of projects that require professionals that more recently people have been willing to get to and that's sort of led to a second wind of sales growth what kind of person would come here at 5 45 a.m well there's Carly a carpenter Home Depot has positioned itself to attract more business from these contractors and home professionals particularly ones that place big orders everything we do in the 2021 fiscal year about 50 percent of its sales came from Pro customers even though they made up less than 10 percent of its customer base in comparison about 20 to 25 percent of Lowe's total sales come from Pro customers according to the company as a key part of its Pro customer strategy Home Depot has invested 1.2 billion dollars in expanding its supply chain and distribution Network the company says it is building 150 new distribution centers to help speed up the replenishment of store shelves and quickly deliver purchases to customers doors each facility with some as large as about 14 professional football fields can hold a huge amount of inventory and deliver orders directly to a project site one thing we know that's important to our Pros is delivery of product to the job site we've shifted our model to a network of nearly 150 distribution centers that are engineered to deliver those big and bulky products that are unique to the Home Depot and unique to the pro think Lumber think doors think Windows think vanities we're designing a network that will deliver those goods same day or next day to 90 percent of the population in our Market the Home Improvement Giants distribution network works in tandem with their online strategy giving Pro customers more flexible options that better align with busy schedules we're one of the largest e-commerce retailers in the country by volume when people come to pick up orders from our lockers or from our service desk they often shop for more products in the store and so that's an economic flywheel that our website creates for our company these possibilities have really helped the company grow its sales quite a bit over the last two years sales from e-commerce channels have gone up by about a hundred percent so basically doubled though Home Depot has seen a long period of consistent Revenue growth the Home Improvement retail space remains a competitive and fragmented Market this is a space where customers are very sensitive to prices so if one brand is charging a higher price for a certain type of equipment that's something that buyers could pick up on and could easily shift to another retailer so Home Depot is definitely very sensitive to other big chains to smaller mom and pop stores the industry is also sensitive to economic fluctuations especially with spending Trends tied to the housing market going back to the Great Recession and the financial crisis 10 years ago that was a very difficult time for Home Improvement retailers a turbulent period for Home Depot in the last couple years during the pandemic that housing Market's been very strong certainly a company that would be in a very different position if there was some kind of big downturn in the housing market in general foreign

Channel: Wall Street Journal

Views: 360,128

Keywords: chick fil a, costco, starbucks, ikea, dollar general, the economics of, wsj the economics of, wsj econ of, economics, companies explained, wsj explainer, wsj explains, chick fila, chickfila, chick fil a business model, crocs, customer satisfaction index, wsj, wall street journal, costco economics, starbucks gift card, starbucks drive thru, starbucks drinks, dollar general couponing, sephora, sephora economics, target, airbnb business, airbnb economics, the home depot, bnss

Id: fq6jDxJk1LM

Length: 66min 12sec (3972 seconds)

Published: Sat May 20 2023