ROBERT SMITH, HOST:
You know, it seemed like a good idea at the time. This guy named Robert Price thought where do stores get their stuff? What if there was a store for stores?
JACOB GOLDSTEIN, HOST:
A place where people who owned, you know, little bodegas, small automotive shops, could come and buy the stuff they needed. So Robert Price and his dad rented a warehouse in this industrial part of San Diego.
ROBERT PRICE: And when we went in there were birds flying around - pigeons. And it was a God awful looking place, but we cleaned it up.
GOLDSTEIN: They decided to be allowed to shop at their store for stores, one, you had to own a business. And, two, you had to pay a membership fee - had to pay $25 a year.
SMITH: For the right to shop, which was not really done at the time.
GOLDSTEIN: It opened for business on July 12, 1976, and it was a disaster.
PRICE: The small businesses didn't come. They didn't spend money and we, after a relatively short time - maybe a few weeks - were basically going bankrupt.
GOLDSTEIN: How did you feel at that moment?
PRICE: Desperate - my wife and I were a month away from our second child being born. I remember my mother-in-law in particular figuring that she wasn't sure that her daughter had married the right person. You know, it was getting kind of rough. And it was really bad.
GOLDSTEIN: Not long after the store opened, somebody suggested opening up the store to people who did not own businesses, people who just wanted to shop for themselves.
SMITH: And Price was afraid that it would alienate the business owners who were the true members of this club. And they he figured, you know, businesses aren't really going for this anyway so let's try it.
PRICE: All of a sudden there were people and they were shopping and there was excitement. And it felt like we had been just given some kind of a gift. I mean, it was amazing. My father said, you know, I think you guys are going to end up having a pretty good business here.
SMITH: You may have heard of it. The warehouse store was called Price Club, which I never knew was named after Robert Price. Of course it is, right?
GOLDSTEIN: Yeah, Robert Price and his dad. And so, you know, they thought it was just going to be this one warehouse, but they added more stores and more stores. A few years later, one of their employees left to start another warehouse club store, Costco.
SMITH: That employee - Jim Cost.
GOLDSTEIN: That employee's name was Jim Sinegal, but he did work at Price Club. He did leave and start Costco. Eventually, Price Club and Costco merged. Other warehouse clubs, basically copying Price Club, popped up all over the world. And, you know, this thing Robert Price stumbled into by accident...
SMITH: This paying in order to shop in a huge warehouse.
GOLDSTEIN: It became a huge economic force. Today, Costco alone sells more stuff every year than Amazon by far.
Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
SMITH: And I'm Robert Smith. It used to be if you ran a store you wanted to make it easy for your customers. But Price Club and Costco went in the opposite direction. They made shopping harder. They made shopping almost unpleasant.
GOLDSTEIN: You hate it.
SMITH: And people couldn't get enough.
GOLDSTEIN: Today on the show, how Price Club and its imitators changed the way we shop.
SMITH: And how a new company is taking what Price Club started to unbelievable extremes.
GOLDSTEIN: I mean, I believe it.
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(SOUNDBITE OF MUSIC)
SMITH: I'm going to pause at some universal laws of retail, of selling something to another human being. Number one - if you're going to have a store, have a convenient location. Advertise the store. Tell people where it is and how they can shop there. And then when they come, welcome them into the store. And then, there's Costco.
UNIDENTIFIED WOMAN #2: You're very welcome. Take care.
SMITH: My membership expired and also I don't have my card. So I need to renew it and I guess get a card or...
UNIDENTIFIED WOMAN #2: OK. You don't have the membership card with you anymore?
GOLDSTEIN: I don't.
I asked Robert Price, the founder of Price Club, like, what was he thinking when he set up a store this way?
PRICE: My original kind of image in my mind was, like, a speakeasy where somebody would feel, gee, I've got this special deal and I can come in and shop and most people can't come in and get in here.
GOLDSTEIN: Like, truly, like a club. Like, oh, I'm a member of this, like, insiders club.
PRICE: Exactly right.
GOLDSTEIN: Yeah, it's an insiders club for, like, 100,000,000 people.
SMITH: But still, for each of those 100,000,000 people there is a dude at the door who says show me your membership card.
GOLDSTEIN: We're in.
SMITH: So the amazing thing about being a member here - you just signed up for membership - just renewed your membership.
GOLDSTEIN: I just paid $55 for the privilege of shopping at Costco.
SMITH: So at this point, like, you're in the hole. Like, you've lost money.
GOLDSTEIN: I'm down.
SMITH: You're down.
GOLDSTEIN: The good news is the more I spend just to...
SMITH: Oh, a curved TV.
GOLDSTEIN: A curved TV - that's one of those things that nobody actually wants that much.
SMITH: I'm sorry, Jacob. I got totally distracted by the curved TV. You were about to say...
GOLDSTEIN: So I was about to say I paid my 55 bucks. Now I feel like I got to spend enough money so that I save more than 55 bucks, which I know is irrational. I know this is the sunk cost fallacy that I'm already out the 55 bucks, but I really do feel that way.
SMITH: So yeah, making you pay to shop is this one big thing that Costco does that's the opposite of how normal stores work. But once they've locked you into this system, they can do all of these weird, secret things that wouldn't fly in any other store, but in Costco can get you to buy more.
GOLDSTEIN: I need Ziploc bags. In a normal store you would look at the sign at the end of the aisle that says Ziploc bags.
GOLDSTEIN: There are no signs in Costco.
SMITH: There are no signs, but why wouldn't you put a sign? Like, it makes no sense, right?
GOLDSTEIN: I asked Robert Price.
PRICE: I was adamant that we would not have signs telling people where things were because that would make it likely that they would wander through all the aisles and find other things to buy.
GOLDSTEIN: That's a little bit devious. It doesn't feel like you're looking out for me when I hear that.
PRICE: No, I mean, I agree with you. I think it was - I think - I don't want to use the word devious, but it was manipulative.
SMITH: Because it creates this whole different philosophy of shopping. It is not the kind of store you just pop in to and grab a couple a little things. You do down every aisle. And if you buy something, you buy a lot of it.
GOLDSTEIN: Carrot juice is a good call. I like the carrot juice call. Do you normally get carrot juice?
SMITH: No (laughter). This is probably costing me more because I just bought 13 gallons of carrot juice, never having drank carrot juice before in my life.
GOLDSTEIN: I'll buy one of those off of you.
And of course, yeah, buying in bulk is always cheaper. We know that part. But for Robert Price, the bulk stuff fit into this broader, really surprising plan he had.
PRICE: Yeah, we didn't want people to come very often, you know?
GOLDSTEIN: Tell me more. That's fun. Why not?
PRICE: Because it was better - it's much better from a cost-expense point of view to have people come less often and buy more.
SMITH: They're literally sitting down and planning ways to have people not come to their store.
GOLDSTEIN: And there's, like, math behind it, right? Because every time you go to a store, that store has to pay for your parking place. It has to pay for the cashier to make change or to authorize your credit card. So if you're the store, right - if you're the store, you would rather have a customer who comes, say, once a month and spends $400 rather than the person who comes every week and spends a hundred dollars.
UNIDENTIFIED CHILD: We need some groceries.
GOLDSTEIN: Now we're at Ziploc.
SMITH: In a normal store, there would be, like, 15 kinds of bags here. You know, different sizes, different brands, the ones with the little zip top on them...
GOLDSTEIN: The little blue thing on it.
SMITH: Not here.
GOLDSTEIN: We got three choices and three choices only.
SMITH: Small medium large.
GOLDSTEIN: Costco - giant store, tiny selection.
SMITH: And the idea is...
PRICE: When you have more selection, there's more labor. You got into a grocery store and you see everything is hand-stacked, everything is being touched.
GOLDSTEIN: In other words, the way a grocery store gets those 15 kinds of Ziploc bags onto the shelf is they pay somebody to put them there, one box at a time.
PRICE: But if you go into Costco and you look at the - particularly the grocery department - those products are driven by forklifts, so they're not touching individual items. They're touching a pallet. It's just quantum difference the labor factors.
GOLDSTEIN: So the choice for the Ziplocs at Costco - small, medium, large - I went with the small. We went to check out, and there was that one last thing. I went and got a couple of those - you know, those weird, like, half cutout boxes they have to put your stuff in.
SMITH: Yeah, I should say that I'm not a regular member of Costco and so it surprises me when I got to a store, spend - what was it - $350 and they're like, yeah, you have to put them in these jenky, little tiny, falling apart boxes to carry them out of the store.
GOLDSTEIN: Yeah, they don't even give you a real box and they definitely do not give you a bag.
PRICE: Never had bags for two reasons. One is that it costs money to have bags and, secondly - this might be a little bit of the for show idea - that if you have bags you look like a retail store.
GOLDSTEIN: And Robert Price told me Price Club and Costco never, ever want to look like a retail store. You know, they want to be that speakeasy he was talking about, that weird place with the cement floors and the pallets full of stuff where you go to your special club and you buy your vat of carrot juice for a great price.
SMITH: I'm sorry. It just makes me laugh every time you say the word speakeasy because it's so clearly not that vibe. It is a cold, harsh vibe where every part of the business is visible the customer. I would rather a regular grocery store take care of all those details for me and I am willing to pay a quarter, 30 cents, 35 cents more.
GOLDSTEIN: And by 35 cents you mean hundreds of dollars a year more, right?
SMITH: Jacob is a member of Costco.
GOLDSTEIN: That's why I shop at Costco and you know it. Like, both totally reasonable.
SMITH: So Costco has basically pushed this about as far as you could push a physical store in this direction. But a lot of people are looking and they're saying, well, is there a place it can go even further? Is there a way that you can strip away even more of the comforts of traditional retail?
GOLDSTEIN: There is this one company that is making a gigantic bet on doing exactly that. The company has raised something like $200 million, which, even today, is a lot of money. The company is called Jet. It's basically an online version of Costco. They've got the same $50-ish membership. They've got the same cheap as we can make it vibe.
SMITH: But I found this company fascinating because it took this deconstructing idea that Costco had to remove all the artifice of retail and just took it to a next level, I thought.
GOLDSTEIN: Marc Lore, who started the company, he told me what that next level is. They built this system that tracks millions of products scattered in warehouses all over the country. And that's all to solve this really basic problem in e-commerce. Marc Lore says when we buy stuff online, even if we don't know it, we are getting killed on shipping.
MARC LORE: If you're buying something online for a hundred dollars, 20 of that is just the embedded cost to cover shipping and fulfillment. Even if you get free shipping, it's already embedded in the price because that how retail has costs.
GOLDSTEIN: So you're telling me I get my Amazon Prime. I get free shipping. It's not free.
LORE: It's not free, no, it's embedded in the price.
GOLDSTEIN: So Lore's big idea - Jet's big idea - is to solve that problem. Lore showed me on his phone how it works.
Let's buy some stuff.
LORE: Yeah. So I pulled up the Jet app, and here's the homepage. Let's pick a category. So let's say...
GOLDSTEIN: Oh, detergent - I actually need detergent.
LORE: OK, so this is one of the most popular. This is the Tide Pods laundry detergent.
GOLDSTEIN: If we just buy the Tide, somebody in a warehouse has to get that Tide off the shelf, has to put together a box, put it in the box, tape up the box, and then somebody from UPS or wherever has to bring that box all the way to my house. That is not efficient. That is expensive. Lore says the way to solve that problem is to get us to buy lots of stuff all at once from the same warehouse. If we do that, the shipping cost per item goes way, way down.
SMITH: So Jet is basically set up to say, oh, you're getting that box of Tide. Well, there's some Handi Wipes over here. You want those? You want this, you want that?
GOLDSTEIN: Yeah, and because this is, like, e-commerce, giant warehouses, there are, like, thousands of things in the same warehouses with that Tide.
LORE: The Tide Pods laundry detergent - add that to the cart and you can see there it says savings just increased on 25,717 items. That means that that particular product is located in warehouses that give access to another 25,000 products.
SMITH: So that feeling I have in Costco where this is all just too much information about how things work in the warehouse - this doubles and triples that idea because now it's like, do I really want to...
GOLDSTEIN: Times it buy a thousand.
SMITH: Do I really want to know what you have in the warehouse and I can save a couple cents on it?
GOLDSTEIN: I'm going to give you one more.
GOLDSTEIN: You want one more thing to worry about? You see it when you go to check out at Jet.
OK, so here - so here's the Tide and then what does it say below the Tide?
LORE: It says waive return and save 24 cents.
GOLDSTEIN: And there's a little button next to it.
LORE: You can click that if you want.
GOLDSTEIN: OK, so push that button.
LORE: You'll save 24 cents additional on your order.
GOLDSTEIN: Robert, Jet offers free returns like a lot of sites, but they tell you free returns are not free. The right to return this box of Tide is worth 24 cents. Give up that right and Jet will give you the money. They'll give you that 24 cents.
SMITH: I just don't want to know that much about the grocery business. It is not worth it to me to save 24 cents.
GOLDSTEIN: Yeah, I kind of love it. I kind of love it. Like, it's - like, I feel like I'm doing work and I'm saving money, you know? It's like - like, I don't know - it's like puttering around the house or something. I find it very satisfying.
SMITH: There's a logical limit to how much work a consumer can do.
GOLDSTEIN: I don't think we've hit that limit yet.
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GOLDSTEIN: You can tweet at us @planetmoney or @JacobGoldstein or @radiosmith.
SMITH: Our episode today was produced by Frances Harlow. And if you're looking for another show to try, check out NPR's newest podcast. It's called the "Hidden Brain." The first show is about switch tracking, which I'd never heard this before, but it is a phenomenon when two people think they're talking about the same thing, but in reality they are speeding down different tracks.
GOLDSTEIN: I hate it when you see - sometimes you observe that and, like, you know it's going on, but you can't - you can't solve it.
SMITH: Subscribe now on the NPR One app, iTunes or npr.org/podcast. I'm Robert Smith.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
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