You’re going to need a bigger cart

This week, a nontechnical but nevertheless effective way to build wealth, or at least increase cash flow by reducing outflow.

The Census Bureau claims that the median household income in the United States was $50,233 in 2005. Other sources claim that the average household spends 7.5% of its income of groceries. Yes, there’s a danger in mixing “average” with “median”, but it shouldn’t affect our calculations too much here: besides, there’s a larger point to be made. The average household makes more than the median, because there’s a lower bound to household income (which is of course $50,233 less than the median), but no such upper bound. Just as obviously, the less money a household earns, the greater the share of that income it’ll spend on groceries. Regardless, the average household spends somewhere around $4000 a year on groceries.

Would it be worth your while to cut that number by, say, $1600? As there’s no way to escape having to eat, you could almost think of it as a 40% return on a $4000 annuity.

Which brings us to Costco, one of the quietly great successes in American retailing. Control Your Cash got to the party late on this one, but that doesn’t make Costco any less amazing.

Stop buying your groceries at Safeway. Or Albertson’s. Or Ralph’s. Or Lucky. Or Vons. Despite its mellifluous slogan, Vons is not value. Nor is Publix nor Piggly Wiggly nor Wegman’s nor Pamida. Fine companies all, to be sure, but not committed to the principle of Controlling One’s Cash.

Pay $50 and buy a Costco membership instead. If you’re a human who enjoys eating things, it’ll pay for itself 40-fold. This is not an exaggeration.

Quick recap, if you’ve only driven by a Costco and have no idea what goes on inside: that membership entitles people to buy groceries and other stuff at prices around 30-40% lower than you’ll find elsewhere, with much of the merchandise stacked to the ceiling in aisles wide enough to hold chariot races in. This leads to the perception that Costco only sells in colossal lots, requiring you to buy, say, a year’s supply of cereal at a time. This is false.

Costco and its competitor, Sam’s Club, represent the zenith of human achievement, on a par with space travel and sanitation. With every dollar these retailer/wholesalers reduce prices by, customers have to expend ever less incremental effort to earn money to feed themselves with. Costco performs wonders by exploiting a fundamental economic truth: the more a seller can sell to a buyer, the more likely the seller is to discount what he’s selling. Therefore, the more you buy, even if it’s in concert with other members, the cheaper each unit becomes.

Costco and Sam’s Club have 90 million members between them, so it’s not as though either company is operating in the shadows.

Costco doesn’t just sell groceries. The displays are loaded with everything from vacuum cleaners to tires to flat-screen TVs to books. Even hearing aids and prescription glasses.  Another misconception is that Costco only deals in minor brands, which is also false. A look at digital SLR cameras at Costco.com, for instance, shows Canon, Nikon and Pentax offered, among others.

Downsides to buying at Costco:

• Parking is scarce on weekends.
• They keep standard retail hours, closing around 8:30 on weekdays and 6:00 on weekends.
• You have to bring your own bags, or boxes.
• There’s little variety among brands. Costco typically carries only one brand of a particular item (e.g. NutriSystem but not Alli, and no, we didn’t choose weight-loss supplements because we’re fat, or even use weight-loss supplements.) But this isn’t necessarily a negative.

When you’re torn between the Prego and the Ragu, or the Coke and the Pepsi, what criteria do you typically weigh when you buy? Be honest with yourself and ask: is there really that much difference between one and the next? And if price isn’t a criterion for you, would it become one if the differences among brands were large enough?

“I would never dream of shopping there.”

Some people find the idea of deciding to save lots of money on groceries to be gauche, a step up from collecting soda cans or beachcombing. Often, these people will justify it by assuming that no retailer could set its prices so low without exploiting its employees. Fine. If you’re wealthy enough to have such a limiting grocery-buying philosophy, or if overpaying somehow makes you feel rich, have at it. Have your kippers and water biscuits shipped over from the Marks & Spencer flagship store at Marble Arch. The rest of us will save money, thank you very much. And hopefully use it to buy assets with.