Costco's Building an Apartment. Will it Work?
Tech Week returns, applications open for Mercury Raise, and 27% of professionals have used ChatGPT in the workpalce
Hi everyone 👋, Turner back again with The Split!
Costco is planning a small format store on the ground floor of a new 800-unit apartment complex in LA. Is this a good idea? I don't know, but I'll try to explain why it could work. Tech Week 2023 returns, Mercury just announced the latest round of applications for its Raise Seed program, and 27% of professionals have used ChatGPT in the workplace.
We're also hosting our first Founders and Funders event of 2023! If you're in SF on Wednesday, February 8th, join us at 6pm PT at AngelList's HQ (it's a cool spot) for some light food, refreshments, and conversation. Capacity is limited, sign-up here.
✨ After School - The Best Consumer Trends Newsletter
One of my favorite newsletter's is After School written by Casey Lewis.
She sends four short emails Monday through Thursday and does an excellent job covering all things consumer trends. She also writes one longer piece each week, like What Gen Z Got for Christmas in 2022.
If your 2023 new years resolution involves curbing your TikTok addiction but you still want to know exactly what's happening with the youth, check out After School here.
Costco's New Apartment Concept
No, this is not a joke. And it's not AI-generated either. Costco, home of your favorite $1.50 hot dog, is slated to be the anchor tenant of a 800-unit multi-family complex in Baldwin Hills, Los Angeles.
I'm not gonna lie, I laughed when I first saw this picture because I thought it was fake. But like most things I write about, I actually think this is a smart concept for Costco to explore.
If you're not familiar with Costco, it's the third largest retailer in the world. It reported $227 billion in revenue over the past 12 months, which puts it just behind Amazon ($502 billion) and Walmart ($573 billion). It requires a $120/year membership just to get in the door. 66.9 million households worldwide currently pay for a membership, and they renewed at a 93% rate last year.
Costco's business is notorious in investor communities for "only making money on the membership fees", as it provides consumer's bulk, discounted products at wholesale prices. If you Google Costco hot dog meme, every month there's a new headline around its famous $1.50 hot dog soda combo that's been the same price for over 30 years despite inflation.
Every Saturday, Costco stores are blanketed with pop-up booth's offering free product samples. For many families, especially considering the sunk cost of membership, Costco trips are a sacred weekend tradition (where they also spend a lot of money). It's a perfect marketing strategy: come for free samples and save $5 on lunch, spend $800 on groceries and a new TV.
Considering $227 billion in revenue from 66.9 million customers, Costco did $3,400 in revenue per member last year. If we assume its customer base skews to the higher-end and makes an average of $75,000 per year (I made this number up, but it feels close), this is 4.5% of their total income. Considering it doesn't naturally capture things like rent, car payments, utilities, entertainment, or restaurant spending (Costco does offer some services like travel, pharmacy, optometry, and even auto parts), Costco's share of its customers addressable disposable income could be in the ballpark of 20-50% depending on the household.
So why is this new store format interesting?
Traditionally, Costco stores are massive warehouses with rows of pallets and shelves stacked with goods multiple stories high. It's how they can sell things so cheap - customers literally pick products off the pallets shipped in from suppliers. These massive warehouses are generally located in suburban areas, which is what makes this smaller format interesting. It brings Costco's "high-end discount store" prices to denser neighborhoods. It puts Costco the closest its ever been to downtown LA and potentially unlocks an entirely new customer segment: city dwellers.
For every business, profitability is a function of how efficiently it can acquire, serve, and retain its customers. Costco may not specifically go this route, but further integrating with urban life opens the opportunity to develop into more of a lifestyle brand. In other words, building more touch points with customers that makes then spend more and come back more often.
The liquor brand Chase Azul just opened a luxury resort, which is essentially a luxury travel destination centered around its expensive, premium tequila. If we assume the core hotel business is the standard, profitable resort, the entire experience likely encourages guests to buy more tequila. And anytime they buy the tequila, they'll be reminded of their time at the resort. A retailer getting into housing isn't quite the same, but Sears actually sold pre-built manufactured houses from 1908 to 1940 during its prime.
Could Costco ever build its own apartment complexes? It's not the same as selling pre-built houses, but it is recurring cash flow.
What if rent came with a Costco membership? And what if that membership meant better prices on everything else in the building? Residents would probably spend a lot of money, and frequently.
This new store format could also operate as a pick-up point for online orders, strengthening Costco's value prop for every resident in the neighborhood.
At a basic level, Costco is experimenting with a new store format that works in urban areas and reaches new customer segments. Going a bit further, its also an opportunity for Costco to expand how it serves its customers by further deepening the relationship with its members.
Based on early sentiment, it looks to be providing incredible value for at least one customer:
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🚀 Product Launches
Tech Week 2023: It's back! More details coming over the next few weeks, but Banana will be participating in multiple Tech Week events again this year.
SF: May 30th to June 4th
LA: June 5th to 11th
NYC: October 16th to 22nd
Sign-up here to stay in the loop.
Mercury's Raise Seed Applications are Now Open: If you're a founder gearing up to raise a Seed round, check out the latest batch of Mercury's Raise program. They select 50 startups to put in front of 800+ investors, including Banana and the others below. I've met interesting founders in every batch, and even invested in one I met in 2021!
Hightouch Launches a Personalization API: This new product flips the role of the data warehouse on its head. Instead of just pushing data to other apps developers can now programmatically query and pull data in real-time. In other words, this should lead to deeper personalization and improved user experiences. If you want to go deeper, here's a brief history on the data warehouse and where Hightouch thinks it's going next.
🔗 Links and Charts
Can Startups Grow Into Sky-High 2021 Valuations?: In 2021, the median late-stage valuation (Series B to D) for SaaS companies reviewed by IVP was 114.3x ARR. This was up from 15.5x in 2017. In other words, the market was valuing the exact same company 7x higher just four years later - and 3x higher in 2021 than in 2020. Ajay Vashee at IVP says companies who raised at 2021 valuations will need to grow 100% per year for two years to settle into these valuations, and more like five years if growing closer to 40%.
The 10x ARR Club: Continuing on ARR multiples, of the nearly 100 publicly traded pure-play SaaS companies, only 20% trade above 10x ARR multiples. And these are generally the cream of the crop. Meritech Capital put together a report on what these 10x ARR public companies tend to look like.
27% of Professionals Have Used ChatGPT in the Workplace: The 4,500 person survey ran from January 4th to 8th found that marketing had the highest adoption, with 37% having used AI to assist with work-related tasks.
Webcomics Platform Tapas Bans AI-Generated Content: In what could be the first of many, Tapas justifies the ban saying copyright laws only protect human-generated art. US-based Tapas was acquired for $510 million in 2021 by Korea-based Kakao, which operates one of the largest messaging platforms in Korea.
Shopify Increases Prices for First Time in 12 Years: It's actually surprising to me Shopify hasn't done this for so long. Prices are increasing 33%, and any customer rolling their monthly plan to annual essentially keeps the same all-in monthly price, while Shopify gets more cash up front. This cool visual of Shopify's roadmap over the past 13 years hopefully gives comfort that it earned that price increase.
GitHub Passes 100 Million Developers: This would represent 1.25% of the total human population. I thought this stat was interesting compared to Electric Capital's Developer Report, which estimates there were 23,343 active crypto developers in December of 2022. In other words, 0.02% of developers touched a crypto product last month.
Music Power Laws: Only 33 artists reach more than 50 million monthly listeners on Spotify. And 7.6 million unique's are needed to hit the top 1,000. h/t Eugene Ng for sharing.
Top 10 Best and Worst Brands to Work With: A cool list from FYPM, it's topped by Adobe at #1 and MICHAEL'S (!!!), the craft store, at #3. Notably, two watch brands were named to the list of top 10 worst brands to work with.
“I think resale is kind of a gateway to luxury”: According Saks OFF 5th (Saks discount brand), 80% of its customers want it to offer used items. 71% already buy sell, or trade items monthly, with 38% doing so at least weekly.
If you're at a large retailer or brand, I'd kick myself if I didn't mention our portfolio company Arrive. Arrive powers full-stack rental and resale programs for companies like Eddie Bauer, Dick's, Burton, and Public Lands.
📚 Long Reads
China's State of Influencers 2023: This 46-page report is packed with information on China's influencer market. I don't do much if any investing in China, but in many ways Asia's consumer market has leapfrogged the US and Europe, so I always keep an eye on what's going on.
Most surprising to me was that Xiaohongshu ("Little Red Book") seems to have gained significant momentum over the past two years. If you're not familiar, it's a video-first product review platform targeted at upper income women in urban areas. It's not the largest, but the nature of the content being mostly product reviews means purchase intent is very high, leading to high conversion rates. Brands plan to increase spend on both Xiaohongshu and Douyin (TikTok's Chinese version) this year, while decreasing on Tmall (Alibaba) and Weibo (the Twitter of China).
Why is Java So Weird?: Java is a small, volcano-filled island in Indonesia, yet its one of the densely populated places in the world. Why? The answer has something to do with the volcanoes, but that's not the full story.
Social's Next Wave: Part 2 of a deep dive into the consumer social space from Mario at The Generalist. He touches on 1) focusing on close friends), 2) counter-positioning, 3) moving beyond ads, and 4) winning the next great use case. I lent some thoughts that you'll find sprinkled throughout!
Another Shoe to Drop with Jeremy Levine: This was a good interview from Eric Newcomer featuring Jeremy Levine of Bessemer Venture Partners. Jeremy joined Bessemer in 2001, and draws many parallels between the Dot Com Bubble and 2021. Beside featuring the actual quote "the entire world smoked a giant joint and was high as a kite", Jeremy walks through the historical phases of the tech and venture markets and where he thinks we're heading from here.
💼 Career Services
The Banana Talent Collective is closing in on 200 candidates. The group has engineering, growth, product, finance, and operations experience at the companies below + a bunch of smaller startups:
Talent Drop #10 goes out on Sunday. If you're exploring a new startup role or are hiring and want a feed of pre-vetted candidates, get started here (and as always, if you're at a Banana portfolio company, reach out for free access).
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