How Brands Keep Their Prices Low

Food, clothing, and shelter are life’s basic necessities. While housing is a complicated, big-ticket item, people need to buy food pretty much constantly, and the clothing industry has tried to make itself just as disposable.

With so much competition in the food and clothing industries, companies try to capture customer dollars by making their products as cheap as possible. Some companies have come up with innovative ways to keep costs down, but others use less-than-ethical cost-cutting measures.

Costco, Trader Joe’s, and Aldi

Costco makes almost all its money from membership fees, and sells items pretty much at wholesale costs.
An >analysis of Costco’s financials showed that the company has an operating margin of 11.4 percent, which means for every $100 it spends to buy its products, it turns around and sells them for $111.40. Which is really, really low.

That’s an average. Costco has an in-house brand called Kirkland Signature. Since there are fewer middlemen involved with in-house brands (see Trader Joe’s), Costco might be able to mark up its Kirkland products by more than 11.4 percent, but if that’s the case, that means its non-Kirkland products are probably sold at an even lower profit margin.

Yet the company had a $100.24 billion market capitalization at the end of 2018, and revenues of $35.07 billion in 4Q18, pretty much all from charging $55 a year for a membership.

Costco understands the value of investing in employees, so shoppers can feel pretty confident that their prices aren’t low because of abusing workers, according to Investopedia.

Costco is well-known for paying its employees’ high wages. In America, a Costco worker earns, on average, about $21 per hour and receives health benefits, ample vacation time, and a 401(k) match. As illogical as it sounds, Costco’s high employee wages are part of its cost-savings plan. With employees earning a decent wage, they are more productive and less likely to quit.

There’s one more strategy that Costco uses to keep its products cheap, involving stock keeping units (SKUs). Compared to other grocery stores, Costco stocks fewer numbers of products―you won’t find 50 different brands of toothpaste here. The advantage is twofold: cheaper administrative and stocking expenses, and the ability to have brands try to outbid each other to get on shelves, giving Costco leverage in negotiating lower wholesale prices.

Aldi is the cheapest grocery store in the country, according to Cooking Light, which cited a study at Consumer Reports.

Like Costco, Aldi has low SKUs, as Mashed reports.

You won’t need to choose from, say, 20 different types of brown rice when you go to Aldi, and that’s because they limit their stock … Aldi keeps around 1,400 core items in stock all the time. That sounds like a lot, but compare them to competitors like Kroger and Wegmans … [that] keep around 30,000 core items.

How does that impact the bottom line for Aldi and, in turn, for their customers? Personal finance expert Lauren Greutman says the big savings come in the bulk buys that limited stock allows Aldi to make. Instead of buying small quantities of, say, 20 different types of fancy ketchup, Aldi buys a huge quantity of one or two kinds. Then, all those bulk discounts make their way to shoppers.

With limited stock, stores are smaller and cheaper to operate. Nearly all of Aldi’s products are off-brand, that is, private label. And instead of attractively displaying products, Aldi saves money by sticking products on shelves in their boxes. That way, stores can just have two or three employees on the floor at a time, saving on labor costs without needing to skimp on compensating workers. Employees don’t spend time corralling shopping carts, either, because they’re coin operated, so customers are more likely to return carts to get their coins back.

Aldi also keeps its advertising budget low by depending on word of mouth, like Trader Joe’s, another one of America’s cheapest grocery stores.

The biggest reason Trader Joe’s is so inexpensive is its policy of carrying its own private label items almost exclusively―about 80 percent of its inventory. The store purchases products directly from suppliers, shortening the supply chain. And its smaller inventory means smaller stores, which means lower personnel costs without screwing its employees over.

Walmart

Walmart’s marketing tagline, “everyday low prices,” is simple and effective.

With massive inventory and huge stores that need to be staffed, heated, and cooled, it’s no secret that the company keeps overhead low by paying low wages and skimping on employee benefits. In fact, one analysis found that Walmart is the worst-paying large company in America.

While Walmart offers benefits to full-time employees, half of its workers are part-time, so they don’t qualify for those benefits.

Otherwise, the company is strategic, opening in many communities where there aren’t any other major stores. According to Business Insider, 90 percent of people in the United States have a Walmart within 15 miles of their houses.

Walmart’s size gives it leverage when negotiating prices with suppliers, and it can keep prices low because it makes money on sheer volume.

Walmart is a one-stop store, straddling the world of groceries and the fashion industry. Its prices are low, but it’s clothing prices aren’t unusual for an industry dominated by fast fashion.

Fast Fashion

Today Americans buy five times the amount of clothing they bought in 1980, about 68 pieces each year, as the Wall Street Journal reports.

And on average, each piece will be worn seven times before getting tossed, according to a 2015 study by the British charity Barnado’s. In China, it’s just three times, says the Chinese fashion-rental platform Y Closet.

Fast fashion originated in the late 1980s, with factories mass-producing garments super fast.

To keep prices low, fast fashion slashed manufacturing costs—and the cheapest labor was in the world’s poorest countries. The sector reset the way that all clothing—from luxury garments to athletic wear—is conceived, advertised and sold. In 30 years, McKinsey & Company reports, fashion has grown from a $500 billion trade, primarily domestically produced, to a $2.4 trillion a year global behemoth.

Half of the clothing bought in the United States was made domestically in 1991. In 2012, that number had plunged to 2.5 percent.

Fast fashion brands include H&M, Forever 21, Zara, Fashion Nova, and Uniqlo, and they all manufacture clothing overseas. Fast fashion companies like H&M don’t own factories, they contract out to suppliers, mostly located in Asia and Europe. Cheap labor wins in the fashion industry. Everyone wants to pay less for clothing, regardless of income.

Cut corners have tragic consequences. In Bangladesh, over 500 garment factory workers died between 2006 and 2012. There’s been lip service to improving conditions after high-profile catastrophes like the 2013 building collapse at Rana Plaza, but safety has not improved much.

The impact of fast fashion goes well beyond just hurting low-wage workers in unsafe conditions on a different continent. About 20 percent of the world’s industrial water pollution comes from the garment industry, as well as 10 of carbon emissions.

One-fifth of fast fashion garments are unsold, and destroyed or buried, out of 100 billion pieces produced every year. Most of those garments contain non-biodegradable synthetics.

When it comes to clothing, or food, there are companies that try to keep prices low while maintaining certain ethical standards. Some sustainable brands have repudiated the fashion industry’s addiction to trendiness, and stuck to making inexpensive, high-quality staple wardrobe pieces. Grocers like Trader Joe’s and Aldi try to keep operations simple so they can keep prices low without screwing over workers. Now we just need some companies to figure out how to make housing cheaper, too.