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Pocketing savings is a loser's game
Strategies built on low cost
The firms that gain fastest are those whose strategies were already conditional on lower costs. IKEA's longtime strategy was to sell quality furniture for low prices and make it up on volume. After containerization let it go worldwide, Ingvar Kamprad, the IK of IKEA, became a billionaire.
Walmart's strategy was high volume and low prices in underserved markets, so it benefited from both the cost savings and just-in-time supply chains, which gave it more product variety and lower inventory costs. Costco launched with the same high volume, low cost strategy in the early 1980s.
Where AI lowers costs
Professional services, healthcare, education, financial services, and creative services together account for between a third and a half of global GDP and have seen little productivity gain from automation. AI can lower costs there, and the companies that benefit will be those already built on low prices and high volume.
Small capital needs
Their capital needs stay small. IKEA never raised risk capital, and Costco raised one round in 1983 before going public in 1985, because implementing cost savings technology is not capital intensive. At the high end of projections, an additional 7 percent of GDP growth over ten years within one-third of the economy gives these companies a tailwind of only about 2 percent per year.
How did IKEA keep its prices so low?
IKEA designs its furniture around production efficiency, so each piece costs less to make. Flat packs cut shipping and storage costs, and customers carry the boxes home and assemble the furniture themselves. The stores are self-service warehouses, which reduces staffing. Founder Ingvar Kamprad built the company on selling at low margins in large volumes.
Why does Costco charge a membership fee?
Costco earns a large share of its operating profit from annual membership fees rather than from the goods it sells. That income lets the company hold its markups on products well below those of typical retailers. The fee also gives shoppers a reason to buy most of what they need there. Members renew in high proportions year after year.
Why is it called a loser's game?
Charles Ellis used the phrase in a 1975 essay in the Financial Analysts Journal. He borrowed the idea from Simon Ramo's tennis writing, which observed that amateur matches are decided by errors rather than by winning shots. In such a game the player who makes fewer mistakes wins. Ellis applied the idea to professional investing.
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