Costco’s business model often appears remarkably generous to the casual observer.
With its significant discounts, bulk purchasing options, and the famously unchanged $1.50 hot dog price for nearly 40 years, one might wonder how the company manages to stay profitable.
According to retail experts, the secret lies in what happens even before customers start filling their carts.
Carol Spieckerman, a retail analyst, explained to the Daily Mail that “Costco’s membership fees are the key ingredient, making up about 50 to 65 percent of its total profit.”
“This strategy allows Costco to maintain extremely low product margins, as profits are already secured through membership renewals and high sales volumes,” she added.
Costco limits its product markups to roughly 14-15 percent, which is significantly lower than the average for supermarkets and department stores, and it steers clear of flashy sales tactics.
‘This builds trust and removes the need for shoppers to hunt for deals,’ Spieckerman added.
That means shoppers trust that prices are fair, don’t waste time comparing labels, and buy more when they’re in the building. Costco makes less per item, but they sell a lot of them.
Ron Vachris, CEO of Costco, has said the company’s top priority is protecting member value as households remain under financial pressure
Membership fees and loyal shoppers are key
A good chunk of Costco’s profit comes from annual membership fees.
Costco has repeatedly said its priority is protecting renewals across its more than 80 million paid members in the US, and 130 million globally.
The basic membership costs $65 a year, while the $130 Executive tier adds extra perks such as early store entry, and although the upfront cost can be a turnoff, regular shoppers often recoup it quickly through lower prices on everyday essentials.
Those fees are predictable, high-margin income that drops straight to the bottom line, giving Costco the freedom to keep shelf prices low.
In effect, shoppers pay upfront for the right to shop cheaply – and come back again and again so long as Costco keeps rolling out good offers, or even keeps the very best.
Costco’s annual sales are around $250billion. That rises to more than $254billion once membership fees are included.
‘Costco rakes in about $5.3 billion a year from membership fees,’ analyst Neil Saunders of Global Data told Daily Mail. That works out at more than $14million a day.
‘While this is only 2 percent of total revenue, the fees are very high margin and make a major contribution to the bottom line.’
He added: ‘This means Costco does not have to make much money on the products they sell, which allows them to keep prices low.’
Join the debate
Does Costco’s membership fee make shopping fairer or does it just lock out those on tighter budgets?
Costco’s membership card gives shoppers access to bulk savings and perks such as enhanced fuel rewards
Bulk buying, fewer choices, faster turnover
Despite sprawling stores, Costco carries fewer items than a typical supermarket.
Instead of stocking 40 brands of olive oil, it might stock four. That gives Costco enormous leverage with suppliers, who are desperate to win shelf space in front of millions of loyal, high-spending customers.
Fewer products also mean faster stock turnover, lower storage costs, and less waste. Items don’t sit around gathering dust.
‘Kirkland Signature is Costco’s not-so-secret weapon,’ according to Spieckerman.
By selling its own brand – often made by the same manufacturers behind premium labels – Costco earns higher margins while still undercutting rivals on price.
Kirkland now generates tens of billions of dollars a year in sales, and it reinforces the idea that Costco equals quality, not compromise.
A recent report outlined how regular shoppers often recoup it quickly through lower prices on everyday essentials.
Bulk savings on staples like diapers, coffee, cheese and water filters can offset the fee within months, while a single big-ticket purchase – such as a TV, sofa or engagement ring – can wipe it out in one go.
For those not in the market for a monumental purchase, buying everyday essentials such as water filters, diapers, coffee beans, and cheese can also quickly earn back the $65 you spent on accessing the warehouse
Loss leaders that lock shoppers in
Some products are intentionally sold at or near cost – for example, the $4.99 rotisserie chicken and the $1.50 hot dog and soda combo. Gas prices tend to be lower than rivals.
These are marketing tools. The value of the positive PR every time Costco reassures shoppers the hot dogs prices are not going up outweighs any lost profit made from a bigger margin.
‘The $1.50 hot dog combo is iconic – it’s been that price since 1985,’ said Spieckerman. ‘Yes, Costco knowingly loses money on certain items like hot dogs, rotisserie chickens, and sometimes fuel.
‘Costco’s loss leaders are loyalty generators and traffic drivers. It’s a small price to pay for customer devotion.’
Shoppers come for the deals, and once inside fill up their carts.
Key to great prices are the retailer’s scale, and its famous buyers.
‘Costco’s buying power gives them incredible leverage with suppliers,’ Spieckerman said. ‘And Costco’s buyers are legendary in the industry for driving hard bargains while maintaining quality standards.’
Credit cards pile on deals – and profits
Earlier this year, Costco boosted cashback rewards on gas for holders of its branded credit card, lifting the rate to 5 percent at its own pumps.
The upgrade applies to gas purchased at Costco locations using the Costco Anywhere Visa Card, issued by Citi, up from the previous 4 percent reward.
Experts say the enhanced pump reward us aimed at protecting loyalty among Costco’s more than 80 million paid members.
Neil Saunders, a retail analyst at GlobalData, said: ‘The boosted gas rewards is a bid to get more people to take its credit card – which helps the company’s profits.
‘Those with branded credit cards tend to be a little more loyal to the chains they get them from.’
Another excellent way to make the most of your membership is to hit up the members-only food court – where $1.50 will get you a signature Costco hot dog and a soda
Travel, cars and insurance quietly add revenue
Costco also earns money from services most shoppers barely think about: travel bookings, optical and hearing centers, pharmacies, tire fitting, insurance referrals, and the sale of cars.
The partnership with insurers offers auto, home, life and health policies at discounted rates for members, while at the same time Costo earns a referral bonus.
Another popular one is is car sales via more than 3,000 dealerships to offer members pre-negotiated pricing, incentives and discounts on vehicles and accessories
Individually, none of these drive the business. Together, they deepen loyalty and add steady income – often with third parties doing the heavy lifting.
No-frills and low theft
Costco spends very little on advertising compared with rivals. Its no-frills warehouses, minimal decor, and bare-bones displays are a way to cut costs.
Costco is also know for lower theft, which analysts say comes down to shoppers feeling they are part of a club thanks to the membership.
By paying to shop there, customers feel part of a club – creating a psychological contract that encourages repeat visits, higher spending and better behaviour in store.
‘Costco has extremely high loyalty because it offers a strong value equation – good products, high quality and low prices – combined with a shopping experience many customers enjoy,’ added Saunders.
‘That shows up clearly in its membership renewal rates. Of course, the warehouse model is not for everyone.
‘Some shoppers do not like buying in bulk or find the stores overwhelming, but that is not a sign of failure. No retailer can please everyone, and Costco has a very distinct model that it is happy to stick with because it works.’
