How does Costco make money?

...and it's not from groceries, surprisingly

Costco Wholesale Corporation is a multibillion-dollar global retailer. Founded in 1976 and operating in around 12 countries, Costco is a membership warehouse club offering customers competitively priced products on brand-name merchandise. With over 540 lotions in the US and 780 warehouses worldwide, Costo is a behemoth in retail.

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Net sales for the fiscal year 2019 were $149.35 billion. With such heavily discounted prices and bulk-buy bargain products, how does Costo make its money?

What makes Costo unique is it runs a membership business model, meaning a customer must buy a membership before being able to make purchases in the store. The standard membership card currently costs $60 for a year's membership with a renewal required at the end of your period.

There are also executive membership cards that give extra benefits such as 2 percent cash back on eligible purchases and are priced at $120.

Costco membership card renewal rates are outstanding, with 90.7 percent in the U.S and Canada and 88.3 percent worldwide.

TickerSecurityLastChangeChange %
COSTCOSTCO WHOLESALE CORPORATION287.66+2.53+0.89%

COSTCO'S TOP 5 BEST SELLERS IN THE US 

What Costco offers is its ability to use economies of scale, buying larger amounts of products at low prices, then passing on these savings to customers. Costco customers have confidence in the store's pricing of goods, knowing they are consistently lower prices than other stores such as Target or Walmart. On top of this, Costo caps its markups so customers know they won't be overpaying for a product.

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It's this ability that even online retailers like Amazon can't match, making the wholesaler somewhat immune from the effects of e-commerce that many other physical store retailers have suffered.

When it comes to the bottom line, Costco actually makes a small loss when it comes to revenue from its products. But this is all part of the plan. While the annual product sales increase on an average of 7 percent,  17 percent of the company's value comes from membership fees, accounting for just 2 percent of the overall total revenues.

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Most recently, Costco earned $768 million in year-on-year membership revenue, and it's these funds from membership fees that make up the core of Costco's profits.