The Surprising Way Costco Really Makes Their Money

If you are the kind of person that cannot go more than a week without dropping by Costco for your weekly groceries, to check out what's new, or even just to grab a hot dog meal, you are probably also wondering how on earth the chain makes money if it can afford to shortchange itself at the food court or offer items at a bulk discount to its members. The answer to that question would be you. Well, ok not just you, but also the nearly 100 million people worldwide (via Statista) who pay membership fees across its nearly 800 warehouse stores worldwide (via Statista). 

Paying $60 for an ordinary membership or $120 for a Gold Star Executive card (via Money) may not sound like much, but it all adds up, so much so, in fact, that in 2018, Costco reported raking in $3.1 billion in membership fees. The Motley Fool says the revenue from the fees goes straight into the bottom line, because the fees cover services that include issuing a card, keeping and maintaining a computerized membership system, and — from time to time that is — dealing with any inquiries you might have. 

Without membership fees, Costco could not deliver its management or its shareholders any bang for their bucks. Investopedia ran the numbers on Costco's financial statements (so we do not have to) and came to the conclusion that the warehouse retailer makes just over an 11 percent profit on most of its brand-name products. That percentage is offset by its Kirkland Signature range, which is sold at higher margins. 

Costco also manages to save a few pennies here and there by carrying a limited number of products and cutting the amount of storage space in their warehouses. Because brands know they will not exactly be fighting for attention, they are happy to shave their prices for the right to position themselves before Costco's shoppers.

At the end of the day, Investopedia says investors do not put their money in Costco because the company turns a huge profit. They put their trust in Costco because the warehouse chain operates in a niche environment. And that will continue to hold true for as long as you keep going back for your hot dog sets, your rotisserie chickens, and Kirkland Signature essentials.