How Does Costco Make its Money?
Costco operates 897 membership-only warehouse clubs worldwide where it sells bulk merchandise at ultra-low markups. The secret of Costco’s business model: the company barely profits from product sales. Instead, Costco generates nearly all its profit from membership fees ($65/yr for Gold Star, $130/yr for Executive). The warehouses effectively operate as a break-even distribution system designed to maximize the value of membership.
Revenue Breakdown
| Segment | FY2024 (Sep) | FY2023 (Sep) | YoY Growth |
|---|---|---|---|
| Net Sales | $249.6B | $237.7B | +5.0% |
| Membership Fees | $4.83B | $4.58B | +5.5% |
| Total Revenue | $254.4B | $242.3B | +5.0% |
Net Sales — 98% of Revenue
Product categories (estimated breakdown):
- Food & Sundries (~40%): Grocery, snacks, beverages, cleaning supplies. The largest category and a key traffic driver.
- Hardlines (~16%): Electronics, health & beauty, hardware, office supplies.
- Fresh Foods (~14%): Meat, bakery, deli, produce. Costco is one of the largest organic food retailers in the U.S.
- Softlines (~11%): Apparel, housewares, small appliances, jewelry.
- Ancillary & Other (~19%): Gasoline (the largest single-item revenue generator), pharmacy, optical, food court, travel.
Kirkland Signature: Costco’s private-label brand generates ~$80B in annual sales (~32% of product revenue). Kirkland products are priced 20-40% below national brands while maintaining comparable or higher quality.
Membership Fees — 2% of Revenue but ~70% of Profit
| Metric | FY2024 | FY2023 |
|---|---|---|
| Total Cardholders | 76.2M | 72.4M |
| Paid Households | 36.9M | 34.8M |
| Renewal Rate (U.S./Canada) | 92.9% | 92.7% |
| Executive Members (% of paid) | ~46% | ~44% |
The membership fee increase to $65/$130 (effective September 2024, first increase since 2017) adds ~$400M annually in high-margin revenue.
Income Statement Overview
| Metric | FY2024 | FY2023 |
|---|---|---|
| Total Revenue | $254.4B | $242.3B |
| Gross Profit | $30.1B | $28.3B |
| Operating Income | $9.3B | $8.4B |
| Net Income | $7.4B | $6.3B |
Key Financial Metrics
- Gross Margin: 11.8% — Intentionally low. Costco caps markups at ~15% (vs 25-50% at traditional retailers). Low margins keep prices low, which drives membership renewals.
- Membership Fee Margin: ~100% — Membership fees drop almost entirely to the bottom line with minimal associated costs.
- Operating Margin: 3.7% — Thin but highly predictable, driven by the recurring membership revenue base.
- Renewal Rate: 92.9% — Extraordinary retention. Nearly all members renew, making membership revenue highly predictable.
What to Watch
- Membership fee increases — The 2024 increase was the first in 7 years. Each $5 increase adds ~$180M in near-100% margin revenue. Future increases drive disproportionate profit growth.
- E-commerce growth — Costco’s online business is growing but still represents <10% of sales. Same-day delivery partnerships (Instacart) and Costco.com expansion are priorities.
- International warehouse openings — Costco is opening 25-30 new warehouses annually, with increasing focus on international markets (China, Japan, Australia, Europe).
- Executive membership mix — Executive members ($130/yr) get 2% cashback on purchases. Growing this to 50%+ of members increases average membership fee revenue.
- Gasoline strategy — Costco gas stations are major traffic drivers. Below-market gas prices attract members to the warehouse, where they make additional purchases.