How Costco Makes its Money: Revenue Breakdown (FY2024)

How Does Costco Make its Money?

Costco Wholesale Corporation (NASDAQ: COST) generated $254.4 billion in total revenue in fiscal year 2024 (ending September 2024) by operating 897 membership-only warehouse clubs worldwide. But Costco’s financial model is unlike any other large retailer: the company earns almost all of its profit from membership fees, not from selling merchandise. Product sales across its warehouses generate a thin ~3% gross margin — barely enough to cover operating costs. The membership fees ($65/year for Gold Star, $130/year for Executive) are where Costco actually makes its money, dropping to the bottom line at near-100% margin.

This is a deliberately engineered model. Costco caps its merchandise markups at approximately 15% (traditional retailers charge 25–50%), intentionally sacrificing retail profit margin to deliver prices so compelling that members renew year after year. The 92.9% U.S./Canada renewal rate — one of the highest retention rates of any consumer subscription product in existence — is the validation of that strategy. Costco’s warehouses are effectively an elaborate, high-quality distribution system built to justify a recurring membership fee.

Key Takeaways

• Costco generated $254.4B in FY2024 total revenue, up 5.0% — and $7.4B in net income on a business where merchandise margins are intentionally near zero
• Membership fees ($4.83B, just 2% of revenue) generate ~70% of Costco’s operating income — the most important financial fact about Costco’s business model
• 92.9% renewal rate (U.S./Canada) is extraordinary consumer loyalty that makes membership revenue highly predictable and virtually annuity-like in its characteristics
• 76.2 million cardholders and 36.9 million paid household memberships — both growing, with cardholder growth of 5.2% year-over-year
• Kirkland Signature — Costco’s private-label brand — generates an estimated $80B+ in annual sales (~32% of product revenue), making it one of the largest consumer packaged goods brands in the world; Kirkland products are priced 20–40% below equivalent national brands
• The September 2024 membership fee increase (from $60 to $65 for Gold Star, $120 to $130 for Executive) was the first increase since 2017 and will add approximately $400M in near-100% margin revenue annually
• Gasoline stations are Costco’s single largest revenue line item within ancillary businesses — below-market fuel prices drive warehouse traffic and function as a membership acquisition and retention tool

Costco (COST) Business Model

Costco operates as a membership-fee-funded warehouse club — a model with no direct equivalent among publicly traded retailers. For how retailers monetize at scale through physical and digital channels, see the E-Commerce & Retail Business Model.

The core model in one sentence: Costco sells merchandise at cost (plus a small markup) to members who pay an annual fee for the privilege of shopping there.

How the economics work:

A Costco Gold Star member pays $65/year. Over the course of the year, they shop at Costco for food, household goods, and gasoline — spending, on average, approximately $3,000–4,000 per household annually. On those purchases, Costco earns approximately 12–13% gross margin (merchandise only, excluding membership fees). So the $3,500 average member spends about $450 in merchandise gross profit. Combined with the $65 membership fee, Costco earns approximately $515 in gross profit per member household per year.

For an Executive member paying $130/year who also earns 2% cashback rewards (capped at $1,000/year in rewards), the math is more complex — the 2% cashback is a cost to Costco — but Executive members spend significantly more per household ($6,000–8,000 annually), producing higher total gross profit per member.

Why the low-markup strategy works:

Costco deliberately caps merchandise markups at ~15% (branded goods) to ~14% (for some private-label categories). This creates a guarantee: items at Costco are always among the lowest prices available anywhere. Members know this — which is why they renew at 92.9% rates. The psychological contract is: “I pay $65/year and I am guaranteed best prices.” Every time Costco raises an item’s price without justification, it risks breaking that contract. Every time a member saves $200 on a TV or $50 on a case of wine vs. alternative retailers, the membership fee is re-justified.

Kirkland Signature as strategic moat:

Kirkland is not a typical private label. Most retailer private labels are positioned as “good enough” cheap alternatives to national brands. Kirkland is positioned as comparable or superior quality at a lower price — and it frequently is. Kirkland Extra Virgin Olive Oil, Kirkland Signature Vodka, Kirkland Whole Bean Coffee, Kirkland Diapers, and Kirkland Organic Chicken Stock are all products with strong consumer followings and quality reputations.

Because Kirkland products are exclusive to Costco (you cannot buy Kirkland Signature at Walmart or Amazon), they function as a differentiated product set that creates genuine shopping destination stickiness. A consumer who relies on Kirkland products for their household has an additional switching cost beyond just losing access to Costco’s prices — they lose access to specific products they’ve come to depend on.

Kirkland’s estimated $80B+ in annual sales would make it larger than any individual CPG brand sold at Costco, and larger than many major consumer staples companies. By volume, Kirkland is among the five largest consumer brands in the United States.

Costco Competitors

Warehouse club competitors:

• Sam’s Club (Walmart-owned) — the only direct warehouse club competitor with comparable scale; Sam’s Club operates approximately 600 clubs with ~46M members (vs. Costco’s 76.2M cardholders); Sam’s Club membership is $50/year (vs. Costco’s $65), positioning it slightly below Costco on price; Costco consistently earns higher member satisfaction scores and higher revenue per warehouse. See Costco vs Walmart for the full head-to-head comparison
• BJ’s Wholesale Club — regional warehouse club operator primarily in the Eastern U.S.; approximately 240 clubs; much smaller than Costco or Sam’s Club; offers manufacturer coupons and a slightly different format

Broader retail competition:

• Walmart — competes for grocery and general merchandise spending; Walmart’s Everyday Low Price positioning is comparable to Costco’s pricing philosophy, but Costco’s model requires a membership fee that filters for higher-income, higher-spending consumers; these are partially different customer bases
• Amazon — Prime membership ($139/year) competes with Costco’s Executive membership ($130/year) for the “annual fee unlocks value” consumer mindset; Amazon competes on convenience (home delivery) vs. Costco’s treasure-hunt discovery experience and bulk value; Amazon Fresh/Whole Foods competes in grocery
• Target — competes in general merchandise and household goods; Target’s Circle loyalty program (free tier + paid $99/year Target Circle 360) positions against Costco’s membership model in some categories
• Kroger — the largest U.S. grocery chain; competes directly with Costco’s Food & Sundries and Fresh Foods categories; Kroger’s loyalty program and personalized digital coupons are competitive tools

For comparative analysis:

• Costco vs Walmart — warehouse club vs. mass merchant, membership model economics, Sam’s Club comparison
• Target vs Walmart — the broader mass retail competitive context where Costco’s premium positioning sits above both

Revenue Breakdown

Financial data sourced from Costco FY2024 Annual Report (10-K). Costco’s fiscal year ends in late August/early September.

Net Sales — $249.6B (98% of Revenue)

Product categories (Costco does not report exact category breakdowns; estimates based on management commentary and channel checks):

Kirkland Signature private label spans nearly every category and generates an estimated $80B+ in annual sales — approximately 32% of product revenue.

Gasoline deserves special mention: Costco operates gas stations at approximately 600+ of its warehouses. Costco prices gasoline 10–20 cents/gallon below the local market average — intentionally pricing below its cost of acquisition in some markets. Gasoline is a loss-leader traffic driver: members visit the gas station, see the warehouse, and make unplanned purchases. Gasoline revenue is included in Ancillary & Other and is Costco’s single largest individual revenue item by dollar value (estimated $30–40B annually at scale), though at near-zero or negative merchandise margin.

Fresh Foods is strategically important: the $5 rotisserie chicken (sold at or below cost, deliberately kept at $4.99 for years despite cost inflation) and the $1.50 hot dog + drink combo (unchanged since 1985, protected by Costco’s founding principles) are iconic traffic drivers that reinforce Costco’s value covenant with members.

Membership Fees — $4.83B (2% of Revenue, ~70% of Profit)

The membership fee increase effective September 1, 2024 — Gold Star from $60 → $65 (+8.3%), Executive from $120 → $130 (+8.3%) — is Costco’s most powerful near-term earnings catalyst. With 36.9M paid households, a $5 average increase across the membership base generates approximately $185M in additional high-margin revenue annually — revenue that falls directly to operating income since membership costs are negligible.

Costco averages one membership fee increase approximately every 5–7 years. The long gap between increases (7 years since 2017) means each increase is large in percentage terms and is absorbed with minimal membership churn. The 92.9% renewal rate held steady through the 2024 fee increase announcement — confirming that members perceive Costco’s value proposition as more than justifying the higher price.

Executive membership economics: At $130/year, Executive members earn 2% cash back on all Costco purchases (capped at $1,000/year in rewards). The 2% reward means Costco returns some margin to its best customers — but Executive members spend dramatically more per household ($6,000–8,000+ annually vs. $3,000–4,000 for Gold Star). The net economics favor Costco: higher fee + higher spending + higher cross-sell = significantly more total gross profit per Executive household despite the 2% rebate.

As Executive membership grows from ~46% to potentially 50%+ of the member base, average fee per member increases without a formal price hike — a structural ARPU tailwind.

Revenue Trend (3-Year)

Revenue growth decelerated from 15.8% (FY2022) to 7.1% (FY2023) to 5.0% (FY2024) as the post-COVID consumer spending boom normalized. The 5% growth rate in FY2024 understates Costco’s health — unit volumes (gallons of gas, pounds of rotisserie chicken, number of units sold) are growing, but deflationary pressure in food and commodity prices reduced the average transaction value. On a comparable store (same-store sales) basis, performance has been consistently positive.

Membership fee revenue has grown steadily — from $4.22B to $4.83B over two years — driven by cardholder growth (+5–6% annually) and Executive membership mix shift. The September 2024 fee increase will accelerate membership revenue growth in FY2025.

Warehouse Unit Economics

Understanding how a single Costco warehouse makes money is essential to understanding the business:

The 3,700 SKU strategy: Costco carries approximately 3,700 unique SKUs per warehouse — about one-tenth the selection of a Walmart Supercenter (~30,000 SKUs) or a full Amazon product catalog (millions of items). This massive curation is deliberate: by carrying only the best-selling items in each category, Costco achieves enormous purchasing volume per SKU, which gives it extraordinary negotiating leverage with suppliers (large orders → better prices → pass savings to members), dramatically reduces inventory complexity, and creates faster inventory turns (items sell through quickly because selection is limited).

High inventory turns mean Costco often collects cash from members before it must pay suppliers — a favorable working capital dynamic that provides a natural cash float, similar to the mechanics described in deferred revenue for subscription businesses.

Costco (COST) Income Statement

Financial data sourced from Costco SEC filings.

Key Financial Metrics

• Gross Margin: 12.8% (blended, including membership) — Intentionally thin. Merchandise-only gross margin of ~11.1% is among the lowest of any major retailer, by design. Costco’s markup cap of ~15% on branded products keeps prices compelling. The blended 12.8% (including membership fees) reflects the high-margin membership fees layered onto the near-zero merchandise margin. Traditional grocers run 25–30% gross margins; Target runs ~30%; Walmart runs ~24%. Costco’s 11% merchandise margin is a strategic choice, not a cost disadvantage

• Operating Margin: 3.7% — Thin but predictable. The ~3.7% operating margin is stable and growing slowly — improving from 3.5% as membership fee revenue (near-100% margin) grows faster than merchandise revenue (3% margin). Each percentage point of operating margin on $254B of revenue is worth $2.54B in operating income — the math that makes Costco’s profitability compelling despite the narrow headline margin

• Membership Fee Operating Leverage — The cleanest way to see Costco’s underlying economics: $4.83B in membership fees at ~100% operating margin contributes the vast majority of Costco’s $9.3B operating income. The $249.6B in merchandise sales generates the remaining ~$4.5B in operating income — a ~1.8% margin on product. As membership grows (new warehouses, higher cardholder count, fee increases), operating leverage compounds: membership revenue grows with near-zero incremental cost

• Free Cash Flow: ~$7.7B — Strong FCF generation driven by high inventory turns and favorable working capital. Costco collects membership fees upfront (1-year prepayment) and has fast inventory turns (~12x/year), meaning it collects cash from product sales before it must pay many of its suppliers. This creates a natural cash generation engine. Costco returns capital through regular dividends plus large special dividends (paid a $15/share special dividend in January 2024, $6.7B total)

• Return on Invested Capital — Costco’s asset-intensive warehouse model (each new warehouse costs $50–100M+ to build and equip) produces high ROIC because the membership fee revenue stream is so reliable and high-margin. New warehouses typically achieve break-even in 1–2 years and strong returns within 3–5 years

• E-commerce — Costco’s online business (Costco.com) is growing but remains a small fraction of total sales (<10%). Costco has partnered with Instacart for same-day grocery delivery from warehouses — a capability essential for competing with Amazon Prime’s convenience. Online growth is structurally limited by Costco’s bulk format (ordering a 30-count pack of paper towels online is less common than buying them in-store during a warehouse visit)

Is Costco Profitable?

Yes, and Costco’s profitability is structurally more durable than its 3.7% operating margin headline implies.

The company reported $7.4 billion in GAAP net income on $254.4 billion in revenue in FY2024. Free cash flow was approximately $7.7 billion. Costco has paid a regular quarterly dividend for decades and supplements it with large special dividends — the January 2024 $15/share special dividend ($6.7B total) returned accumulated cash to shareholders.

The durability argument: Costco’s $4.83B membership fee stream is effectively an annuity. At 92.9% renewal rates, even if Costco opened no new warehouses and acquired no new members in FY2025, it would still collect approximately $4.48B in membership fees — essentially certain income before a single product is sold. This recurring fee base gives Costco’s earnings a predictability that most $254B revenue retailers cannot match.

The profitability risk: if membership renewal rates declined materially (from 92.9% to, say, 88%), membership fee revenue would fall significantly and operating income would compress dramatically — because merchandise sales barely cover warehouse operating costs. Costco’s entire profit model depends on near-universal member loyalty, making renewal rate the single most important metric to track.

The Kirkland Signature Flywheel

Kirkland Signature is not just a private label — it is a strategic weapon that deepens Costco’s moat in ways that compound over time.

How Kirkland works operationally: Costco approaches major national brand manufacturers and negotiates to produce Kirkland-branded versions of their products at a lower price, in exchange for guaranteed large volume orders. Many Kirkland products are made by the same factories producing the national brands they sit next to on the shelf:

• Kirkland Signature Vodka is widely reported to be produced by the same distillery as Grey Goose
• Kirkland Signature Organic Extra Virgin Olive Oil has consistently won blind taste tests against premium national brands
• Kirkland Signature Diapers are made by Huggies (Kimberly-Clark) to Costco’s specifications
• Kirkland Signature Batteries are manufactured by Duracell

This manufacturing arrangement means Kirkland can match or exceed national brand quality at 20–40% lower prices — a combination that national brand retailers cannot replicate because they don’t have Costco’s volume guarantees or the operational structure to maintain quality at massive scale.

The flywheel: Kirkland builds member loyalty → members trust Kirkland → members renew memberships → Costco grows member base → Costco has more volume to offer manufacturers → Kirkland gets better manufacturing deals → Kirkland prices remain lower → members trust Kirkland more. Each cycle of the flywheel deepens the moat.

What to Watch

1. Membership fee revenue per cardholder — Growing through Executive member mix shift (~46% → 50%+) and the September 2024 fee increase ($60 → $65 Gold Star, $120 → $130 Executive). The blended average fee per paid household is the highest-quality revenue metric to track — it grows without adding members and at near-zero incremental cost. Watch for any commentary on the pace of Executive member conversion

2. New warehouse opening cadence — Costco targets 25–30 new warehouse openings annually. Each new warehouse has a predictable ramp: membership revenue begins at open, and merchandise revenue grows as the local member base builds. International warehouses (China, Japan, Australia, UK, Canada) are particularly important growth vectors — Costco’s brand recognition internationally is growing rapidly and new international markets have decades of whitespace. Any acceleration or deceleration in the opening pace changes the medium-term revenue trajectory

3. Renewal rate stability through the fee increase — The September 2024 fee increase is Costco’s first in 7 years. Historically, Costco members have absorbed fee increases without meaningful churn — but monitoring the FY2025 renewal rate (reported each quarter) is important. A decline from 92.9% toward 91–92% would be a mild warning; anything below 91% would be a significant signal that the fee increase was too large or that competitive alternatives have improved

4. E-commerce and same-day delivery expansion — Costco’s Instacart partnership and Costco.com are the primary digital channels. As consumers increasingly expect delivery convenience from all retailers, Costco’s in-warehouse experience alone may become less compelling for younger consumer cohorts. Watch for any digital revenue percentage disclosure or commentary on online member acquisition

5. Gasoline station unit economics — As electric vehicle adoption grows, Costco’s gas station traffic model faces a long-term structural shift. EV charging infrastructure at Costco warehouses could replicate the traffic driver function — but the revenue model is different (kWh vs. gallons, longer dwell time, different economics). Early Costco EV charging pilots and any commentary on gas station economics are forward-looking signals

6. Competition from Amazon Prime — Amazon Prime ($139/year) and Costco Executive ($130/year) compete for similar household budgets as “annual fee unlocks value” propositions. As Amazon expands Fresh (grocery) delivery and Whole Foods presence, it increasingly serves the same household needs that Costco’s food categories address. Any market research data on overlap between Costco and Prime household memberships — and whether consumers are reducing Costco visit frequency in favor of Amazon delivery — is strategically relevant

Costco (COST) Financial Summary

Costco (NASDAQ: COST) generated $254.4 billion in total revenue in fiscal year 2024 (ending September 2024), up 5.0%, with $7.4 billion in GAAP net income and a 3.7% operating margin — thin by headline measure but underpinned by $4.83B in near-100%-margin membership fee revenue that drives ~70% of operating income. The September 2024 membership fee increase ($60 → $65 Gold Star, $120 → $130 Executive) will add approximately $400M in incremental high-margin revenue annually. Kirkland Signature’s estimated $80B+ in sales functions as a competitive moat by creating exclusive products that drive member loyalty and renewal. The 92.9% U.S./Canada renewal rate is the single most important metric in Costco’s model — it is the validation that the entire value proposition (membership fee → best prices + Kirkland quality → renewal) is working.

For the broader retail competitive context, see the Retail Sector analysis and comparisons: Costco vs Walmart and Target vs Walmart.