# How Costco Makes Money: The Costco Business Model and Revenue Streams Explained Author: Roald Larsen Source: https://untaylored.com/post/how-costco-makes-money-business-model-explained [Costco](https://untaylored.com/post/who-owns-costco) makes money from merchandise sales and annual membership fees. Its business model combines a limited product assortment, high sales volumes and efficient warehouse operations. Membership income supports that model, but it is misleading to say that products make no profit or that membership fees equal all of Costco's earnings. This article explains how those parts work together. Financial comparisons use Costco's fiscal 2026 results; older operating details are labelled with their reporting year. Reported facts are linked to primary sources, while the business-model implications are analysis. ## What Is the Costco Business Model? Costco operates a membership-based warehouse club. Customers pay for access to a selection of goods and services, while the company seeks to keep prices attractive through purchasing scale and operating efficiency. The membership creates an additional revenue stream alongside the margin earned on merchandise. In the U.S. and Canada, annual Gold Star and Business memberships cost $65 and Executive membership costs $130, before applicable taxes. Executive members can earn a 2% annual reward on eligible purchases, subject to exclusions and a $1,250 maximum. These rates took effect on September 1, 2024; prices and benefits differ by country. See [Costco's membership-fee announcement](https://investor.costco.com/news/news-details/2024/Costco-Wholesale-Corporation-Reports-June-Sales-Results-and-Announces-Quarterly-Cash-Dividend-and-Plans-for-Membership-Fee-Increase/default.aspx). The warehouse format is part of the economics. Bulk packaging, simple displays and a focused assortment reduce the complexity of handling a very broad retail range. That does not eliminate costs: buying stock, paying employees, operating buildings and fulfilling orders still require substantial spending. ## The History of Costco: From Price Club to Retail Giant The business has roots in two warehouse-club companies. Price Club opened in San Diego in 1976, initially serving business customers. Jim Sinegal and Jeff Brotman opened the first Costco warehouse in Seattle in 1983. [Costco's company history](https://www.costco.com/f/-/about) describes how the two businesses developed around membership and efficient purchasing. The companies merged in 1993 as PriceCostco, bringing together 206 locations. The Costco name returned in 1997. Those events help explain why the model serves both households and businesses rather than operating as a conventional grocery chain. The lasting commercial principle is that purchasing and operating savings can support member value. Its success depends on continuing to deliver that value, rather than simply charging for access to a store. The operating model has expanded internationally, but membership prices, local merchandise and services are not identical in every market. ## How Costco Makes Money: Primary Revenue Streams Costco's income statement distinguishes **net sales** from **membership fees**. Adding those two lines gives total revenue. Neither line is the same as profit: merchandise costs and operating expenses must still be deducted. The financial table below keeps those measures separate. Merchandise includes food, household supplies, fresh foods and non-food products such as clothing and appliances. Ancillary and other businesses extend the offer through services such as fuel and travel. A sales category's size does not, by itself, reveal its profit contribution; a high-revenue business can operate on a small margin. International warehouses and online shopping broaden Costco's reach. Their economics can differ because of exchange rates, product mix, local costs and delivery requirements. It is therefore more useful to examine reported geographic and channel figures for a stated period than to apply one permanent revenue percentage to every market. ## Membership Fees: The Foundation of Costco's Profitability Membership fees matter because they provide income beyond the margin on each shopping basket. They also give Costco a reason to focus on the customer's ongoing decision to renew. However, the company does not report a separate membership profit figure that justifies treating the entire fee line as cost-free earnings. Paying an annual fee can encourage a customer to consolidate purchases at Costco to obtain enough value from the membership. That is a plausible commercial incentive, not proof that every member shops a particular number of times or spends a fixed amount per visit. Costco's [fiscal 2025 annual report](https://s201.q4cdn.com/287523651/files/doc_financials/2025/ar/COST-Annual-Report-2025.pdf) gives renewal rates of 92.3% for the U.S. and Canada and 89.8% worldwide. These FY2025 figures describe different geographic groups and should not be conflated. The company uses a trailing renewal calculation, so the measure is not simply the percentage of all cardholders who renewed during that calendar year. The 2024 fee increase has already happened. Its effect can be assessed through reported membership revenue and renewals, with care to distinguish fee revenue from profit. Executive rewards also have eligibility rules; they are not an unconditional cash rebate on every item. ## Costco's Warehouse Model: Keeping Costs Low Costco's warehouse format serves as a cost-reduction system. Large selling areas and straightforward product displays support handling goods in volume. Concrete floors, exposed ceilings and pallet displays reflect an emphasis on function over elaborate retail presentation. The FY2025 annual report says the core warehouse business carries fewer than 4,000 active stock-keeping units per warehouse. Concentrating purchasing on a selected range can increase the volume bought per product and simplify replenishment. The trade-off is less choice within some categories. The treasure hunt merchandising strategy keeps customers engaged. Costco regularly rotates non-staple items, creating urgency for discretionary purchases. Shoppers may find seasonal products or unexpected offers alongside routine purchases. The value of that approach depends on choosing stock that sells, rather than assuming a limited-time offer automatically creates demand. Simple displays and bulk handling can reduce repeated handling work. They do not eliminate shelf-stocking costs or guarantee fewer stockouts. A warehouse still needs enough staff, reliable inventory information and an appropriate balance between storage space and customer access. ## The Kirkland Signature Strategy: Private Label Dominance Kirkland Signature is Costco's own brand, introduced in 1995. It spans categories including groceries, household essentials, clothing and luggage. Costco presents it as an exclusive combination of quality and value on its [Kirkland Signature page](https://www.costco.com/f/-/about-kirkland-signature). A private label gives a retailer more influence over specifications, packaging and how a product is positioned. It can also provide an alternative when a national brand's offer is less attractive. The commercial opportunity is to offer a product that members trust at a price that still supports the retailer's economics. That does not mean all Kirkland items are identical to national brands in different packaging. Manufacturing relationships can differ by product, market and date. A shared manufacturer would not, by itself, establish that two products have identical specifications or quality. Private-label products can offer different margins from branded goods, but there is no basis here for a fixed margin premium or a universal percentage discount. The cited company-wide income statement does not separately disclose Kirkland revenue. An exact current share of total revenue cannot be calculated from it. ## Costco's Supplier Relationships and Bulk Buying Power Costco concentrates purchasing across a limited range of products. For suppliers, a place in that range can offer substantial volume. For Costco, combining demand can strengthen negotiations over product specifications, packaging and price. Neither side's commercial terms can be inferred from the number of products alone. Limited shelf space also creates choices. Costco must decide which products justify that space, while suppliers weigh the benefits of volume against the price and terms offered. The relationship works when the product remains attractive to members and commercially sustainable for both parties. Payment timing matters as well. If inventory sells before the supplier invoice becomes due, customer receipts can help fund the operating cycle. That is different from saying that Costco always has negative working capital or receives an unlimited interest-free loan. Inventory, payables and cash must be assessed for the same reporting period. Direct sourcing can reduce intermediaries, while production or logistics investments may give a retailer more control over supply. Those arrangements have their own costs and risks. Claims about fixed payment periods, guaranteed shortage priority or a particular number of annual inventory turns require evidence, not an assumption based on purchasing scale. ## How Costco's Low Markup Strategy Drives Customer Loyalty A low-price position can make membership worthwhile when the savings on a customer's actual purchases exceed the fee and any extra travel or delivery costs. The relevant comparison is the price of a comparable product and quantity, not simply the size of a pack or the presence of a member discount. Costco's stated emphasis on value helps explain why pricing is central to the model. Evaluating that position requires comparing the actual prices and quantities available to a member. A company-wide margin cannot establish the markup on an individual product. Low markups can support faster sales when prices and product selection meet customer demand. Faster turnover can reduce the time capital is tied up in stock. But low prices alone do not guarantee profitability: the business must sell enough volume to cover its costs. Competitive pricing is also not immunity from price wars. A competitor can be cheaper on a particular item, and Costco can face higher input or operating costs. Maintaining loyalty means sustaining an attractive overall offer, rather than winning every individual price comparison. ## Ancillary Services: Gas, Pharmacy, and Optical Revenue Fuel, pharmacy, optical services, hearing aids, tires and other services give members reasons to use Costco beyond the main merchandise aisles. They can add convenience to a warehouse visit and broaden the value of membership. Availability varies by location and country; Costco's [company overview](https://www.costco.com/f/-/about) describes this wider service offer. Fuel is a useful example of the relationship between revenue and customer visits. A member may combine filling the car with a shopping trip. That does not establish that every station sells fuel at a loss or at a fixed discount to nearby competitors. Fuel prices and sales values also change with the market. Pharmacy and optical services meet different needs and have their own costs, regulation and operating arrangements. The useful price comparison depends on the actual prescription, insurance situation or product involved. Food courts also form part of the warehouse experience. Their visibility can reinforce Costco's value positioning, but that does not reveal their revenue or profitability. Customers should check current local access rules instead of assuming every food court or service is available without membership. ## Costco's E-commerce and Digital Strategy Online shopping extends the warehouse model by adding another way to browse and buy. For FY2026, Costco reported 20.9% growth in **digitally-enabled comparable sales**. That is a growth measure, not the percentage of revenue generated online. The [FY2026 results release](https://investor.costco.com/news/news-details/2026/Costco-Wholesale-Corporation-Reports-Fourth-Quarter-and-Fiscal-Year-2026-Operating-Results/default.aspx) uses that specific label; it should not be silently substituted for an older e-commerce metric. Online selection can accommodate products that are difficult to keep in every warehouse. It also introduces shipping, returns and fulfilment costs. A warehouse price and a delivered price therefore need not be the same, even when the product is identical. Same-day orders powered by Instacart are delivered to the customer, rather than requiring warehouse pickup. Costco's [Same-Day Delivery FAQ](https://customerservice.costco.com/app/answers/answer_view/a_id/8150) explains that item prices are higher than warehouse prices to cover the delivery service. Availability depends on the address. This gives Costco a convenience offer alongside services from competitors such as [Walmart](https://untaylored.com/post/how-walmart-makes-money-business-model-explained). The strategic question is how to add convenience while preserving member value and viable order economics. A delivery partnership does not mean Costco avoids competing on speed altogether, nor does it establish that every online order includes free shipping. ## The Economics of Costco: Key Financial Metrics The table uses Costco's [September 24, 2026 results release](https://investor.costco.com/news/news-details/2026/Costco-Wholesale-Corporation-Reports-Fourth-Quarter-and-Fiscal-Year-2026-Operating-Results/default.aspx), whose statements are labelled unaudited. Both periods cover 52 weeks: FY2026 ended August 30, 2026; FY2025 ended August 31, 2025. Dollar amounts below are in billions.
Financial metricFY2026FY2025
Net sales$297.247B$269.912B
Membership fees$5.907B$5.323B
Total revenue$303.154B$275.235B
Operating income$11.685B$10.383B
Net income$9.226B$8.099B
Operating margin, calculated3.85%3.77%
Operating margin is calculated as operating income divided by total revenue, rounded to two decimal places. It is not a markup on products. Operating income and net income differ because interest, other income and taxes sit between those lines. The table also shows why membership fees cannot simply be labelled all of Costco's profit. Merchandise sales generate gross margin, and the business incurs shared operating costs. Comparing fee revenue with consolidated earnings does not allocate those costs or establish a separate membership profit margin. ## Competitive Advantages: What Sets Costco Apart Costco's advantages come from the way its choices reinforce one another. A focused range concentrates purchasing; efficient warehouses support competitive prices; and an attractive offer can encourage members to return. Membership income contributes to that system, but the fee alone is easy for another business to copy. Scale advantages matter when they produce better purchasing or operating economics. Size is less useful if a retailer selects products customers do not want or adds costs faster than sales. Costco's purchasing power should therefore be understood alongside its discipline over selection and price. The treasure hunt approach adds discovery to routine shopping. Rotating non-staple products can give people a reason to look beyond their planned purchases. This also creates an execution challenge: the retailer has to keep the selection interesting without accumulating unwanted inventory. Kirkland Signature gives the offer an identity that is different from selling only brands available elsewhere. Its value depends on product consistency and trust. A failure in quality can damage both the private label and confidence in the wider membership offer. Experienced employees and reliable operations can support these advantages. Pay and benefits are costs, but reliable staffing can also support service and reduce repeated recruitment and training. The value of those investments should be evaluated with dated workforce measures. ## Challenges and Risks to Costco's Business Model Competition comes from other warehouse clubs, supermarkets, large retailers and online platforms. Customers may compare convenience as well as prices. An attractive bulk price is less useful to someone who cannot store the quantity or does not have easy access to a warehouse. International expansion introduces differences in regulation, sourcing, customer habits and property availability. A successful format in one market does not ensure the same results elsewhere. Currency movements can also change reported results without an equivalent change in local shopping behaviour. Online fulfilment adds another operational challenge. Picking, delivery and returns must be funded by prices, fees or operating efficiencies. Growing online sales is not enough if the cost of serving those orders grows faster. Membership pricing requires care. The increase introduced in September 2024 is already part of the business, but future pricing decisions could affect perceived value. Renewal data helps assess retention; it does not guarantee that members will accept any later increase. Wages, energy, freight and merchandise costs can pressure margins. Suitable warehouse sites may be difficult to secure, and a focused assortment can leave fewer substitutes when a supplier fails. These are practical risks to the operating model, not reasons to assume that its historical success will stop or continue automatically. ## The Future of Costco: Growth Opportunities and Strategic Direction Costco reported 939 warehouses on September 24, 2026, including seven in China. These are dated location counts, not a forecast. The counts appear in the [FY2026 results announcement](https://investor.costco.com/news/news-details/2026/Costco-Wholesale-Corporation-Reports-Fourth-Quarter-and-Fiscal-Year-2026-Operating-Results/default.aspx). New locations can extend reach, but they require capital, suitable sites and enough local demand. Online services can reach customers differently, while changes to products and services may increase the usefulness of an existing membership. Each opportunity has to justify its costs. Fresh foods, private-label products and services for business customers are possible areas to develop the offer. Product quality, fulfilment and customer adoption determine whether a wider offer creates lasting value and supports its costs. The useful question for the next stage is whether Costco can preserve the connection between member value and operating efficiency as it grows. The pace and value of expansion will depend on investment costs, execution and demand in each market. ## Related Reading * [Who Owns Trader Joe's? The Grocery Chain's Ownership Explained](https://untaylored.com/post/who-owns-trader-joes) ## FAQ ### **How much of Costco's profit comes from membership fees?** Costco reports membership revenue, not a separately allocated membership profit. Fees are an important contribution, but merchandise also generates gross margin and the company has shared operating costs. The financial table distinguishes fees, operating income and net income; equating these amounts would overstate what the accounts establish. ### **Why does Costco charge a membership fee?** The fee adds an income stream alongside merchandise sales and gives customers a reason to assess the value they obtain over a year. It supports a commercial relationship based on repeat use and renewal. Customers still need to decide whether the offer fits their purchases and circumstances. ### **What is Costco's average markup on products?** The sources cited here do not establish a current company-wide average product markup or a universal markup cap. Markup is measured against cost, while gross margin is measured against sales; the two are not interchangeable. Costco's overall operating margin is a different measure again because it includes operating expenses and membership income. ### **How does Costco make money if their prices are so low?** It combines margin on a large volume of merchandise with membership income. A focused assortment, purchasing scale and warehouse efficiency help support the pricing model. Profit still depends on covering the cost of goods and the wider operation; low prices do not mean that products contribute nothing to earnings. ### **What percentage of revenue comes from Kirkland Signature products?** The consolidated results cited in this article do not provide a separate Kirkland revenue line. They therefore do not support an exact current percentage. Kirkland's strategic role as an exclusive private label is clear; a precise sales share needs a dated disclosure that defines what is included. ## Conclusion The Costco business model combines recurring membership income with merchandise margins and an operation designed to handle substantial sales volume. Its distinctive feature is how those choices support one another: a focused range, purchasing scale and warehouse efficiency can help deliver the value that makes membership attractive. For anyone studying the model, the important distinction is between the mechanism and the financial result. Membership fees support the business, but they are not identical to profit. A high renewal rate is useful evidence of retention for a specified market and period, rather than proof that every customer is satisfied. Costco remains exposed to competition, operating costs and the difficulty of expanding without weakening its offer. The lesson for other businesses is to understand how customer value, pricing and operating costs fit together before copying an individual feature such as a subscription fee. ## Sources and reporting periods * [Costco FY2026 operating results](https://investor.costco.com/news/news-details/2026/Costco-Wholesale-Corporation-Reports-Fourth-Quarter-and-Fiscal-Year-2026-Operating-Results/default.aspx), published September 24, 2026: financial table, digital growth measure and dated warehouse counts. * [Costco FY2025 annual report](https://s201.q4cdn.com/287523651/files/doc_financials/2025/ar/COST-Annual-Report-2025.pdf): renewal-rate definitions and warehouse assortment. * [Membership fee announcement](https://investor.costco.com/news/news-details/2024/Costco-Wholesale-Corporation-Reports-June-Sales-Results-and-Announces-Quarterly-Cash-Dividend-and-Plans-for-Membership-Fee-Increase/default.aspx), July 10, 2024: fees and reward cap effective September 1, 2024. * [Costco company history and overview](https://www.costco.com/f/-/about) and [Kirkland Signature overview](https://www.costco.com/f/-/about-kirkland-signature): history and the private-label offer. * [Costco Same-Day Delivery FAQ](https://customerservice.costco.com/app/answers/answer_view/a_id/8150): delivery arrangements and pricing.