- Costco is an American discount big-box retailer and one of America's biggest retail companies.
- The company uses a membership model, charging members an annual fee for shopping at its stores.
- Costco operates internationally, with over 800 global locations.
Jeffrey Brotman and James Sinegal founded Costco in 1976. They started the idea under the name "Price Club," rebranding to "Costco" in 1983. The company is one of America's largest big-box retail chains, with over 800 locations worldwide.
Costco was listed on the NASDAQ stock exchange in December 1985 at a $10 share price.
The company trades under the ticker $COST. It was the first retailer to use a membership model for its customers. You can only purchase goods from Costco if you're a member.
What does Costco do?
Costco is one of America's largest big-box retailers.
The company operates a wholesale membership warehouse model, operating 829+ locations across North America, Europe, and Asia.
The company uses an in-store and e-commerce sales model, with the in-store model being the more popular option in the retail market.
The company built its reputation of offering rock-bottom prices on bulk volumes.
How does Costco work?
If you want to shop at Costco, you need to sign up for a membership.
After registering, you are part of the "Costco Club." Only members may buy from the retail giant in-store or online.
Costco experiences a high customer retention rate of around 90%.
Thanks to its affordable pricing model, it inspires brand loyalty in its members.
Members may issue one free supplementary card to a household member, fellow staff member, or colleague working in the same company.
How Costco makes money
Costco makes money from merchandise sales, membership fees, and ecommerce sales.
Its huge pricing power allows it to benefit from economies of scale, offering products at lower prices than you find with other retailers.
Around $153 billion or more than 91% of Costco's annual comes from its in-store sales.
The company also generate revenues through its retail sales and its membership model.
If you want to buy something at Costco, you have to be a member.
Let's look at the details of the Costco business model.
Merchandise sales
Costco makes the bulk of its revenues through merchandise sales at its 572 locations in the United States and nearly 300 international warehouses.
The company attracts shoppers looking for the lowest prices, and they are willing to pay for annual membership to receive a deep discount on goods.
Costco offers goods in the following categories; Hardlines, Softlines, Food and Sundries, Fresh Foods, and Ancillaries.
Around $153 billion or more than 91% of Costco's annual comes from its in-store sales. The company carries around 3,700 active SKUs (Stock Keeping Units) in its warehouses.
Membership fees
To shop at Costco, you need to register as a member. You might think that this might repel shoppers by erecting a barrier to entry but it hasn't.
Memberships aren't free, and they come in Gold Star Executive, Gold Star Everyday Value, Business Executive, and Business Everyday Value tiers.
Membership fees range from $60 to $120 per year, depending on the tier you take.
Typically, restaurants and other businesses choose the higher levels to benefit from buying in bulk.
Most private citizens choose the entry-level tier to access the store locations.
Costco has nearly 115 million members, and the company experienced a huge jump in membership applications during the pandemic as people looked to preserve their household budget.
Memberships count for just over 2% of Costco's annual revenue.
Ecommerce sales
Costco launched its e-commerce platform in April 2001.
The company offers shoppers over 8,000 active SKUs on its website, or more than double the SKUs available in-store.
While it is one of the most established online retailers in the US market, its online business only accounts for approximately 6% of annual revenues.
Future growth engine
Costco believes that the company's future prospect comes from its international and local expansion.
The company continues to build locations across the US and the world.
Costco entered into an agreement with Citi and Visa to provide its customers with a dedicated "Anywhere Card" Costco credit card. Its innovations allow it to stay ahead of Amazon and Walmart, two of its primary competitors.
Competitors
Costco competes with other large big-box retailers for market share. Some of its closest competitors include the following companies.
- Walmart
- Amazon
- The Kroger Company
- Target
- Sam's Club
As an enthusiast deeply immersed in the world of retail and business, particularly in the context of large-scale, membership-based retail models, I bring a wealth of firsthand expertise to shed light on the intricacies of Costco's business model and its position in the market.
My knowledge extends beyond the surface, delving into the historical roots of Costco, which was founded in 1976 by Jeffrey Brotman and James Sinegal. The company, initially known as "Price Club," underwent a strategic rebranding in 1983, adopting the name "Costco." Notably, Costco pioneered the membership model in retail, requiring an annual fee for customers to access its stores—a groundbreaking approach that has shaped its identity in the industry.
Costco's international presence, with over 800 locations globally, underscores its status as one of America's largest big-box retail chains. The company's initial public offering (IPO) on the NASDAQ stock exchange in December 1985 marked a significant milestone, and it currently trades under the ticker symbol $COST.
The core of Costco's business revolves around its wholesale membership warehouse model, boasting over 829 locations across North America, Europe, and Asia. The company strategically employs both in-store and e-commerce sales models, with the former being the predominant choice in the retail market. Costco has earned its reputation for offering competitive prices on bulk volumes, attracting a customer base loyal to its cost-effective approach.
To comprehend how Costco functions, one must appreciate its membership-centric structure. Individuals desiring to shop at Costco must first sign up for a membership, becoming part of the exclusive "Costco Club." The company maintains an impressive customer retention rate of around 90%, a testament to the brand loyalty fostered by its affordable pricing model. Members can extend benefits by issuing a free supplementary card to a household member, colleague, or fellow staff member.
Costco's revenue streams are diverse, with significant contributions from merchandise sales, membership fees, and e-commerce sales. The company's pricing power, driven by economies of scale, allows it to offer products at lower prices compared to many competitors. Remarkably, more than 91% of Costco's annual revenue, which exceeds $153 billion, is generated through in-store sales.
Merchandise sales form the cornerstone of Costco's revenue, encompassing various categories such as Hardlines, Softlines, Food and Sundries, Fresh Foods, and Ancillaries. The company maintains around 3,700 active SKUs (Stock Keeping Units) in its warehouses, catering to a broad consumer base seeking value for their money.
Membership fees, ranging from $60 to $120 per year across different tiers, constitute a crucial revenue stream for Costco. Despite the potential entry barrier, the company boasts nearly 115 million members, with applications surging during the pandemic as individuals sought budget-friendly shopping options. Membership fees contribute just over 2% to Costco's annual revenue.
E-commerce sales, introduced in April 2001, add another dimension to Costco's revenue portfolio. While the company offers over 8,000 active SKUs on its website, online sales currently represent approximately 6% of its annual revenues.
Looking ahead, Costco envisions future growth through international and local expansion, exemplified by its continuous construction of new locations worldwide. Strategic partnerships, such as the collaboration with Citi and Visa for the "Anywhere Card" Costco credit card, showcase Costco's innovative approach to stay ahead of formidable competitors like Amazon and Walmart.
In the competitive landscape, Costco faces challenges from other big-box retailers, with Walmart, Amazon, The Kroger Company, Target, and Sam's Club being notable competitors vying for market share.
In conclusion, Costco's success is intricately woven into its membership-centric, bulk-focused business model, marked by strategic expansions, innovative partnerships, and a relentless commitment to providing value for its diverse and extensive customer base.
