Costco's genius business model

Costco Wholesale Corporation (COST) is one of the most interesting and unique wholesale companies out there. Known for its extremely low prices and items in bulk, Costco also has one of the most interesting business models out there. For those of you who frequent the store, you may wonder how Costco can turn a profit for items like their rotisserie chicken, which runs you a whopping $4.99. I know, you will probably need to get a second mortgage. However, the simplest solution is correct: They don’t. That’s right, Costco loses money with every chicken they sell. And that isn’t the exception either, they also lose money on other products too, like their $1.50 hotdog and soda combo. The company barely breaks even on any of its products. This may make you question how they possibly are still in business, they must barely make anything, right?

But a quick look at Costco’s income statements will prove you wrong. Not does Costco net billions annually, but they have increased how much they have made year to year. That’s because the real money isn’t even in the store, it’s in the memberships.

Source: Costco

You see, to gain access to Costco you need to pay a membership fee, which is where Costco deviates from a traditional wholesale/grocery store. Since Costco at least breaks even on most items, the membership is pure profit. Even their loss leaders like the chicken and hotdogs serve a purpose. When you think of Costco, the first thing you think of is items in bulk for cheap. Things like the chicken attract people to Costco and get them signed up for the membership. Instead of being thought of as the snobby store you need to pay to spend at, Costco is thought of as a bargain for quality items. Even better, since the membership fee is so low, the acquisition of new members is easy. Who can’t spare an extra $5 a month, especially when that can be easily made up for in savings?

Source: TradingView

Another bonus to the model is there isn’t some trick to it, like a gym where everyone will get a membership but the gym banks on the majority never showing up. While Costco will make money from customers who never take advantage of their membership, since they at least break even on most items, their earnings will not be substantially affected whether you use it or not. If you are looking to invest in the wholesale market, Costco is a great option to start with, as its business model holds it apart from other companies in the wholesale business, giving it an edge over the competition.