The Business Behind Costco

When Jim Sinegal opened the first Costco in Seattle in 1983, it was an immediate success, drawing customers to the membership warehouse for bulk packaged goods. Sinegal noticed hot dog vendors camping outside the store, selling to customers leaving the store. Wanting to bring that experience inside, he hired vendors and created what would become one of the most iconic deals in retail history: the hot dog-and-soda combo for $1.50. That price still hasn’t changed in over 40 years. Today, the Costco signature combo accounts for $130 million in annual sales (WSJ). It perfectly encapsulates what Costco ultimately stands for, giving members the best deal possible, even if that means leaving money on the table. And that philosophy scaled phenomenally, roughly one-third of U.S. consumers shopped at Costco last year, making it the third-largest retailer in the world behind only Amazon and Walmart (NYT). But there’s a lot more behind the business, because Costco is not your average retailer 

Costco has two revenue streams: membership dues and warehouse sales. To shop at Costco, you must pay an annual fee, either the standard $65 Gold Star membership or the premium $130 Executive membership, which offers additional perks, including 2% cash back on purchases (Costco). In 2025, Costco generated a whopping $269.9 billion in total revenue, up 8% from the previous year (Costco). Of that, $5.3 billion came exclusively from membership fees, up 10% from last year (Costco). Because membership revenue carries virtually no associated cost of goods, it effectively operates at nearly 100% gross margin, meaning before Costco sells a single item, it has already collected $5.3 billion in stable recurring cash flow. The warehouse sales side of the business works extremely differently. Costco deliberately targets a gross margin of around 11% on packaged goods and caps it at 14% (Macrotrends). That may sound like a strange way to run a business until you consider that the industry-average gross margin for packaged goods is between 25% and 50% (Investopedia). Costco intentionally leaves that margin on the table, not because it has to, but because it wants to keep prices as low as possible for its members. 

Kirkland Signature is to Costco what 365 is to Whole Foods, the store’s private label brand. Kirkland was named after Costco’s original headquarters location in the suburbs of Seattle, and was created with a simple purpose: to lower prices on goods where Costco believes it can do better than other brands. Before launching any new Kirkland product, Costco’s board evaluates whether the investment is worth the overhead, weighing how relevant and important the item is to members before committing. This cost discipline extends across the entire warehouse operation; Costco doesn’t even rack items on traditional shelves. Instead, they move pallets of goods in bulk directly on the floor to minimize handling costs. The result is stellar savings. On average, a Kirkland Signature item offers members 15-20% savings compared to what they would pay for the equivalent name brand. In 2025, Kirkland Signature accounted for a stunning $90 billion in revenue, a staggering 33% of Costco’s total revenue (Costco). Beyond the private label, Costco’s sheer revenue size gives it another layer of pricing power. When suppliers sell through Costco, Costco is often their largest customer, giving it significant leverage to negotiate lower prices. Suppliers also agree to make their products a slightly different skew. For example, a pack of Nerf guns at Costco may include extra bullets compared to the same product at Target or Walmart. This product differentiation created supplier reliance on Costco as a unique sales channel, and is yet another mechanism through which Costco delivers extra value for its members. 

One interesting paradoxical fact I came across while researching Costco is that a company whose entire ethos is built around lowering prices and maximizing purchasing power for its members primarily serves wealthy people. Costco achieves low prices by selling in bulk, which requires members to spend more upfront and have storage space to accommodate large quantities, conditions that naturally favor affluent, suburban households. The average Costco member’s household annual income is approximately $125,000, significantly higher than the U.S. average of $83,730 and well above Walmart’s average customer annual household income of $76,300 (Business Insider). The company most committed to giving consumers the best deal tends to attract the consumers who need it least, and that tension is one of the most fascinating contradictions in all of retail.  

Today, Costco is in a great position for continued growth. Last year, the company opened 24 new locations, 15 of which were in the U.S., and plans to accelerate that pace in the coming years (Costco). While Costco remains heavily U.S.-centric, international demand is growing rapidly, particularly in China (Costco). The one credible bear case is Costco’s e-commerce gap. The company was slow and hesitant to build an online platform, leaving it flat-footed relative to its competitors, Walmart and Target, both of which have an established and growing e-commerce presence. Nevertheless, whether e-commerce is an existential threat to Costco remains a debate, because the treasure-hunt experience of walking through Costco, finding the best deals, and grabbing a $1.50 hot dog is something its competitors can’t even come close to matching. 

To close out the article, I will give a SWOT analysis for Costco to evaluate the company’s position by identifying internal strengths and weaknesses alongside external opportunities and threats. 

Strengths 

1. Low Prices 
2. Efficient Supply Chain Management
3. Membership Business Model 
4. Latent Pricing Power 

Weaknesses 

1. Limited Product Selection
2. Cater to Small Customer Base 
3. Limited E-commerce Presence 

Opportunities 

1. Online Presences 
2. International Expansion
3. Expansion of Kirkland Signature 

Threats 

1. E-Commerce Gap  (Amazon & Walmart)
2. Tariff and Supply Chain Risk