How does Costco make money?

Costco Wholesale Corp. – Business Breakdown

The Essentials

Costco Wholesale Corporation operates a large-scale membership warehouse model built around low prices, a limited assortment of nationally branded and private-label merchandise, and a recurring-fee customer relationship. As of August 31, 2025, the company operated 914 warehouses across the U.S. and multiple international markets, supported by 341,000 employees. The business is structurally significant because it combines high-volume merchandising with a membership framework that reinforces customer retention and recurring economic value.

For FY2025, Costco generated $254.5 billion in total revenue and $8.1 billion in net income attributable to the company, with diluted EPS of $18.21. The filings indicate a business that is scale-driven, operationally disciplined, and anchored in a low-margin, high-turnover model rather than in product innovation or premium pricing.

Business Model & Revenue Drivers

Costco’s economic engine is built on a tightly integrated warehouse retail model, with revenue concentration across a few core merchandise and service categories:

• Foods and Sundries: $101.5 billion, or 40.6% of net sales. This is the largest revenue contributor and underscores the importance of high-frequency, repeat-purchase categories in driving traffic and inventory velocity.
• Non-Foods: $64.0 billion, or 25.6% of net sales. This category broadens basket size and supports margin mix through discretionary and seasonal merchandise.
• Fresh Foods: $34.2 billion, or 13.7% of net sales. This segment reinforces customer visit frequency and supports the warehouse value proposition through perishability-driven turnover.
• Warehouse Ancillary and Other: $50.0 billion, or 20.0% of net sales. This indicates a meaningful contribution from non-merchandise and adjacent warehouse-related activity.
• E-commerce and Costco Travel: approximately 10% of total net sales. Digital fulfillment is described as warehouse/distribution-supported rather than technology-led, suggesting it functions as an extension of the core operating model.
• Executive Membership Penetration: Executive members accounted for 73.6% of worldwide net sales, highlighting the commercial importance of the premium membership tier and its role in deepening customer monetization.

Geographically, the business remains heavily weighted toward the United States, which generated approximately 78.6% of total revenue, followed by Canada at 14.5% and other international markets at 6.9%. Operating income was also concentrated in the U.S., with Canada and other international regions contributing smaller but still meaningful shares.

Strategic Edge & Market Positioning

Costco’s competitive position appears to rest on a combination of structural and execution-based advantages.

Economic Moat

• Membership lock-in: Renewal rates of 92.9% in the U.S./Canada and 90.5% worldwide indicate a durable recurring relationship that is difficult for peers to displace.
• Cost leadership: The company benefits from volume purchasing, cross-docking depots, and vendor rebate economics, allowing it to sustain a low-price model while preserving profitability.
• Brand and private-label differentiation: The filings identify trademarks such as Costco Wholesale and Kirkland Signature, with Kirkland serving as a quality-price differentiator.
• Switching friction: Annual membership fees and household card structures create practical switching costs that reinforce retention.

Execution Advantage

• The filings also point to strong operational execution in inventory turnover, supplier negotiation, and warehouse productivity.
• Costco’s ability to maintain profitability despite low gross margins reflects disciplined merchandising and supply chain execution.
• E-commerce growth appears to be an operational extension of the warehouse network rather than a separate technological moat.

Overall, the moat is best characterized as narrow but structural: not dependent on patents or proprietary technology, but on scale, membership economics, and supply-chain efficiency that are difficult to replicate at comparable breadth.

Outlook & Innovation Pipeline

The filings do not disclose a formal three-year strategic roadmap, quantified innovation targets, or meaningful R&D pipeline. There is no indication of patent-driven development or proprietary technology as a growth lever.

What is visible instead is a continuation of the existing operating model:

• Warehouse expansion remains a core lever, with 914 warehouses as of August 31, 2025.
• E-commerce growth is expected to remain relevant, though it is framed as a fulfillment channel rather than a technology platform.
• Membership monetization remains central, particularly through Executive membership penetration.
• Compensation and labor cost management are part of the operating backdrop, with U.S. and Canada entry-level wages raised to $20 per hour in March 2025.

In short, Costco’s forward trajectory appears to be driven by scale expansion, member retention, and incremental channel development rather than by a distinct innovation pipeline.