Investing

How Does Costco Make Money?

how-does-costco-make-money



Editor’s note: The member figures in the video are in thousands, so the 51,600 member number cited is actually 51.6 million paid members.

You might think that Costco is your average retailer… but it’s not.
The “everything in bulk” store sells cleaning supplies, jeans, pet food, and anything in-between, but Costco doesn’t actually make much money on the merchandise it sells.
In this video, we’re going to break down exactly where the cash really comes from for Costco.
According to the company’s 2018 results, it sold $138 billion in merchandise – that’s a lot of Kirkland brand trail mix and discount prescription glasses.
The products they sold cost the company $123 billion, leaving $15 billion for the business.
BUT WAIT! We also have to account for all the company’s retail employees, pallet trucks, and store overhead expenses that enable Costco to sell those goods and give away those sweet, sweet free samples.
All those costs combined totaled nearly $14B.
So we’ve got:
• Sales of $138 billion
• Cost of goods sold of $123 billion
• And selling, general, and administrative costs of $14 billion.
That leaves us with just $1 billion dollars… but the company reported over $3 billion in net income for the year. So where’d the extra money come from?
Costco’s real source of income, its memberships.
In order to shop at Costco, you need to be a member, and annual membership costs either $60 or $120, depending on the benefits an individual or business chooses.
Those membership fees add up over time, in the company’s 2018 results, they said they collected $3.1 billion in membership fees.
A huge chunk of this revenue flows directly down to the company’s bottom line, because memberships are relatively cheap to create – all the company needs to do is give people a card, maintain a tracking system, and occasionally provide some customer service. All told, that’s a much higher-margin business than selling products to consumers, even at regular retail prices.
If you look over the past few years, you’ll see Costco’s net income tracks pretty closely to the revenue it brings in from membership fees.
Year Membership fees Net income
2016 $2.6 billion $2.4 billion
2017 $2.8 billion $2.7 billion
2018 $3.1 billion $3.1 billion

The revenue from membership fees is what allows the company to offer customers the marked down prices and cheap private label goods they’ve come to expect.
It also means that while merchandise sales matter for the company, the metrics that Wall Street tends to care about are mostly related to Costco’s member base.
When the company reports earnings, investors want to see the company continue to add members, and over the past few years, it has:

Year Paid members
2016 47,600
2017 49,400
2018 51,600

And the members the company brings in are generally pretty satisfied with what they’re paying for. Costco maintains a member renewal rate of around 90%.
Satisfied members keep the money consistently flowing in, and it helps insulate Costco from the creeping competition of e-commerce. The membership model has helped Costco earn the “Amazon-proof” label, and kept the company’s brick and mortar business thriving even as online sales make up a larger portion of U.S. retail.
Membership fees, it’s how Costco actually makes money.

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15 Comments
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Robert Dunfee

15 Comments

  1. Thilan W
    July 18, 2021 at 5:09 pm

    Thanks for the information!

  2. Frank Business
    July 18, 2021 at 5:09 pm

    Do one on Target, Amazon , eBay , Sephora , UltaBeauty, BestBuy, JCPenney, Macy’s, Nordstrom, Kohl’s , BJS, Bed Bath & Beyond, Home Depot, Lowe’s

  3. Mark DeFazio
    July 18, 2021 at 5:09 pm

    There is something wrong with their math. I have seen several sites report how many actual members they have and none stated less than 90 million. At $60 a member (and some as you say pay double that) their profit should be 5.4 billion.

  4. Gemika
    July 18, 2021 at 5:09 pm

    Please explain Mastercard’s business model. Thank you!

  5. MrProTechHD
    July 18, 2021 at 5:09 pm

    Their not reporting all of their income , their hiding something in order to avoid taxes just because their a liberal Corp that doesn’t mean jackshit

  6. Anonymous
    July 18, 2021 at 5:09 pm

    Thanks very much, Motley Fool,for your "How companies make money?". These "Revenue Breakdown" videos are very relevant and useful to the retail Investor. Please make more of such videos for good companies whose stocks we would like to buy and hold. Thsnks again!

  7. Margarita Martinez
    July 18, 2021 at 5:09 pm

    Amazing!😇

  8. Benjamin Tsui
    July 18, 2021 at 5:09 pm

    Great video. Succinct and to the point.

  9. The Valiant Investor
    July 18, 2021 at 5:09 pm

    Please do one on intel

  10. GoVeganHelpEarth
    July 18, 2021 at 5:09 pm

    It is kind of sickening the amount of plastic in those stores.

  11. Kenton McDaniel
    July 18, 2021 at 5:09 pm

    pepsico

  12. GARY GODLEY
    July 18, 2021 at 5:09 pm

    A GREAT BUSINESS MODEL… WHERE THE CUSTOMER IS ACTUALLY ITS BEST ASSET!!!

  13. Bryan McWayne
    July 18, 2021 at 5:09 pm

    I am lost in the numbers here a little bit. If members for 2018 were 51,600 and the fee for membership was what you have outlined as the highest level of $120 that equals $6.2M (rounded). $6.2M is a far cry from the $3.1B of net income. Said another way if member fees generates $3.1B and the annual fee is $120 almost 26M members would be needed. Am I missing something?

  14. Daryl Cooper
    July 18, 2021 at 5:09 pm

    I'd like to see an example of a REIT (i.e. Realty Income, O) or an MLP (i.e. Brookfield Infrastructure Partners, BIP).

  15. dom madden
    July 18, 2021 at 5:09 pm

    First