Costco stands out among global retailers because its operating model is built around two deceptively simple ideas: act on behalf of the customer and remove everything that does not improve value.
The figures in this analysis reflect public information available when the original Chinese article was published in December 2022. They provide a historical operating snapshot rather than current financial guidance.
At the time, Costco was the world's third-largest retailer, with more than 800 warehouses across 11 countries, over 107 million cardholders, and renewal rates above 90% in the United States and Canada. Annual revenue had reached approximately USD 226.9 billion and net income USD 5.84 billion.
The remarkable feature was not scale alone. Costco generated that scale with a deliberately narrow assortment, very low merchandise margins, high inventory turnover, and a membership relationship designed to align the retailer with the shopper.
A Long-Term Contract With Members
The conventional retailer earns more when the gross margin on a product rises. Costco tries to make the opposite promise: it will select products for members, negotiate hard with suppliers, and pass a large portion of the economic benefit to shoppers.
Membership changes the relationship. The store is not merely trying to maximize the profit on each visit; it must remain valuable enough for the customer to renew every year.
In fiscal 2018, membership-fee revenue was USD 3.142 billion while net profit was USD 3.134 billion. The numbers were not economically identical—membership has operating costs and merchandise contributes profit—but the comparison illustrates how closely the company's earnings power was linked to member retention rather than high product markups.
Costco's mission reflects that logic: continually provide members with quality goods and services at the lowest possible prices.
The Model Began With Aggregated Purchasing Power
The warehouse-club model traces its roots to Sol Price. After founding the discount chain FedMart, Price developed the idea of pooling the purchasing power of many members, buying directly from manufacturers in large quantities, and removing distribution and merchandising costs.
Price Club opened in San Diego in 1976, initially serving small businesses before expanding to individual consumers. Jim Sinegal and Jeff Brotman opened the first Costco warehouse in Seattle in 1983. Price Club and Costco merged in 1993.
The early philosophy was to sell at the lowest sustainable markup, avoiding promotional tricks that created the appearance of savings. Scale was useful only if it reduced costs for members.
The economic environment also mattered. Warehouse clubs emerged during a period of oil shocks, inflation, slow growth, and pressure on the American middle class. A high-quality, low-price solution for mainstream households met a clear need.
A Warehouse Designed for Throughput
The historical operating profile showed the discipline of the format:
- A typical location occupied about 13,000 square meters.
- The assortment was held near 3,700 SKUs, compared with tens of thousands at a conventional hypermarket.
- Annual sales per warehouse were roughly USD 180 million.
- Monthly sales per square meter were estimated at about USD 1,150.
- Gross margin was generally held between 11% and 14%.
- Inventory turned in about 29.5 days, faster than the comparisons cited for Walmart and Target.
Fewer SKUs concentrate purchasing volume. A large order for one carefully chosen product strengthens negotiating power, reduces complexity, and supports a lower selling price.
High turnover lowers inventory costs and improves cash flow. In some cases, goods can be sold before the supplier payment is due, reducing working-capital needs. Simple warehouses, pallet displays, suburban sites, large pack sizes, and self-service operations remove costs that do not directly improve the product.
The limited assortment is not simply a constraint. It is a service. Costco takes responsibility for selection so that members spend less time comparing nearly identical products.
Private Label Deepens the Value Proposition
Costco launched Kirkland Signature in 1995. By 2018, the private label represented about 28% of sales, up from 12% in 1999.
Kirkland expanded across snacks, nuts, supplements, bakery, frozen food, meat, cleaning products, paper goods, batteries, clothing, and pet products. The portfolio allowed Costco to establish a quality and price benchmark in categories where branded alternatives carried higher margins.
Private label also improved control over product specifications and supply. Combined with the narrow assortment, it gave Costco a way to translate consumer trust directly into purchasing scale.
Low Margin Raises the Competitive Barrier
Costco's merchandise margin historically stayed far below that of many conventional retailers. In 2021, gross margin was approximately 12.15%, while net margin was about 2.6%.
This low-margin structure is difficult for a less efficient competitor to copy. Matching the price without matching the turnover, purchasing scale, cost structure, and membership income can destroy profitability.
Costco's advantage therefore does not come from one isolated tactic. It comes from the interaction of the whole system:
- Membership creates recurring income and accountability to the shopper.
- A narrow assortment concentrates buying power.
- Large volumes improve supplier terms.
- Low prices increase member traffic and renewal.
- High turnover reduces inventory and financing costs.
- Private label strengthens differentiation and value control.
Each element reinforces the others.
Returns Are Part of the Trust Contract
Costco also became known for a highly permissive return policy. Most products historically had no fixed return deadline, while selected electronics were subject to a 90-day window.
Such a policy appears costly when evaluated transaction by transaction. At the system level, it reduces purchase anxiety and signals that the retailer is willing to absorb risk on behalf of the member.
Trust becomes an operating asset: members buy with greater confidence, renew more often, and allow Costco to sell a smaller number of products at greater scale.
Employee Economics Matter Too
The model depends on productive, experienced people. Costco has historically paid above-average retail wages and offered benefits to many part-time employees. At the end of 2021, the company employed 288,000 people globally, maintained at least half its workforce in full-time roles, and reported that more than 90% of US employees with at least one year of service remained with the company.
Higher pay can reduce turnover, improve execution, and lower the hidden costs of recruitment and retraining. Most senior leaders have been promoted internally, and the large majority of warehouse managers have front-line experience.
The company's stated ethical sequence is also unusual: obey the law, take care of members, take care of employees, respect suppliers, and then reward shareholders.
That ordering does not reject shareholder returns. It argues that durable returns are an outcome of correctly serving the other participants in the system.
What Retailers Can Learn
Costco and ALDI differ in customer segment, membership, private-label penetration, assortment, and experience, but both demonstrate the power of reduction. They limit choice, suppress brand premiums, simplify stores, and turn operating efficiency into customer value.
The lesson is not that every retailer should open a warehouse club. It is that a coherent operating philosophy can be more powerful than a collection of promotions.
Costco chooses what not to sell, what not to decorate, what margin not to take, and what complexity not to add. Those decisions support a clear promise: high-quality products at prices that justify a long-term membership relationship.
In a retail world optimized for infinite assortment and impulse, disciplined subtraction can itself be a competitive strategy.