---
title: "New Retail Revelation: How Does Costco Retain 90% of Its Members?"
description: "As the world's second-largest retail brand and the largest membership warehouse club, Costco achieves annual sales of nearly $130 billion and a market value of about $82 billion, with 741 warehouses globally. Yet Costco does not focus on sales as its primary profit driver. What is its secret? Especially after the New Retail narrative has been repeated time and again, anxiety plagues not only traditional supermarkets and department stores struggling to survive, but also internet companies facing dwindling online traffic and various capital providers fearing they might miss the next trend. Where is the way out for traditional supermarkets?"
author: "七月"
publisher: "New Distribution"
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published: "2018-01-16"
language: "en"
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# New Retail Revelation: How Does Costco Retain 90% of Its Members?

> As the world's second-largest retail brand and the largest membership warehouse club, Costco achieves annual sales of nearly $130 billion and a market value of about $82 billion, with 741 warehouses globally. Yet Costco does not focus on sales as its primary profit driver. What is its secret? Especially after the New Retail narrative has been repeated time and again, anxiety plagues not only traditional supermarkets and department stores struggling to survive, but also internet companies facing dwindling online traffic and various capital providers fearing they might miss the next trend. Where is the way out for traditional supermarkets?

As the world's second-largest retail brand, Costco is also the largest membership warehouse club chain, with annual sales approaching $130 billion, a market value of nearly $82 billion, and 741 warehouses globally. However, Costco does not focus on sales as its primary profit driver. What is its secret?
Especially after the New Retail story has been told over and over, anxiety plagues not only traditional supermarkets and department stores that are struggling, but also internet companies with dwindling online traffic and various capital providers worried about missing the next big thing. Where is the way out for traditional supermarkets? **Perhaps Costco can tell us another version of the New Retail story.**
1
## **Why Membership System?**
Costco is not a traditional retailer.
While other retailers are frantically attracting customers to boost sales, Costco has established a membership system that keeps some customers out: a non-executive membership at $60 per year, or an executive membership at $120 per year, offering up to 2% cashback up to $1,000. Unlike partial membership systems that provide value-added services, Costco's full membership system emphasizes that only members are eligible to shop inside.
Compared to ordinary retail, Costco's membership system is more similar to prepaid gyms. The essence of what consumers pay for is not the goods but the service—Costco leverages economies of scale to pass on savings to consumers while providing them with a better experience.
**The membership system constructs a beautiful vision for consumers, similar to the illusion gyms give people that "I will soon have a healthy body." Costco members are also attracted by the prospect of saving money. Even if they don't benefit from it, they are willing to renew for the possibility of future savings.**
From this perspective, the membership system can capture the spillover value of a considerable number of low-frequency, small-order customers, and the benefits of the membership system do not stop there.
**First, it narrows the target customer range.** Costco targets middle-class families, and "willingness to pay membership fees" becomes the simplest criterion to distinguish the purchasing power of the audience. Above the membership fee threshold, Costco defines a relatively precise customer group, making data monitoring of members simpler and improving service levels and operational efficiency.
**Second, prepaid membership fees bring a substantial cash flow to the company.** According to data, Costco's membership fee profits account for about 70% of its total profits. In fiscal year 2017, Costco's net profit was $2.68 billion, while its net operating cash flow was $6.73 billion. This cash flow obtained before consumption greatly enhances Costco's procurement and risk response capabilities.
**Third, the membership system also helps enhance user loyalty.** At the same price and quality level, consumers often prioritize shopping at Costco due to the upfront membership fee cost, hoping to make their membership worthwhile.
In a continuous virtuous cycle, consumers become more accepting of the chosen brand and maintain high stickiness. Costco CFO Richard Galanti pointed out that in the third quarter of fiscal year 2017, Costco had a total of 18.3 million executive members, generating $20 billion in sales, approximately 70.9% of total sales.
Under this membership model, fluctuations in sales do not affect overall profits. **Costco does not need to rely on members' strong purchasing power to maintain profitability. Even if internal and external conditions lead to lower sales, it only needs to make consumers see the value of membership; membership fees are enough to ensure stable profits.**
2
## **Key Factors in Locking Down the Target Group**
From this perspective, for Costco, the core question shifts from "how to increase gross margin and sales" to "how to attract and retain members." According to data, **Costco's member retention rate in North America is 91%, while the global retention rate is 87%. How does Costco achieve such impressive member retention?**
Enhancing the granularity of cost control and providing more precise product services may be the only answer.
For the middle-class target group, Costco emphasizes that time and cost-effectiveness are the most important factors. Maintaining an average profit margin of around 10%, the Costco team selects bulk commodities with single categories and multiple varieties from around the world, offering one-stop services including food, clothing, appliances, cars, gas, and health checkups at high quality and low prices. Under this premise, cost control is key to maintaining Costco's price advantage.
In fixed costs, Costco minimizes land costs. Similar to McDonald's, Costco chooses to purchase and hold land rather than lease it to reduce long-term rental expenses. Moreover, Costco's supermarkets are almost all located in suburbs, minimizing land costs to the greatest extent.
Facing another significant cost—labor costs—Costco strives to minimize this expense. Generally, warehouse-style supermarkets require relatively fewer employees. Costco ensures high service standards while providing employees with high wages and benefits to reduce losses from turnover.
For example, while the average hourly wage for retail employees in the U.S. is $11.39, most Costco employees enjoy an average hourly wage of $21 plus medical insurance. **In return, each Costco employee produces an average output of $560,000, approximately three times the per-capita efficiency of Walmart.**
In the production and supply chain, Costco focuses on a curated selection of SKUs. Compared to Walmart's over 20,000 SKUs, Costco has only about 4,000 active SKUs. Correspondingly, in 2016, Costco's inventory turnover days were only 31.36 days, far lower than Walmart's 45 days.
**On one hand, fewer SKUs save costs on ordering, tracking, and display, reducing average inventory costs; on the other hand, single-category SKUs often represent sufficiently large order volumes and less brand competition, which is more conducive to Costco's bargaining with suppliers.**
At the same time, Costco's private label is very famous. By reducing intermediate distributors, Costco has more profit margin on private labels, using the higher profit margins of private labels to balance the lower margins of national brands, and can afford near-zero profit or even losses on some low-priced and branded items.
In backend marketing, Costco spends almost nothing. Compared to Walmart's 0.5% and Target's 2% marketing expenses, Costco has no advertising budget, only sending emails to potential users and distributing coupons to existing users. Costco allows members to bring a friend or relative to shop, which to some extent creates a word-of-mouth advertising effect.
**It can be said that Costco, based on its core focus on products and services, disruptively uses the membership system to lock in target groups, enhancing its competitiveness through business model innovation.**
3
## **Costco's Possibilities in China**
2017 was called the first year of New Retail. While convenience stores, unmanned shelves, and other New Retail formats remained hot, traditional department stores and supermarkets suffered defeats in this transformation. Nevertheless, foreign brands still show strong interest in the Chinese market. In March, Germany's ALDI opened on Tmall; in April, UK's ASDA opened on JD Worldwide; in September, Germany's Lidl opened on Tmall Global and JD Worldwide; in November, Denmark's Irma opened on NetEase Kaola...
Costco, after entering Tmall Global in 2014, also announced in September this year that its first store in mainland China would land in Shanghai.
**As soon as the news came out, both expectations and doubts fell on Costco's shoulders.**
Considering Costco's mature development in Japan, Taiwan, and other markets, compared to its main battlefield in the U.S., China's denser population and different consumer habits may not be the primary issues. Referring to Sam's Club, a comparable company under Walmart, which is accelerating expansion in China, it can be predicted that Costco's prospects in the Chinese market are relatively optimistic.
It is foreseeable that although increased costs such as rent, localized supply chains, and logistics will lead to higher product prices, as long as Costco adheres to its global procurement strategy and provides high-quality goods from around the world, its advantages in the global supply chain will certainly become a strong barrier, allowing it to gain a share in the Chinese market.
**So, as a representative of excellent offline retail, can Costco resist the erosion of New Retail companies, and what inspiration does it bring to New Retail enterprises?**
In fact, when talking about technology and data, online and offline, the scope of New Retail has been unconsciously narrowed, and traditional retail has even been placed in opposition to New Retail. What is New Retail? Essentially, setting aside the story of traffic monetization, when talking about relying on retail itself for profitability, any retail method that can improve operational efficiency can be called New Retail.
Costco's model is more advanced than traditional supermarkets because the business model it provides allows it to operate at higher sales per square foot and per-capita efficiency. By the same logic, the essence of New Retail is also to improve the sales per square foot and per-capita efficiency of the retail industry.
How to achieve this ultimate goal of the retail industry? Judging from current consumption trends, improving user experience is the most core key. **Whether it is the division of "product, efficiency" or the traditional classification of "more, faster, better, cheaper," they all describe user experience from different dimensions.**
Under the trend of consumption upgrading, enriching user experience is a transformation that the retail industry must undergo. New Retail is essentially the process of using internet thinking and internet tools to enhance user experience and ultimately improve retail operational efficiency.
Clearly, this is not a zero-sum game; the difference between online and offline is not the focus of New Retail. Whichever model provides a better user experience and achieves higher retail sales per square foot and per-capita efficiency will ultimately survive.
The difference lies only in that traditional retailers may focus more on whether the current profit model is sustainable, while internet thinking focuses on future possibilities, whether it can better gather and serve people, making offline traffic more operable in the future.
From this logic, Costco is already a leader in the current evolution of retail, with no possibility of surrender in the short term. **To ensure long-term profitability, Costco has already undergone digital transformation in the U.S., and it is foreseeable that it will gradually integrate more internet thinking and technology in various markets.**
4
## **The Final Showdown of New Retail**
In the domestic market, although the economies of scale required by Costco's membership system deter many merchants, Costco is still one of the benchmarks for offline retail. Under the New Retail wave, many enterprises have emerged that use Costco's model and philosophy as a template and explore internet gameplay on this basis.
Take Hema Fresh as an example; its business form has been significantly influenced by Costco. Hema upgraded Costco's team-selected supply model into a buyout "buyer system" to build core competitiveness. Hema's proposal that private label products will account for more than 50% in the future can also be traced back to Costco's successful private label, Kirkland Signature. **Further down, the one-stop "dining + supermarket" service and warehouse-style display all reveal Costco's influence.**
Unlike Costco's simple model in the Chinese market relying on Tmall online, Hema, with its internet genes, puts more effort into technology and e-commerce. On one hand, Hema's data technology not only monitors customers more precisely but also greatly improves per-capita efficiency;
On the other hand, Hema's heavily invested online mall and logistics system are sufficient to form business barriers. Although the profitability of Hema Fresh's heavy self-built logistics model is still controversial, once the user habits it cultivates are formed, there will be more variations in the future.
In summary, the booming New Retail ultimately needs to return to the essence of business, competing on operational efficiency in terms of sales per square foot and per-capita efficiency. **Whether through internal model improvement or external technology empowerment, retail transformation will eventually face a head-on showdown in user experience.**
Source: Wild Grass New Consumption (ID: yecaoxxf)
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