Have you ever wondered how Costco makes money?
Most people know that the membership-only mega-retailer sells items in large quantities at what are basically wholesale prices, so where’s the profit in that? Turns out, it’s all in the membership fees, according to a Twitter thread that went viral over the weekend.
The thread by an investor explained to the general public what most experts in retail circles have known for some time — Costco’s high volume of sales and rapid turnover of inventory are not the real reason the company is so profitable: the memberships are. The cheapest membership option is the Gold Star card, which costs $60 annually. The more expensive membership card, the Gold Star Executive card, costs $120 a year and has added perks like 2% cash back on eligible purchases.
Here’s how it works:
Since Costco operates at very low gross margins — if you buy 5 pounds of peanut butter for $10, the company makes only $1 off your purchase, according to the thread — it can’t make big bucks just by selling you things cheaply. But, since the retailer has developed a reputation for having consistently lower prices than its competitors, it has something called “price authority,” meaning Costco can lean on suppliers for competitive prices and also rely on consumers to steadily continue signing up for and renewing their memberships. The company had a 90% member renewal rate in the U.S. and Canada last year (and 88% worldwide), according to the company’s annual report.
There are more than 53 million paid members as of this year, according to the Twitter thread. That means Costco is on track to make $4.3 billion from memberships in 2019, which accounts for essentially all of the company’s profit so far, the thread says.
by Alix Langone, Money | Read more:
Image: via
Most people know that the membership-only mega-retailer sells items in large quantities at what are basically wholesale prices, so where’s the profit in that? Turns out, it’s all in the membership fees, according to a Twitter thread that went viral over the weekend.
The thread by an investor explained to the general public what most experts in retail circles have known for some time — Costco’s high volume of sales and rapid turnover of inventory are not the real reason the company is so profitable: the memberships are. The cheapest membership option is the Gold Star card, which costs $60 annually. The more expensive membership card, the Gold Star Executive card, costs $120 a year and has added perks like 2% cash back on eligible purchases.Here’s how it works:
Since Costco operates at very low gross margins — if you buy 5 pounds of peanut butter for $10, the company makes only $1 off your purchase, according to the thread — it can’t make big bucks just by selling you things cheaply. But, since the retailer has developed a reputation for having consistently lower prices than its competitors, it has something called “price authority,” meaning Costco can lean on suppliers for competitive prices and also rely on consumers to steadily continue signing up for and renewing their memberships. The company had a 90% member renewal rate in the U.S. and Canada last year (and 88% worldwide), according to the company’s annual report.
There are more than 53 million paid members as of this year, according to the Twitter thread. That means Costco is on track to make $4.3 billion from memberships in 2019, which accounts for essentially all of the company’s profit so far, the thread says.
by Alix Langone, Money | Read more:
Image: via
