Costco Model

Studied in MBA programs world wide, the way Costco does business proves the power of scale. Despite generating US$152b in revenue and US$3b in profit in 2020, the bulk goods retailer struggles to break even on a lot of products it sells. In the ever volatile petrol market, Costco still manages to sell gas at a 20% discount to competitors. One of many staple products that will provide a consistent source of demand.

So, how do they make their money? Almost one third of the American population is a subscribing member: 99 million people pay US$60 a year. With a 91% renewal rate, the recurring revenue allows them to offer products at a discount to essentially all other retailers. But even still, they are barely breaking even on brand names products.

The money making secret? Kirkland Signature. Costco’s homebrand label appears on around 20% of products from golf balls to water. With their scale, Costco has taken control of the supply chain for a lot of their products. For example, in 2014 they changed the shape of their cashew jars to square instead of round in an effort to increase shipping capacity. Removing the middlemen and producing at a reduced cost, the supermarket can now capitalise on brand loyalty and sell for a more regular profit margin back to their customers.

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