How Does Costco Make Money Selling Things So Cheaply?

How Does Costco Make Money Selling Things So Cheaply?

Costco could charge you more for that giant tub of olive oil. It has written itself a rule saying it won't. Everyone assumes the answer is buying power — they buy in bulk, they get it cheap, they pass it down. But Walmart buys more than twice as much and still keeps roughly twice as much of every dollar. Volume explains what a store can charge, not what it does charge.
So we followed the money to the door. A markup ceiling of fourteen percent on outside brands. A membership fee that costs the median American worker a long morning of pay. And in the most recent financial year, about fifty-one cents of every dollar of Costco's operating profit arriving before anyone put anything in a cart. The story starts with a man fired from his own company in December 1975, who opened a warehouse in a converted Howard Hughes airplane hangar and charged people to walk in.

Sources: Costco and Walmart SEC filings, Bureau of Labor Statistics wage data, The Journal of San Diego History, and on-the-record interviews with Costco chief executives Jim Sinegal and Craig Jelinek.

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Financial Minds explains why things cost what they cost — the business model behind it, the design decision behind that, and the person who figured it out first.

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