No, Costco is accounting for it normally by putting membership fees up there with gross revenue. I'm saying the gee-whiz description of memberships being 75% or more of profit is silly. The firm has gross margins on its sales. It also collects membership fees. Any one of its product lines could be a large portion of revenue that you could single out as being the driver of their profit. I just think it's silly to single it out like that. Gross margin pays for the stores to be open just as much as anything else, and with less margin the stores could be out of business despite collecting all those membership fees.
"Their profits primarily come from membership fees."
I've seen this quoted repeated but it's not a useful lens.
While Costco's annual revenue from membership fees is approximately equal to Costco's annual net profit, memberships are only valuable because of the additional services and products Costco offers, which also incur costs and contribute to their overall profits.
So it makes no sense to consider Costco memberships a product with close to 100% gross margin, which is what people normally mean when they say profits primarily come from membership fees.
Costco has 81M members or so, at $50/yr that is around $4B/yr total in membership revenue. Their profit in the last year was $2.3B. Thus you are correct, Costco would lose money if they didn't charge membership fees.
Costco's profit is actually really low. $115B in sales with $2.3B in net income, so ~2% profit margin. I guess they really do have low prices.
Walmart for comparison has a 3.3% profit margin in the last year on $445B in sales. Amazon has a -0.3% profit margin on $88B of sales.
> if you separate Costco's business into the purely discount retail sales part, and membership fees, the former runs at a modest loss, the company makes its money on the fees.
But this is at least a bit misleading, because in the separation all the costs of running the business, plus the cost of goods sold, is counted on the retail side, and the memberships are treated as just freestanding revenue. Part of the cost of running the business is associated with memberships.
I've heard that before, but I can't see how it could be. My back-of-an-envelope calculation: Let's say I spend $1000 per year (I'm estimating low). According to the article, Costco's average markup is 11%. So they make $99.10 profit on my $1000 of spending. Let's assume that the $60 membership is 100% profit. The total profit from me is $159.10. My membership fees would be only 37% profit (60/159.10 = .37). Do vast numbers of people pay for $60 or $120 memberships and spend much less than $1000?
> Costco makes the majority of its money from memberships
Not really. Their total profits last year were $2.8B and their membership income was $1.5B. It only represents the majority if you assume there is no cost to their membership income. But we know there is, because they have to have employees who do nothing but process memberships and they have to maintain all their membership benefits which also requires employees.
It's fair to say that about 1/2 of their income is from memberships though, which is still high.
I looked at Costco's financials a few years ago and their total annual profit is (was?) approximately equal to their total annual income from membership fees.
Thanks for the update. While it may be true that they'd be losing money overall without the membership fees, I doubt they sell most products at a direct loss. There's overhead for managing everything, but they surely don't set things up so that each sale of a washing machine or patio furniture or whatever is actually a net loss. I'd be shocked if having all members increase their spending would decrease rather than increase CostCo profits.
> And they attribute their revenue to the membership fees.
No, their profit is largely attributes to membership fees; their revenue is almost entirely sales (for the 53-week “year” in their most recent 10-K, $126+ billion in net sales, less than $3 billion in membership fees.)
Basically, Costco uses a giant near-zero-profit sales operation as a the key benefit to sell memberships, which are its profit-making business.
"if you look at their financial statements ... you're buying things at cost price on average"
Not quite.
Costco's gross margin is ~12% of revenue. That means their average markup (including revenue from membership fees) is over 10%. If membership fees are about 2% of revenue, and other income (e.g. commission from the vendors near the exit), then Costco's markup is in the 8% to 9% range.
If we were buying things at cost price on average, then Costco would not have enough money to pay for rent, staff etc.
This analysis is a little bit weird and I don’t think quite tells the whole story. I remember digging into their 10K a while ago and the big takeaway was that a good Costco store will do somewhere around a billion dollars in revenue per year. Their merchandise profit is low, but I don’t think zero - I believe I calculated it at somewhere between half a percent and a percent on average. But again, that’s on a billion dollars per store.
Membership fees also aren’t pure profit - there’s some overhead with them and other member services at a net negative that lower it below 100%.
So, if I put membership fees under operating revenue, and then factor out their liquor store as special revenue, I could say they make a huge amount of their profit from liquor sales, and say Costco is just a big liquor store that sells food, merchandise and memberships for fun. That doesn't make much accounting sense.
> Costco's profit comes from their membership fees rather than selling anything
Membership is key both because its essentially zero cost, and because paid membership motivates choosing Costco as the place to make purchases (one reason Costco sells so,much more per unit of floospace than, e.g., WalMart), but Costco, absolutely, does make profits from sales, even if its margins are fairly low.
This argument only makes sense if you consider 100% of membership revenue to be profit with absolutely no associated costs. However, clearly Costco's customers would not be willing to pay $60 annual dues if there were no benefits.
Last I read, memberships were like half their profit or something. It's certainly not like CostCo makes no more profit if people buy twice as much. Setting prices to that level would be insane.
CostCo doesn't do weird pricing scheming, but they have higher-profit items and getting people in the stores with memberships does get people to buy more stuff there, even stuff people might have not bought at all otherwise.
Don't get me wrong, CostCo does a better ethical and consumer-respecting business than most, but they DO profit on sales, it's just slim enough profit that they couldn't get by well without the member fees.
I haven't done the math, but I don't know how accurate this is given that 2/3 of their sales are to members who receive 2% cash back ($110 executive members). The executive membership would need to average $5500 in purchases to wipe out any Costco profit on their memberships. $8250 average to wipe out ALL membership profit.
I'll have to come up with a formula based on the numbers in your article. It'll be interesting to see how accurate that "profit from memberships" statement really is.
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