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Costco revenue model. A Twitter thread

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Costco revenue model. A Twitter thread

Interesting to learn about memberships and revenue

"I felt a great disturbance at KFC as if millions of chickens suddenly cried out in terror and were suddenly silenced." RFD user stephroll
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Deal Expert
Aug 22, 2006
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sprung wrote: Yeah, they basically sell those at breakeven and then make all of their profit from the $60 annual membership fees.
Not quite all, but I did the math once and it was something like 60/40 towards memberships.
I can't find the thread where I did the math.
What I do remember is that even a tiny change (sub 1%) change in pricing would go from doubling the profit to losing money.
In turn, this gives it pricing authority. In other words, you don't even look at the price because you know it's going to be the best.
I finally found someone that said it! People accuse me of this all the time, but it's blatantly false.
Costco isn't always cheapest. When it is, it can be a landslide, but there's quite a few examples where they do not have the best price.
Off of merchandise, Costco's gross margins are only 11%.
Hmm. I thought I calculated higher. But obviously this would change based on year.
Strangely he covered the years I covered and I get different numbers.
Not that I can find that stupid thread....
Deal Addict
Dec 18, 2017
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My wife used to give me shit for buying certain things at Costco because it's nowhere near as cheap as say Walmart. To which I replied "it was bad enough to go to Costco, I'm not going to Walmart too". Who knows what the other things I bought at Costco would have cost at Walmart so it's hard to say whether I saved money overall, but I certainly am not wasting time to chase a couple dollars either.
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Feb 7, 2017
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This has been discussed many times on RFD

FACTS...

1- YES Costco buys in bulk

2- YES, their Customers pay a Membership Fee that offsets part of Costco’s Revenues vs other Retailers

3- NO that doesn’t automatically mean that Costco makes most of their money from Membership Fees
OR ... that Costco has the lowest prices around, because they buy in bulk, run out of a warehouse, or offer things in larger sizes

I am a strategic shopper
Which means I KNOW (or track prices) on most things we buy
Always looking for the best price / promo from the set of Retailers we frequent

Costco DOES NOT have the best pricing on all of the 4000 or so SKU items in their inventory at any given time
Anymore than any other retailer has with their total inventory ...
be it a B&M Store like Walmart
Or an online one like Amazon

In retail the model remains the same as it’s been for eons
Some things are lower priced = loss leaders
And others are priced at around the average range
Or above... to generate cash flow to carry the loss leaders

It’s up to the Consumer to figure out the BEST Median price
And buy when things are at their lowest mark

This is exactly WHY you’ll see how every Grocery Store for example will list particular items on sale on the same week in their flyer
(Example ... this week leading into Thanksgiving is a big week for Stove Top Stuffing, seems everyone has it featured. But prices run from a low of $ 0.87 to over a $ 1.00)

Also why if one belongs to the PCO Program, it’s very clear that things / offers are on a Cycle of rotation.

Most Consumers though, apparently don’t notice / track prices that closely
They just throw whatever they want / need in the cart
And buy week to week
Vs budgeting their money out for stocking up just on whatever is cheapest in any given week

That’s where the real savings are
Truly knowing prices
And only buying when the price is right / lower
Than buying when the need / want is high

EDIT / ADD
Most people don’t mind the fact that Costco has a Membership Fee
Cuz when they shop there, they do save money overall on many items
In many cases all it takes is just the purchase of one big ticket item
And the savings can represent what was spent on Membership Fee of $ 60
(For some folks that Tires ... for others it’s Appliances, Electronics, Tech Or Eyeglasses
Or in our case the first year we were members, first shop ... it was an item for our outside patio that was fresh from the US, not otherwise available in Canada ... the $ 60 Savings came because we couldn’t buy it here otherwise, and if we bought from the USA it was gonna be more than $ 60 Cdn based on Exchange and/or Shipping etc)

@death_hawk not sure if this was the Costco thread you were thinking of
But it does have some math in it you presented
why-costco-wholesale-still-called-wholesale-2271203/
Deal Fanatic
Oct 26, 2008
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PointsHubby wrote:
FACTS...

1- YES Costco buys in bulk

2- YES, their Customers pay a Membership Fee that offsets part of Costco’s Revenues vs other Retailers

3- ................
All good points under 3. But on 1, surely every retailer buys in bulk? You mean that Costco is able able to take it to an even higher level than, say, Walmart?

On 2, the membership fees augment Costco's revenues, unless for any year their revenues were negative in which case the membership fees would provide an offset.
Deal Expert
Jun 30, 2006
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Costco also has negotiating power to get the goods at even cheaper so I don't believe they break even on all items. Maybe a few items, but not 90% of them.
Deal Addict
Dec 18, 2017
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A quick google search showed their just released Q4 report showed operating income 50% higher than membership sales, so I guess they make money on merchandise and services as well.
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Aug 22, 2006
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PointsHubby wrote: 3- NO that doesn’t automatically mean that Costco makes most of their money from Membership Fees
It's a good portion of it though.
The revenue from selling of goods basically just pays for operations of the stores.
As I mentioned above, a TINY percentage change in pricing would literally mean the difference between making money and losing money.
In many cases all it takes is just the purchase of one big ticket item
And the savings can represent what was spent on Membership Fee of $ 60
Instead of looking at it as $60/year, look at it as $5/month.
If you save $5 or more per month buying anything (or one thing) you have your membership paid for.
Doing this, even small purchases can easily pay for a membership.
@death_hawk not sure if this was the Costco thread you were thinking of
But it does have some math in it you presented
It does have some math, but it's not the thread I was thinking of.
This was much older. Maybe a year or more.
I broke down the annual report showing exactly how much money they made off memberships vs merchandise.
All else fails I'll do it again.

macnut wrote: You mean that Costco is able able to take it to an even higher level than, say, Walmart?
I kind of wonder where this balances.
Walmart for (a simple) example would buy 10 pallets total but 1 flavor of each pallet.
Costco would buy 10 pallets in a single flavor.
Not to mention the fact that there's 10x the number of Walmart stores vs Costcos. (Probably even more to be honest) so each store is getting like a case of things whereas a Costco would get a whole pallet.
carmaster wrote: Costco also has negotiating power to get the goods at even cheaper so I don't believe they break even on all items. Maybe a few items, but not 90% of them.
Generally speaking they do break even on selling goods.
The sale price of goods - the cost of goods - operational costs of the warehouses = not quite zero but basically insignificant relative to the cost of the goods.
That said, they sell billions of dollars worth of goods so even a fraction of a percent is millions of dollars.

You know what... this is about a good as time as any. Let's do some math.
Post to follow.
Member
Apr 21, 2019
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See page 20: http://investor.costco.com/static-files ... 456e5a0f7e

It does appear to be true that their net income is slightly below their membership fees. However, this doesn't mean they have the lowest prices.

They have 11% margin on their product, ie. they sell product for 11% higher than what they pay for it.

So when items are cheaper at Superstore, that means Superstore has a lower margin on those items or Superstore pays less for those items to begin with than what Costco pays.

If Costco reduced their operating costs (ie. paid employees less, fired those stupid people checking you at the doors) then perhaps they could lower their margins and be even more competitive.
Deal Expert
Aug 22, 2006
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2018 year ending September 2nd.

$3.142B Membership fees
+$138.434B Sales
=$141.576B Total Revenue

$123.152B Merchandise costs
+$13.944B Operations
=$137.096B Expenses

$141.576B Total Revenue
+$137.096B Expenses
=$4.48B Profit

$3.142B / $4.48B = 70.134% of Profit from Memberships.
That means just under 30% comes from the excess after calculating cost of sales or $1.344B.
$1.344B profit over $138.434B in sales is 0.971%. So if they adjust their pricing system wide down by 1%, they'd make 100% of their money from memberships.
I'd say that's pretty much a rounding error. But rounding errors add up to literally a billion dollars when you're talking about $100B in revenues.
Member
Apr 21, 2019
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death_hawk wrote: 2018 year ending September 2nd.

$3.142B Membership fees
+$138.434B Sales
=$141.576B Total Revenue

$123.152B Merchandise costs
+$13.944B Operations
=$137.096B Expenses

$141.576B Total Revenue
+$137.096B Expenses
=$4.48B Profit

$3.142B / $4.48B = 70.134% of Profit from Memberships.
That means just under 30% comes from the excess after calculating cost of sales or $1.344B.
$1.344B profit over $138.434B in sales is 0.971%. So if they adjust their pricing system wide down by 1%, they'd make 100% of their money from memberships.
I'd say that's pretty much a rounding error. But rounding errors add up to literally a billion dollars when you're talking about $100B in revenues.
Not sure where $13.944B came from?

They report their own net income at $3.134B.
Member
Apr 10, 2019
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Ottawa
monsterdon wrote:
They have ON AVERAGE 11% margin on their product, ie. they sell product for ON AVERAGE 11% higher than what they pay for it.
FTFY

It's not a flat markup across the board. Obviously many items are subject to shrink, breakage, competition, projected rate of return, etc...

I worked there for many years and the example they would use in training and orientation was the pickle jar. The margins on those is very tight in order to be on par with their competitors. If one jar on the skid happens to break the profitability of that entire skid drops to 0. If a 2nd jar breaks they're in the red on that skid. Impulse and seasonal items have up to 30% markup. You walk in to get a cheap pickle jar and walk out with a Christmas tree, 2 pairs of pants and a coffee maker. They always refuse to offer loss leaders, it's strongly against their philosophy but they're willing to work on any margin > 0% to get traffic in the door.
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Aug 22, 2006
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monsterdon wrote: Not sure where $13.944B came from?
That's operations.
They report their own net income at $3.134B.
That's after income tax.
I could use that line since income tax is still an expense.
Let's adjust:

$3.142B / 3.134B = 100.255% of their revenue comes from Memberships.
Deal Addict
Oct 6, 2015
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Costco is very expensive for most things that I buy, compared to, for example, RCSS, or Wal-Mart.

What Costco does have is good availability. If you're trying to serve a set menu, or run a business/restaurant, you actually can find what you need at Costco most of the time and come to rely upon it.

While, for example, if RCSS puts a certain item on sale, its almost guaranteed to be completely depleted. And don't even get me started at how unpredictable the meat supply is at RCSS.

Costco may have a competitive advantage in better quality staff (ie: less shrinkage/internal theft), certainly has a much higher ticket average than Wal-Mart or RCSS, and they may suffer lower losses due to shoplifting due to their "membership"-only entrance policies and large package sizes making shoplifting less attractive. While they're the obvious victims of 'return' fraud (see: various RFD threads), so are outfits like RCSS and Wal-Mart. Costco may even negotiate with its suppliers to offload much of its return fraud risk.
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burnt69 wrote: Costco is very expensive for most things that I buy, compared to, for example, RCSS, or Wal-Mart.

What Costco does have is good availability. If you're trying to serve a set menu, or run a business/restaurant, you actually can find what you need at Costco most of the time and come to rely upon it.

While, for example, if RCSS puts a certain item on sale, its almost guaranteed to be completely depleted. And don't even get me started at how unpredictable the meat supply is at RCSS.

Costco may have a competitive advantage in better quality staff (ie: less shrinkage/internal theft), certainly has a much higher ticket average than Wal-Mart or RCSS, and they may suffer lower losses due to shoplifting due to their "membership"-only entrance policies and large package sizes making shoplifting less attractive. While they're the obvious victims of 'return' fraud (see: various RFD threads), so are outfits like RCSS and Wal-Mart. Costco may even negotiate with its suppliers to offload much of its return fraud risk.
Can you provide some examples where the same item is much cheaper at Walmart or RCSS? That's certainly not my experience.
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"3- NO that doesn’t automatically mean that Costco makes most of their money from Membership Fees"

well, it kinda does

NET INCOME ATTRIBUTABLE TO COSTCO . . . . $ 3,134

and

Membership fees . . . . . . . . . . . . . . . . . . . . . . . 3,142

Granted there are income taxes:

Provision for income taxes . . . . . . . . . . . . . . . . 1,263, reducing their income from 4,480

But a majortiy of their profit comes from membership fee
http://investor.costco.com/static-files ... 456e5a0f7e
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Aug 22, 2006
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burnt69 wrote: Costco is very expensive for most things that I buy, compared to, for example, RCSS, or Wal-Mart.
I mean... I don't know what you buy, but most of what I buy certainly isn't cheaper at Walmart or RCSS.
The only thing that comes to mind in the last 6 months was those $7/lb Bone in Ribeyes that were on sale all summer.
jcon wrote: Can you provide some examples where the same item is much cheaper at Walmart or RCSS? That's certainly not my experience.
I'm also curious.
I've done hard number comparisons for quite a lot of products at Costco generally speaking comes out as a winner.
I like seeing math per unit.

That's not to say that Costco is always cheaper. Meat and produce for example are almost always more expensive but you get far higher quality.
Melons for example are cheaper at RCSS/Walmart quite frequently. But they also weigh 40% less. Even if they were 40% cheaper, you're losing more than that in the "waste" from peeling.
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burnt69 wrote: Costco is very expensive for most things that I buy, compared to, for example, RCSS, or Wal-Mart.

What Costco does have is good availability. If you're trying to serve a set menu, or run a business/restaurant, you actually can find what you need at Costco most of the time and come to rely upon it.

While, for example, if RCSS puts a certain item on sale, its almost guaranteed to be completely depleted. And don't even get me started at how unpredictable the meat supply is at RCSS.

Costco may have a competitive advantage in better quality staff (ie: less shrinkage/internal theft), certainly has a much higher ticket average than Wal-Mart or RCSS, and they may suffer lower losses due to shoplifting due to their "membership"-only entrance policies and large package sizes making shoplifting less attractive. While they're the obvious victims of 'return' fraud (see: various RFD threads), so are outfits like RCSS and Wal-Mart. Costco may even negotiate with its suppliers to offload much of its return fraud risk.
100% Agree

People need to know their prices, and then weigh WHY they choose to shop at Costco

Is it for Different Goods, Bigger Sizes / Bulk Buys, Better Quality (like Meats & Veggies), or Convenience ... as I am here already vs making an extra trip to another retailer

This is on top of Pricing
(Apples to Apples ... not Apples to Oranges ... same items being compared head-to-head)
jcon wrote: Can you provide some examples where the same item is much cheaper at Walmart or RCSS? That's certainly not my experience.

Example, we don’t buy our Paper Products at Costco
TP, PT, Kleenex, Paper Napkins etc

Cuz brand name to brand name their prices are higher... even if they are on sale at Costco
We can still do better with sale pricing somewhere else by watching the flyers

We like brand name goods in this category
So for example:
Bounty SAS PT ... Or Royale TP ... Or Kleenex
Can be other brand names ... but not store brands ... like Kirkland

When compared, Costco isn’t the cheapest by volume
BUT I think a lot of folks just buy it there cuz they assume it is
Or cuz it’s in a larger sizes
Or it’s convenient to add to their cart as they are already there

An easy way to prove this all out is to look at the RFD Threads dedicated to these calculations
TP = http://forums.redflagdeals.com/toilet-p ... 2078163/16
PT = paper-towel-calculation-thread-2176002
Or just track prices & do the math yourself
(The RFD Threads also include a calculator where you can punch in your numbers)
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PointsHubby wrote: 100% Agree

People need to know their prices, and then weigh WHY they choose to shop at Costco

Is it for Different Goods, Bigger Sizes / Bulk Buys, Better Quality (like Meats & Veggies), or Convenience ... as I am here already vs making an extra trip to another retailer

This is on top of Pricing
(Apples to Apples ... not Apples to Oranges ... same items being compared head-to-head)




Example, we don’t buy our Paper Products at Costco
TP, PT, Kleenex, Paper Napkins etc

Cuz brand name to brand name their prices are higher... even if they are on sale at Costco
We can still do better with sale pricing somewhere else by watching the flyers

We like brand name goods in this category
So for example:
Bounty SAS PT ... Or Royale TP ... Or Kleenex
Can be other brand names ... but not store brands ... like Kirkland

When compared, Costco isn’t the cheapest by volume
BUT I think a lot of folks just buy it there cuz they assume it is
Or cuz it’s in a larger sizes
Or it’s convenient to add to their cart as they are already there

An easy way to prove this all out is to look at the RFD Threads dedicated to these calculations
TP = http://forums.redflagdeals.com/toilet-p ... 2078163/16
PT = paper-towel-calculation-thread-2176002
Or just track prices & do the math yourself
(The RFD Threads also include a calculator where you can punch in your numbers)
I don't buy my paper towels from Costco online or when it's not on sale, so this is comparing apples to oranges.

Bounty is cheaper in store and on sale at Costco then at RCSS or Walmart.

Also, Charmin is cheaper at Costco than anywhere else when it's on sale.

I don't assume anything, I can do simple math.
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