As a savvy shopper and student of the retail industry, I‘ve long been fascinated by Costco‘s ability to consistently offer the lowest prices on a wide range of products. While most retailers rely on markups of 25-50% or more to turn a profit, Costco takes a radically different approach. Through a combination of membership fees, high sales volumes, a limited product assortment, and a relentless focus on efficiency, Costco is able to profitably sell products at astonishingly low prices.
But just how cheap is Costco compared to other retailers? Let‘s take a closer look at the data. According to research by investment firm Sanford Bernstein, Costco‘s average markup on products is just 11%, far lower than the retail average of 25-50%. This means that a product that costs Costco $10 to buy from the manufacturer would be sold for around $11.10 in its warehouses. At a typical supermarket or big box store, that same item might sell for $12.50-$15.00 or more.
Buying Power and Bare Bones Efficiency
The foundation of Costco‘s low-cost model is its membership program. By charging an annual fee of $60 for a Gold Star membership or $120 for an Executive membership, Costco is able to offset its razor-thin product markups. In 2021, Costco collected over $3.9 billion in membership fees from its 114.8 million cardholders worldwide. These fees accounted for a whopping 64% of Costco‘s total operating profit. Costco‘s renewal rate is also industry-leading at over 90% in North America, a testament to the incredible value shoppers get from their memberships.
With membership fees subsidizing product margins, Costco is able to focus relentlessly on lowering costs and prices. One key way Costco does this is by heavily curating its product selection. A typical Costco warehouse stocks only about 4,000 unique products or SKUs at a given time. In contrast, the average supermarket carries around 30,000 SKUs and a Walmart supercenter sells over 100,000 different items.
By narrowing down to only the most popular products in each category, Costco is able to drive massive sales volumes per SKU. This gives Costco tremendous leverage to negotiate the lowest possible wholesale prices from suppliers. When you‘re buying truckloads of a single product, you can demand substantial discounts. Costco also saves on inventory costs by carrying fewer slow-moving items.
Costco further reduces operating costs with its no-frills warehouse environment. Its cavernous stores dispense with all the fancy fixtures, signage, and decor of traditional retailers. Merchandise is often simply sold directly off shipping pallets and shelves are stacked high to the ceiling. Even the lighting largely relies on skylights to save on energy bills. All of these carefully considered efficiencies allow Costco to profitably sell goods at large discounts.
Kirkland Signature‘s Rise to Dominance
In addition to securing great deals from outside brands, Costco has another secret weapon for undercutting competitors: its Kirkland Signature private label. First launched in 1995, Kirkland has grown to encompass over 350 different products from diapers to golf balls to vodka. By sourcing goods directly from manufacturers, Kirkland is able to eliminate intermediate costs and offer quality products for 20% less than comparable brands.
To accomplish this, Costco works directly with many of the same factories and suppliers that produce premium branded goods. In fact, several high-end brands actually manufacture Kirkland products. For example, Costco‘s Kirkland Signature batteries are made by Duracell and its diapers are produced by Kimberly-Clark, the maker of Huggies. Grey Goose is even rumored to produce Kirkland vodka at its France distilleries. Without the brand name markup, Kirkland versions sell for much less.
Kirkland‘s rise has been stunning, with the brand now accounting for over 30% of Costco‘s total sales. This ranks Kirkland as one of the top private label brands in the world, ahead of Kroger, Walgreens, and even Walmart‘s Great Value label. Kirkland now does over $50 billion in sales annually, more than the entirety of Coca-Cola or Kraft-Heinz.
Costco‘s Hyper-Productive Workforce
Another key driver of Costco‘s industry-leading cost structure is its ultra-lean labor model. While Costco pays higher wages than most retailers, it squeezes far more productivity out of each employee. The typical Costco location employs about 50% fewer workers than comparably-sized retailers.
How is Costco able to operate with such a small staff? A big reason is that Costco invests heavily in state-of-the-art logistics technology to minimize product handling. Goods can go straight from delivery trucks to the sales floor, bypassing the need for separate storage and stocking. Costco also cross-trains employees to perform multiple roles and incentivizes them with opportunities for advancement. The higher pay leads to extremely low turnover, reducing training and hiring costs.
The end result is labor efficiency that puts other retailers to shame. Costco generates a staggering $600,000+ in sales per employee, about 3x more than competitors like Walmart and Target. An analysis by Jeffries Group found that Costco‘s labor costs average just 3% of revenue compared to 5-6% at other major chains. With over 180,000 employees worldwide, this lean staffing allows Costco to save billions on overhead.
Scaling Up the Savings
As Costco has expanded over the years, it has gained ever more purchasing power to drive down costs. With over $150 billion in global sales across over 800 warehouses, Costco now ranks as the world‘s 2nd largest retailer behind only Walmart. This immense scale gives Costco a seat at the table with the biggest brands and manufacturers.
Jim Sinegal, Costco‘s co-founder and former CEO, was famous for personally meeting with suppliers to hammer out the lowest possible prices. He was known for walking away from any deal where he thought Costco wasn‘t getting the best value for members. This hardball approach to negotiations has become a key part of Costco‘s DNA.
As Costco has added more warehouses and members, it has been able to secure even better deals from suppliers. For example, when Costco was dissatisfied with the prices Coca-Cola was offering in 2009, it simply stopped carrying Coke products in its stores for a period of time. Coke quickly caved and agreed to lower prices to get its products back on Costco shelves. Costco has used similar tactics with brands like Kraft, Kimberly-Clark, and General Mills to extract cheaper wholesale prices.
Saving Members Money Every Day
To see how Costco‘s prices stack up to competitors, let‘s compare the unit prices on some everyday staples. Here‘s how much these popular items cost at Costco vs. other major retailers:
| Item | Costco | Kroger | Walmart | Target | Amazon |
|---|---|---|---|---|---|
| Eggs (60 ct) | $6.99 | $10.99 | $8.43 | $11.49 | $16.99 |
| Milk (1 gal) | $2.99 | $3.29 | $3.18 | $3.59 | $3.49 |
| Bananas (per lb) | $0.59 | $0.69 | $0.59 | $0.69 | $0.69 |
| Tide Detergent (146 oz) | $19.99 | $27.99 | $23.94 | $27.89 | $28.99 |
| Bounty Paper Towels (12 ct) | $23.99 | $26.99 | $31.44 | $27.49 | $31.49 |
| Cheerios Cereal (55 oz) | $6.99 | $7.99 | $7.28 | $7.59 | $6.98 |
As you can see, Costco beats out rivals on price for most common goods, often by a wide margin. Buying in bulk sizes provides even more savings. While not every single item is cheaper at Costco, the store‘s base prices are usually the lowest around.
"Costco has established itself as the clear price leader in wholesale clubs," says Chuck Cerankosky, an analyst with Northcoast Research. "By capping its margins at around 11% and operating with such low overheads, Costco can sustainably undercut other retailers. It‘s a volume game."
A Winning Formula for the Future
With a proven model for delivering unbeatable value, Costco has plenty of room for growth ahead. The company opened 20 new warehouses in 2021 and plans to open around 25 more locations annually in coming years. Even with over 800 total warehouses, Costco still has a much smaller footprint than competitors like Walmart and Kroger. Industry analysts estimate Costco could easily expand to over 2,000 locations worldwide in the next decade.
Costco is also ramping up its e-commerce business to meet growing demand for online shopping and delivery. While only around 7% of Costco‘s total sales came from e-commerce in 2021, the company is quickly building out its digital capabilities. Online sales jumped 50% in 2020 alone as Costco expanded same-day delivery options. CFO Richard Galanti noted that "some of the highest sales increases have been in areas like grocery and sundries that were not traditional online sellers."
As Costco continues to extend its lead as the low-price champion and adapt to stay relevant, all signs point to a bright future ahead. With renewal rates remaining strong even in the face of a pandemic and economic upheaval, it‘s clear that members are sticking with Costco for the long haul. As long as Costco keeps delighting deal seekers with unbeatable savings, expect those check-out lines to keep growing.
Next time you marvel at Costco‘s rock-bottom prices, look beyond the concrete and pallets to appreciate the complex economic machinery whirring away behind the scenes. From its membership model to its streamlined selection to its buying clout to its Kirkland brand, it all works in concert to shave off every cent of excess cost. The end result is a price tag that seems almost too good to be true. But for over 100 million Costco members worldwide, those unbelievable deals are very much a reality.
