Costco: the warehouse retailer whose customers pay annually for the privilege of shopping
Jim Sinegal and Jeffrey Brotman founded Costco in 1983 in Seattle. The model was unusual then and remains unusual now: customers pay an annual membership fee to access the warehouse, where Costco sells a limited selection of products at the lowest possible margins (target gross margins around 10-12% versus 25-35% at conventional supermarkets). By 2026, Costco has approximately 130 million members globally, $240 billion+ in annual revenue, and a stock that has compounded for decades. The membership-fee profit model is the structural innovation that makes the entire business work.
- Story: Jim Sinegal and Jeffrey Brotman founded Costco in 1983. Customers pay an annual membership fee to access the warehouse, where Costco sells a limited selection of products at the lowest possible margins (target ~10-12% gross margins vs 25-35% at supermarkets). By 2026, Costco has ~130M paid memberships globally, $240B+ in annual revenue, and a stock that has compounded for decades.
- Why it matters: Costco is the defining membership-retail model. Membership fees fund operating profit; product margins are kept thin so prices stay low; member-loyalty (~90% renewal) is the structural moat.
- Takeaway: Membership fees fund operating profit; product margins stay thin to keep prices low.
- Takeaway: Limited SKU count makes curation the value proposition.
- Takeaway: Multi-decade operational discipline produces compound brand equity.
Costco — the four-step story
Costco at a glance
Quick facts
Where retail was in 1983
In 1983, US retail was Sears, Kmart, regional supermarkets, and the early days of category-killers (Toys R Us, Home Depot). Margins were 25-35% at supermarkets, 30-40% at general retail. The economic model assumed that consumers paid retail prices that funded distribution, marketing, real estate, and corporate operations.
Jim Sinegal and Jeffrey Brotman had been working with Sol Price, who'd founded Price Club (the first US warehouse-club retailer) in 1976. The thesis behind Costco was an evolution of the Price Club model: limit SKU count to ~4,000 (vs 30,000+ at supermarkets), buy in bulk, sell at near-cost margins, and charge customers an annual fee for access. The membership fee, not product margin, would be the primary profit source.
Costco's structural choices
Costco's strategy has remained consistent over four decades:
- Annual membership fee. Basic membership at $65/year (raised periodically over decades), Executive at $130/year. Members get warehouse access; non-members can't shop.
- Limited SKU count. ~4,000 SKUs (vs 30,000+ at conventional supermarkets). The curation is part of the value proposition.
- Bulk pricing. Products sold in large pack sizes (cases of paper towels, 5-pound jars of mayo) at per-unit prices significantly below conventional retail.
- Thin gross margins. Target ~10-12% gross margin on most products. The thin margins keep prices low and depend on membership fees to fund operating profit.
- Kirkland Signature private label. Costco's house brand introduced 1995. Now accounts for roughly a third of Costco sales. Maintains the high-quality-at-low-price brand position.
- Employee treatment. Costco pays employees significantly above industry average and has historically had low turnover. The labor cost structure is higher than competitors; the retention and productivity benefits offset.
What grew
Costco scaled steadily through the 1990s, 2000s, 2010s, and into the 2020s. The company merged with Price Club in 1993, becoming the dominant US warehouse-club retailer. By 2026, Costco has approximately 130 million paid memberships globally with annual revenue exceeding $240 billion. Membership renewal rates are around 90% globally (and 93% in the US and Canada). The stock has been one of the best-performing US retailers over multiple decades.
The strategy has weathered Amazon, big-box retail consolidation, the rise of e-commerce, and broader retail industry pressure. Costco's combination of low prices, employee retention, and member-loyalty has produced a structural moat that's been hard for competitors to match.
How RGM thinks about membership retail
When clients ask about membership-based retail or subscription-based models, the Costco case is the defining example. The conditions: the underlying products have to be genuinely cheaper than alternatives (so the membership fee is justified), the curation has to be valuable enough to justify the limited assortment, and the operational discipline has to be sustained for decades (not quarters).
The harder lesson is that membership retail requires multi-decade brand discipline. Costco hasn't significantly broadened the assortment, hasn't significantly raised gross margins, and hasn't significantly increased member fees beyond inflation in real terms. The discipline is the strategy. Brands that try to copy the membership model usually broaden the assortment or raise margins faster than Costco has, which erodes the trust that makes the model work. We tell clients that membership retail is a multi-decade discipline, not a tactical positioning.
Frequently asked questions
How much profit comes from membership fees?
A significant share of operating profit — often quoted at 60-70%+ in trade press, though the exact figure varies year-to-year and depends on accounting categorization. The underlying point is that product margins are thin (~10-12%) so membership fees fund most operating profit. SEC filings break out membership-fee revenue from product revenue.
What is Kirkland Signature?
Costco's private-label brand, launched 1995. Kirkland Signature products span virtually every category Costco sells (groceries, household goods, apparel, vitamins, batteries, etc.). The brand emphasizes high-quality-at-low-price positioning and accounts for roughly a third of Costco sales. Many Kirkland Signature products are produced by major national brands under contract.
Why has Costco been so resistant to Amazon?
Several reasons. Costco's warehouse-shopping experience is part of the brand value (the “treasure hunt” of seeing what's new, the sampling, the food court) that Amazon can't replicate online. The membership-fee model creates lock-in that Amazon's transactional model doesn't have. And Costco's prices on many products are genuinely lower than Amazon's, even after Amazon Prime shipping. The combination makes Costco less Amazon-vulnerable than most retailers.
Sources & references
- Costco investor relations (COST) — SEC filings and quarterly reports.
- Costco (company site) — Product and membership reference.
- Jim Sinegal interviews and writings — CNBC and other coverage of founder Jim Sinegal.