How Costco makes billions by charging people to shop there

Costco became a massive global retailer by doing something many people might have once thought crazy: charging people a fee just to shop in its stores. 

However, it has worked beautifully for the company.

Today’s Costco was born out of a merger of two stores with similar models — Price Club, founded in 1976, and Costco, founded in 1983. The idea of charging memberships came from Price Club founder Sol Price, who got the idea from a company called FedCo, a single warehouse store that sold products mostly to U.S. Postal Service workers. 

Though memberships cost a minimum of $60 a year, renewal rates are high — around 90% in 2019. In an era where shopping is increasingly moving online, Costco draws shoppers to its warehouses by offering low prices, an array of services such as credit cards and travel booking, and an inventory that combines reliably available staples with a rotating selection of other goods that turn visits into treasure hunts. 

Investors do have some concerns. The company has been slower to move online that retail overall — overall online penetration for retail was above 20% in the second quarter of 2020, whereas Costco’s was only about 7%. But the company is trying to beef up its online business, even if it is doing so slowly. 

Investors are also watching the store’s ability to attract younger buyers. Evercore ISI estimated that Costco’s average customer age is around 50, and the firm thinks lowering that to 40 or 45 would be better. Costco has been introducing product types popular among younger shoppers such as organic produce and items that are sustainably made. 

The company is also expanding internationally, though some think not fast enough. China is one market where Costco has room to grow. When it opened a store in Shanghai, it attracted mobs of customers. 

Finally, the store has to keep members loyal. Membership fees make up most of Costco’s income. Some analysts worry that if consumers were to cancel subscriptions and memberships, either due to “subscription fatigue” or tightening household budgets, Costco would have problems. But because Costco sells so many essentials, such as toilet paper and produce, and its private label Kirkland Signature brand is so admired — not to mention its customers, who are loyal to the point of near-fanaticism — investors do not anticipate waves of cancellations in its future. 

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