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Costco: A Retail Evergreen That Generates All Profits from Membership Fees

Founded: James Sinegal, Jeffrey Brotman · Costco Wholesale Corporation

JOURNEY

Key Fields

FIELD STAMPS
IndustryE-commerce / Retail
RegionUS
ScaleGiant
ChannelOther

Origin

In 1983, retail veteran James Sinegal and lawyer-turned-entrepreneur Jeffrey Brotman founded Costco in Seattle, Washington. Having participated in the early operations of the warehouse club Price Club, they realized that the traditional retail model of relying on product markups was unsustainable in the face of the discount wave. Sinegal saw that a wholesale membership system could attract stable foot traffic through extremely low margins and then lock in long-term consumption via membership fees, so he decided to strengthen this model. From the beginning, Costco was clear: products are tools for driving traffic, while membership fees are the real business.

Milestones

1983
Inception Turning Point
In 1983, James Sinegal and Jeffrey Brotman opened the first Costco warehouse store in Seattle. Sinegal had worked for years at Sol Price's Price Club, accumulating experience in warehouse club operations. The initial store was approximately 13,000 square feet with SKUs limited to under 4,000, using bulk purchasing to drive down costs and keeping product gross margins far below those of traditional supermarkets. This structure, where products are essentially non-profit and costs are covered by membership fees, was extremely radical for the retail industry at the time.
1990
Model Solidification PMF
Costco expanded its private label, Kirkland Signature, from niche categories to core areas like food, daily necessities, and apparel. Kirkland Signature was priced 20% to 30% lower than comparable branded goods but matched the quality of top-tier brands, becoming a key reason for membership renewals. Meanwhile, Costco insisted on keeping product gross margins below 14% to 15%, refusing to raise prices easily even during years of high inflationary pressure. Membership renewal rates stabilized above 85%, and annual sales in the U.S. market exceeded $30 billion.
1993
Merger and Integration Turning Point
In 1993, Costco merged with Price Club to form PriceCostco, later officially renaming to Costco Companies in 1997. Both companies had been expanding independently in the warehouse club sector before the merger; post-merger, the store count approached 200, with a membership base exceeding 1 million. This integration gave Costco a store network in California and the Southwest, but also brought management culture clashes, leading some former Price Club executives to leave. Sinegal continued to lead the overall operational direction.
2000
Global Expansion Growth
Costco entered markets including Canada, Mexico, the UK, Japan, South Korea, and Taiwan. Overseas stores generally faced challenges in local supply chain reconstruction and differences in consumption habits. Stores in Japan and South Korea took years of cultivation to achieve a slow climb to profitability. By the end of the 2000s, there were nearly 600 stores globally with over 50 million members. Gross margins remained in the 12% to 14% range, and net margins were consistently around 2%, but membership fee revenue grew steadily, validating that the model of making money through fees was globally replicable.
2013
E-commerce Experiment Failure
In 2013, Costco launched an online store and delivery service in the U.S., but for a long time, e-commerce penetration remained below 5%. The 2017 acquisition of logistics company Innovel Solutions was an attempt to improve large-item delivery capabilities, but fulfillment costs remained high. Management publicly admitted that the e-commerce business dragged down overall profit margins, and in fiscal year 2019, online sales growth consistently lagged behind Sam's Club and Amazon. This attempt revealed that the Costco model is extremely dependent on offline store visits and impulse buying, naturally limiting online conversion efficiency.
2019
Entering China Growth
Costco opened its first mainland China store in Minhang, Shanghai. On the opening day, traffic was so heavy that surrounding traffic was paralyzed, forcing the store to limit entry that afternoon. Over 160,000 membership cards were issued, setting a global record for a single store's opening day. Scarce goods like Moutai and Hermès attracted many resellers and queue-standers, though retail experts noted that this opening effect would be difficult to sustain long-term. Before the Shanghai store opened, Costco had already accumulated significant attention through online teasers and media hype.
2026
Omnichannel Catch-up Turning Point
Costco officially launched an official flagship store on JD.com, attempting to fill the gap in its online channels in China. Previously, Costco only had offline stores and its own App in China, with online penetration far lower than Sam's Club. Sam's Club had already gained a first-mover advantage in the Chinese membership store market, relying on over 500 front-end warehouses and a mature instant delivery network. Costco's entry into JD.com is interpreted as a defensive move that had to be made in 2026, but whether the partnership with JD can effectively translate into membership renewals remains to be seen.

Turning Points

  • The merger with Price Club allowed Costco to quickly gain a store network in California and the Southwest, but also brought integration pains.
  • The maturity of the Kirkland Signature private label became a core driver for membership renewals, allowing product gross margins to be pushed even lower.
  • The explosive opening of the first Shanghai store proved that Chinese consumers have a strong demand for membership-based warehouse stores, but the test of long-term repurchases has only just begun.
  • The 2026 entry into JD.com is a key node for Costco to catch up in Chinese e-commerce; whether it can establish an online membership cycle remains to be seen.

Failures & Pitfalls

  • U.S. e-commerce penetration remained below 5% for years, significantly lagging behind Sam's Club and Amazon around 2019.
  • After acquiring logistics company Innovel Solutions, large-item delivery costs remained high, failing to reverse e-commerce losses.
  • The pace of expansion in China is far slower than Sam's Club; by 2026, both the number of stores and the front-end warehouse network are at a distinct disadvantage.
  • The heat of the Shanghai store's opening effect could not be quickly replicated in other cities, with some new stores seeing a clear decline in popularity after opening.

关键成功要素

  • Product gross margins are locked below 14% long-term, with some categories approaching zero margin; selling goods is a means, not an end.
  • Membership fee revenue covers almost all net profit, with renewal rates stable between 85% and 90%; renewals are far more important than acquiring new members.
  • SKUs are streamlined to about 4,000, with massive single-item procurement volumes, providing extremely strong bargaining power over suppliers.
  • The Kirkland Signature private label allows Costco to retain high-value members even within a low-margin framework.

Lessons

  • Pushing profit margins to a level where competitors dare not follow can build the widest moat.
  • The core metric for membership retail is not transaction volume but renewal rate; all actions must serve the purpose of renewal.
  • There is a structural conflict between e-commerce and the warehouse store model; blindly chasing online growth will erode overall profits.
  • In overseas expansion, an explosive opening does not equal long-term success; supply chains and repurchases are the deciding factors in the tug-of-war.

Core Data

  • Global Store Count：Over 890 (based on public data, independent verification not performed)
  • Global Paid Members：Approximately 130 million cardholders (including supplementary cards) (based on public data, independent verification not performed)
  • Membership Fee Revenue：Approximately $4.8 billion in fiscal year 2024 (based on public data, independent verification not performed)
  • Membership Renewal Rate：Approximately 92% in the U.S. and Canada, approximately 90% globally (based on public data, independent verification not performed)
  • Product Gross Margin：Consistently maintained in the 11% to 14% range (based on public data, independent verification not performed)
  • Shanghai First Store Opening Day Registrations：Over 160,000 (based on public data, independent verification not performed)
  • Annual Revenue：Approximately $254.4 billion in fiscal year 2024 (based on public data, independent verification not performed)
  • Net Margin：Consistently around 2% (based on public data, independent verification not performed)

Competitors / Peers

Globally, Costco primarily benchmarks against Sam's Club and Amazon. Under the Walmart system, Sam's Club possesses a stronger instant delivery network, with over 500 front-end warehouses in China, and its online sales proportion far exceeds Costco's. Amazon exerts indirect substitution pressure on Costco through its Prime membership and full-category e-commerce ecosystem. In the Chinese market, local retailers like Hema and Yonghui are also experimenting with warehouse membership formats, with Hema X Membership Store once directly benchmarking against Costco. The key difference between Costco and Sam's Club lies in Costco's ability to push product gross margins lower while relying on higher renewal rates to maintain profits, though this has also led to relatively restrained investment in e-commerce, making it easier to lose young consumers in markets with insufficient offline density.

Sources

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⚠️ This entry draws on self-reported accounts and public reporting, not independently verified, and is not investment, startup, or legal advice; revenue figures are case-specific and not representative of typical results.