How Costco Makes Money – Investopedia

Costco Wholesale Corp. (COST) is a big-box retailer and a wholesale warehouse club operating roughly 800 locations in North America, Asia, and Europe. It also has a major e-commerce operation. The company’s warehouses offer low prices on a limited selection of both name brand and private label products, typically offered in bulk volumes. Customers purchase memberships to access the warehouses and make purchases. Costco aims to offer lower prices than competitors by purchasing merchandise directly from manufactures, limiting store hours of operation, and minimizing labor by storing merchandise on large racks above a vast, self-service warehouse sales floor.

Costco offers merchandise in categories including: Food and Sundries; Hardlines such as major appliances, electronics, and hardware; Fresh Foods; Softlines such as apparel and small appliances; and Ancillary, which includes gasoline and pharmacy products. The company also generates a small percentage of revenue through membership fees. Costco’s main competitors include discount stores such as Target Corp. (TGT) and Walmart Inc. (WMT), as well as big-box rivals like BJ’s Wholesale Club Holdings Inc. (BJ).

Key Takeaways

• Costco is a wholesale retailer selling discounted goods through membership warehouses and online.
• The 2 fastest-growing areas are fresh foods and hardlines products such as hardware and large appliances.
• The fastest-growing segment is International Operations.
• The e-commerce business reported a 50% increase in sales in 2020, spurred by the COVID-19 pandemic.

Costco’s Financials

In FY 2020, ended August 30, 2020, Costco posted year-over-year (YOY) gains in revenue, net income, and other metrics. Total revenue increased by 9.2% YOY while net income attributable to Costco climbed by 9.4% YOY. The company said that its e-commerce business saw a 50% YOY increase in sales for FY 2020 as a result of gains in grocery deliveries, prescription medications, electronics, and office supplies as a result of the COVID-19 pandemic.

Costco posted revenue of $43.2 billion and net income attributable to Costco of $1.2 billion in its Q1 FY 2021, ended November 22, 2020. Revenue rose 16.7% while net income attributable to Costco grew 38.2% compared to Q1 FY 2020.

Costco’s Business Segments

Costco divides its business into three reportable segments, breaking out results geographically and by both revenue and operating income: United States Operations, Canadian Operations, and Other International Operations. Although not official reportable segments, the company also provides summaries of net sales by merchandise category. These categories, cited above, include both warehouse and e-commerce sales. Food and Sundries, for example, comprised 42.6% of net sales in Q1 FY 2021, and was by far the biggest category by this measure. But Fresh Foods and Hardlines were the fastest-growing categories, with YOY increases in net sales of 28.1% and 25.4%, respectively. Fresh Food accounted for 13.8% of sales and Hardlines for 17.3% during the period.

Costco also provides information about revenue generated through membership fees as well. Membership fees typically make up a much smaller portion of total revenue. For FY 2020, for example, the company reported $163.2 billion in net sales and $3.5 billion in membership fees.

United States Operations

The bulk of Costco’s business comes from its operations in the United States, making this the largest of the company’s three reportable segments. For Q1 FY 2021, United States Operations reported roughly $31.3 billion in total revenue, a 15.6% YOY increase. In the same time period, the segment reported $848 million in operating income, a 33.5% YOY increase. For Q1 FY 2021, United States Operations represented 72.4% of Costco’s total revenue and 59.3% of operating income, company-wide.

Canadian Operations

Though significantly smaller than its U.S. operations, Costco still does considerable business through its Canadian Operations segment. This segment reported about $6.0 billion in total revenue for Q1 FY 2021, representing a 17.2% YOY increase. Canadian Operations also posted operating income for the quarter of $293 million, a 28.5% YOY increase. For this quarter, Canadian Operations represented 13.9% of Costco’s total revenue and 20.5% of the company’s operating income.

Other International Operations

Besides the U.S. and Canada, Costco operates membership warehouses in Mexico, the U.K., Japan, Korea, Spain, Australia, France, China, and Iceland, and these latter countries are represented in the Other International Operations segment. Together, the non-U.S. and non-Canadian countries represent roughly the same amount of revenue and operating income as the company’s Canadian business. For Q1 FY 2021, Other International Operations generated total revenue of about $5.9 billion, a 21.8% YOY increase. Other International Operations also posted Q1 FY 2021 operating income of $289 million, a 46.0% YOY increase. This makes this segment the fastest-growing in terms of both total revenue and operating income. It comprises 13.7% of revenue and 20.2% of operating income.

Costco’s Recent Developments

Continuing its sales strength during the COVID-19 pandemic, the company reported net sales across all segments of $19.1 billion for the five-week period ending January 3, 2021, a 12.3% YOY improvement overall as e-commerce sales jumped 62.5%. At the same time, the company’s retail operations recently experienced multiple COVID-19 outbreaks at locations in Washington and California, a pandemic hot spot, with nearly 450 employees testing positive as of January 8, 2021.

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