The Costco Business Model: Helping You Save Money, and the Earth

Huge warehouses, dirt cheap prices, bulk purchases and high quality products all have one thing in common: Costco Wholesale.

Basically, the business idea that has molded Costco into the retail giant that it is, is to lower the price per unit and sell you more units. Pretty simple, right? It’s actually a lot more complicated than it appears to be.

Let’s compare Costco to one of the typical large retailers around the country, shall we? If you walk into a normal grocery store, you’ll find well labeled aisles, lots of open self checkout lanes, tons of employees, and everything is very well organized on their shelves, right? That’s pretty much the exact opposite at Costco. When you stroll into a Costco, you won’t have any help to navigate your way through the store (there are no signs, but dairy products are grouped together, as are electronics, etc.), fewer cash registers, all of which are being operated by employees, and their products are kept on pallets. It might as well be an automated warehouse for how efficient it is.

Rather than spend boatloads money on unnecessary things, Costco lowers their prices and sells more than the competition. Since they employ less people than a large retailer, they’re able to pay their employees more and provide better benefits, too. When you check out, you will never hear the question "Paper or plastic?". Costco not only saves you (and themselves) money by not offering bags for your groceries, but they use any boxes that products were shipped in to hold your purchases. This equates to less waste, and no plastic bags going into landfills. Costco has made a huge effort to institute green business practices, aside from selling their signature bulk-sized products, of course. From offering more Eco-friendly products to reducing packaging, they have been a huge advocate for green business, and a great example to other similar companies.

Those are just some of the things that have shaped Costco’s business model. Another huge secret to the super store’s success, is the annual membership fee.

One benefit of shopping at Costco’s competitors (e.g. Wal-Mart, Target), is that it’s free. You’ll need to pay a fee in order to even walk through the door, at Costco. These fees are a large part of how Costco actually makes a profit. Remember that 36 pack of toilet paper that you got from Costco, last week? They probably didn’t even turn a profit from your purchase. Their 15% maximum markup barely covers the cost to keep the warehouses operational.

Since these wholesale warehouses sell most of their products at or near cost, they don’t make much money, if any, on the actual process of selling you these products. Their profits come from their members paying the annual membership fee. It takes a lot of members to turn a profit, though. According to their 2012 annual report, Costco had 26.7 million gold star members and 6.4 million business members. That number has grown each year for the since 2008.

Not only is Costco revolutionizing the way that a retail store should be run, they’re paving the path for how any warehouse should be run. Their revolutionary logistics systems used in the distribution centers ensures that your favorite products rarely go out of stock. They have employees working well past the operating hours, making sure that everything is shipped, stocked and ready for the days business. It certainly appears that Costco is providing us with warehouse solutions that many companies have been looking for.

I’m a fan of Costco. Why shouldn’t I be? They provide their consumers, myself included, with great products, a good experience and unbeatable prices, all without killing the envirionment like many of their fellow corporations. Costco helps it's members be more environmentally responsible in ways tha would otherwise be extremely expensive, or inconvenient. It’s no wonder that their net sales have increased by 10 billion dollars since 2011. Last year, the company generated over three billion dollars in operating cash flow. Since they keep growing, it’s hard to imagine that their prices are going to be beat, anytime soon.