I get accused of being obsessed with Costco, to the point of often telling people that if “If Costco doesn’t sell it, I probably didn’t need it”. I am a bigger fan than average, but its become a running joke now with my friends.
- When I go on vacation, I usually stop by a local Costco and post a picture on Facebook.
- When they were building the local Costco (reducing my distance from 10 miles to 3 miles), I would post pictures updating the construction
- I went to the new Costco on opening day and it was a personal highlight to meet Craig Jelinek, the current CEO of Costco.
- At one point at had a 10%+ concentration in $COST in my portfolio.
Okay, maybe I’m a bit obsessed. But why should you shop at Costco?
Costco’s Gross Profit Margin is 13.3%. This is the reported difference between total revenue and cost of goods sold. This is the total average markup for all items sold in the store. Costco is the #2 retailer in the United States, I’ve compared this below with #1 and #3 (WalMart and Target) plus the largest publicly traded grocery store chain, Kroger.
Wal Mart: 25.1%
This means you will save 8.7% to 16% on average by shopping at Costco, or $8.70 to $16.20 per $100 spent. CNBC recently posted an article on comparing the new Amazon owned Whole Foods to Costco, and found Costco still remains 58% cheaper. Ironically, I’ve seen plenty of Lacroix at my local Costco, so I laughed at the one “negative” they point out.
But Costco has a membership fee!
Costco has a two tiered membership fee, $60 and $120. Lets see how much you actually spend for the first $500 in product cost to the retailer when you include the membership fee:
Costco: You buy $500 in product from Costco and pay a 13.1% gross profit margin on the product. This costs you $565.50 at the register. You also have to pay your membership fee to join, so when you add the $60 fee, you pay $615.50. You got to Kroger to get the same amount of product. You pay a 22.1% gross margin on this product, meaning $500 in product cost to Kroger equates to $610.50 at the register. You win today Kroger!
But wait…that Costco membership fee is annual. Each purchase after the first $615 at Costco will save you over the other retailers.
So how do they do it? Costco is the lowest cost retailer for two reasons:
- Costco’s Membership Fee represents its return to shareholders. Costco’s markup inside the warehouse pays for the people, facilities, and store support center overhead. The membership fee(s) represent the net income for the company that’s returned to shareholders.
- Item Count: Costco carries between 3,800 and 4,300 individual items in a warehouse compare to Walmart at 142,000. This means when Costco purchases a specific item, they will be the largest buyer of that item in the country.
Executive Membership: The executive membership is more of a decision. You get a 2% rebate on everything you buy, but have to invest $120 for the membership. If you spent at least $3,000/year in Costco, the membership breaks even. If you spend $6,000 or more, your membership is essentially paid through your spending.
Credit Cards: The change to Visa has opened up Costco. Members used to complain about the exclusivity with American Express. Costco switched to Visa in 2016 and now accepts any Visa card in addition to cash or a debit card. If you like to churn credit card rewards, this opens up your options since Citi, Chase, and Capital One will all issue you a Visa product. If you don’t deal with rewards, the 1% cash back card from Costco is decent (although I prefer Fidelity’s 2% as the best cash-back Visa product).
Convenience: Costco guarantees you’ll pay 13% above cost. Period. If you want to put in the additional work, you can beat their cost. This can come through carefully shopping the full price stores for their sales or through using lower quality generics through Walmart and Aldi. Costco’s goal is to provide the best value, not the absolute lowest cost.
So are you a Costco member? If not, then ask yourself why.