Costco’s Secret Profit Engine

Beneath the surface, Costco isn’t just about cheap gas, hot dogs, and fancy electronics, but the financial engine is far less obvious, and far more powerful than most casual shoppers realize.

If you’re thinking about buying Costco stock, understanding these three fundamentals could change how you see the company’s long-term investment case.

Key Points

• Annual fees generate the majority of net income, making Costco operate more like a subscription business than a traditional retailer.

• With $75 billion in sales, Kirkland is larger than many Fortune 500 companies and delivers higher margins while reinforcing customer loyalty.

• A self-reinforcing cycle of lower prices, stronger buying power, and high renewal rates makes Costco’s customer base incredibly sticky.

Membership Fees Are the True Profit Center

Costco’s entire business model is engineered around its membership program. The annual fee, currently $65 for basic and $130 for executive, generates the majority of Costco’s net income.

In Q3, Costco collected $1.24 billion in membership fees. Net income that quarter? $1.90 billion. That means more than 65% of profits came from fees alone. And unlike traditional retail margins, which get squeezed by labor, logistics, and price wars, membership revenue flows through with minimal costs. It’s essentially pure profit.

To put Costco’s scale in perspective, the company has around 137 million paying members, a number on par with Disney+ and T-Mobile’s U.S. customer base. That’s also nearly double the size of Sam’s Club, Walmart’s competing warehouse chain.

This is the foundation of Costco’s moat. Because fees are recurring, predictable, and largely insulated from economic swings, Costco behaves more like a subscription business than a traditional retailer. Investors often overlook that Costco’s model has more in common with Netflix than it does with Walmart.

Kirkland Signature Is a Fortune 500 Business in Disguise

Costco’s private label, Kirkland Signature, doesn’t just offer bargain alternatives, it’s a retail juggernaut in its own right. Kirkland products generate around $75 billion in annual sales, roughly 25% of Costco’s total revenue. To put that in perspective, Kirkland alone is bigger than companies like Target, Nike, or Coca-Cola.

The strategy works because Kirkland doesn’t cut corners. The brand often partners with major manufacturers, its vodka famously comes from the same distillery that produces Grey Goose, and its batteries are made by Duracell. Shoppers aren’t just paying less, they’re often getting identical or better quality than the name brand.

Interestingly, Costco has shown restraint in expanding Kirkland into categories where it can’t deliver best-in-class quality. It pulled Kirkland razors off shelves after underwhelming results and has resisted slapping the brand on certain categories, even though it could boost sales. That discipline keeps customer trust intact.

For investors, Kirkland’s success means Costco enjoys higher margins on private label sales than it would from selling third-party brands. The result? A stickier customer base and another reliable profit stream that quietly powers the business.

The Bulk Model Builds a Virtuous Cycle

At first glance, Costco’s no-frills warehouses and limited product assortment (around 4,000 SKUs versus 30,000+ at a traditional big-box store) look like constraints. But this lean model creates a flywheel effect that’s hard to replicate.

Here’s how it works, more members give Costco greater buying power and greater buying power means lower prices. Plus, lower prices attract more members.

It’s a self-reinforcing cycle, and the numbers prove it. Costco’s renewal rates hover around 93% in the U.S. and Canada, an almost unheard-of figure in retail. Once shoppers join, they rarely leave.

Even in recessions, Costco’s model shines. Consumers trading down from higher-priced retailers often find Costco’s bulk value irresistible, which strengthens the company’s ability to weather downturns. That resilience helps explain why Costco stock has historically outperformed the S&P 500 by a wide margin over decades.

So, Now What?

Costco’s success isn’t about cheap groceries or bargain gas. It’s about the subscription-like membership model, the hidden profit engine of Kirkland Signature, and the bulk flywheel that strengthens with every renewal.

For investors, that combination creates a rare retail business with predictable recurring revenue, high customer loyalty, and a built-in moat that rivals can’t easily match.

So next time you’re standing in the checkout line behind someone with two shopping carts full of Kirkland goods, remember this: Costco’s real treasure isn’t just in the cart, it’s in the business model.