I've heard that before, but I can't see how it could be. My back-of-an-envelope calculation: Let's say I spend $1000 per year (I'm estimating low). According to the article, Costco's average markup is 11%. So they make $99.10 profit on my $1000 of spending. Let's assume that the $60 membership is 100% profit. The total profit from me is $159.10. My membership fees would be only 37% profit (60/159.10 = .37). Do vast numbers of people pay for $60 or $120 memberships and spend much less than $1000?
They make $100 of net revenue on your $1000 of spending. Markup isn't profit. They use that money to do things like pay their workers and heat their buildings.
So, if I put membership fees under operating revenue, and then factor out their liquor store as special revenue, I could say they make a huge amount of their profit from liquor sales, and say Costco is just a big liquor store that sells food, merchandise and memberships for fun. That doesn't make much accounting sense.
This is technically true, but sort of misses the mark. Costco does not price goods such that their Cost of Goods Sold + Operating Expenses = their Membership Fees + Non Alcohol Gross Revenue, Alcohol Gross Revenue to be their main source of profit. They do price goods such that their COGS + OPEX = Gross Revenue, leaving their membership fees to be the main source of profit.
In other words, you can say that any given vertical worth $Xbn of their revenue was their profit, if you are convinced that Costco actually models their pricing around that vertical section of their revenue. But in reality, everyone knows that the section they model around is membership fees - everything else is break even and the fees are profit.
No, Costco is accounting for it normally by putting membership fees up there with gross revenue. I'm saying the gee-whiz description of memberships being 75% or more of profit is silly. The firm has gross margins on its sales. It also collects membership fees. Any one of its product lines could be a large portion of revenue that you could single out as being the driver of their profit. I just think it's silly to single it out like that. Gross margin pays for the stores to be open just as much as anything else, and with less margin the stores could be out of business despite collecting all those membership fees.
> According to the article, Costco's average mark up is 11%. So they make $99.10 profit on my $1000 of spending.
No, they are selling to you for $1000 something that they bought for $900. But they still have to pay all their operating costs.
Their revenue in FY 2019 was $149.4bn (+ $3.4bn in membership fees) and the cost of merchandise was $132.bn. Their gross margin is 11% but then you have $15bn in "Selling, General and Administrative" expenses.
I've heard that before, but I can't see how it could be. My back-of-an-envelope calculation: Let's say I spend $1000 per year (I'm estimating low). According to the article, Costco's average markup is 11%. So they make $99.10 profit on my $1000 of spending. Let's assume that the $60 membership is 100% profit. The total profit from me is $159.10. My membership fees would be only 37% profit (60/159.10 = .37). Do vast numbers of people pay for $60 or $120 memberships and spend much less than $1000?