Costco Wholesale Corp is a big box retailer selling mass quantities of items at Wholesale prices. They are a very consistent company, with constant growth and profitability. They show no major signs of corrupt business practices, and for that reason have been known as one of the best businesses. They currently operate with 174000 employees, which are paid well and have low employee turnover. They do their business in 608 warehouses internationally, and continue to grow. Costco is a highly profitable, well functioning business. Costco only marks up their item’s selling price 15% from original cost, which gives them a low profit margin of 1.7%. With such a low margin, it brings into question how Costco is able to make so much money. There are a variety of ways that Costco makes money: Membership Fees, Rapid Inventory Turnover, Affordability, private label brands, premium products and effective use of square footage.
Membership Fees: In order to shop at Costco, you must be a member paying an annual membership fee. There are 3 different memberships, Executive ($55), Business ($55), and Gold Star ($110). Membership fees account for an average of 3% of total revenues, which make up $2M for 2012 alone. With 67000 total cardholders, Costco makes about $1200 a year per member.
Inventory Turnover: Costco is known for selling items in bulk in order to maintain profitability, but not only do they sell a lot, they sell it fast. Their inventory turnover is at 12.24, the fastest out of all of its competitors. They also have a Cash Conversion Cycle of around 3 days, a record low in industry comparison. This shows that they are getting inventory in and out as quickly as possible, while receiving the payment for such in a timely manner. This has helped them to keep up profitability as they can sell more than competitors and gain more profit.
Affordability: Because Costco only as a 15% markup, their items are cheap. In recent slow economic times, money is