Ask anyone who shops at Costco (COST) what they think of it and you'll probably hear exuberant praise, along with a list of the great deals they scored on their last visit. More than 111 million people pay an annual membership fee just to get in the door, with fewer than 10% each year who decide the experience isn’t worth the price of renewing.
To some, shopping at Costco is close to a religious experience, which might explain why Sunday is its busiest day. For others, going to the warehouse is like going on a treasure hunt. They may be going to get cereal or pet food, but to get there they need to walk past aisles packed floor to ceiling with new inventories of cool stuff. But just who is the average Costco shopper? Keep reading to learn more.
- Costco began operations in 1983 in Seattle.
- Customers spend an average of $230 per month at the warehouse.
- The average U.S. shopper is a 39-year-old college-educated Asian-American woman who earns more than $125,000 per year.
- The average retail markup at Costco is around 11%.
- Membership fees are key to Costco's financial success.
Tires, Pianos, and Cookies
When you walk into a Costco, you never know what you are going to find. True, it's mostly grocery items, and the sheer number of items stocked is a fraction of what's on sale at Walmart. But if Costco can get a good deal on tires or pianos, you'll find them there as well.
That sheer serendipity is one of the reasons why Costco is popular with its member shoppers. They spend as much as $230 per month or more than $2,700 annually at the warehouse. Another reason is that the average retail markup at Costco is around 11%, so shoppers know they are getting a good deal.
Costco’s Customer Profile
Costco got its start in 1983 in Seattle, although the discount warehouse model was invented a few years earlier in San Diego as Price Club. The two companies merged in 1993. Since then, the company targeted relatively affluent and college-educated customers.
When it opened its membership to the wider public, Costco knew it would attract a certain type of shopper who understood the value of membership. To this day the company doesn’t try to chase customers who aren’t a good fit. It doesn't advertise. Instead, it chooses to cater to the needs and preferences of those ideal members.
The cost of shampoo at Costco is the lowest around, but shoppers typically have to buy a three-pack. Multiply that by any number of products that shoppers add to their carts, and you can see why the average transaction total is so high.
This also explains why the vast majority of the 815 Costco stores are located in affluent suburban areas both in the U.S. and around the world. Most Costco shoppers are suburban homeowners. It takes a lot of space to store bulk purchases.
So who is the typical shopper? The average shopper in the United States is an Asian-American woman. College educated and 39 years old, this individual earns more than $125,000 per year.
Costco was initially marketed to business owners, licensed professionals, and people employed by governments, utilities, hospitals, and banks. These were a stable source of sales revenue.
Big Spenders Drive Revenues
The membership component is a critical part of the Costco experience. It's also intrinsic to the company’s business model and its growth strategy.
For starters, membership fees generated $3.9 billion in pure revenue in 2021, which was an increase of 9%. But the membership fee is also a reason why members keep coming back.
About 45% of Costco shoppers paid $60 for a Gold Star membership in 2021. That gives them access to Costco bargains for a year. The company noted that 55% of members in the U.S. and Canada pay $120 for the Gold Star Executive membership, which gets them 2% cash back on their purchases. These members spend more and shop more frequently than any others at the warehouse. Keep in mind that there are business versions of both memberships for the same prices.
To cover the cost of the extra $55, executive members have to spend a minimum of $230 per month, or $2,750 a year. Executive members who spend twice that earn enough to cover the full cost of membership. To reap the full benefit of up to $750 cash back, they have to spend $37,500 per year.
When Did Costco First Open?
The first Costco opened in Seattle in 1983. It was co-founded by Jim Sinegal and Jeff Brotman. Sinegal was an executive at Price Club, a wholesale warehouse store that targeted businesses. The two retailers merged in 1993.
Is Costco a Good Stock to Own?
That depends on you, your risk tolerance, and, of course, the economy. But there are several factors to consider when it comes to investing in this stock. Costco has a unique business model that stands out from other retailers. Costco doesn't just compete on margins, it makes money by selling memberships. Costco does perform well during economic slowdowns. In fact, the company reported an 18% increase in net sales in 2021 from 2020 despite challenges from the COVID-19 pandemic. Some of the drawbacks of investing in the company include a high price-to-earnings ratio and how slowly it is moving into the online marketplace.
How Does Costco Make Money?
Costco is a multinational corporation. It operates retail locations that are membership-only, which means shoppers must purchase annual memberships in order to shop at its locations. The company makes money by selling high volumes of products at low margins. Another way it makes money is by selling its annual memberships.