How Costco Makes Money

E-commerce and fresh food sales are growing dramatically

Costco Wholesale Corp. (COST) is a big-box retailer and a wholesale warehouse club operating roughly 800 locations in North America, Asia, and Europe. It also has a major e-commerce operation. The company's warehouses offer low prices on a limited selection of both name brand and private label products, typically offered in bulk volumes.

Customers purchase memberships to access the warehouses and make purchases. Costco aims to offer lower prices than competitors by purchasing merchandise directly from manufacturers, limiting store hours of operation, and minimizing labor by storing merchandise on large racks above a vast, self-service warehouse sales floor.

Costco offers merchandise in categories, including:

  • Food and Sundries
  • Hardlines (such as major appliances, electronics, and hardware)
  • Fresh Foods
  • Softlines such as apparel and small appliances
  • Ancillary (which includes gasoline and pharmacy products)

The company also generates a small percentage of revenue through membership fees. Costco's main competitors include discount stores such as Target Corp. (TGT) and Walmart Inc. (WMT), as well as big-box rivals like BJ's Wholesale Club Holdings Inc. (BJ).

Key Takeaways

  • Costco is a wholesale retailer selling discounted goods through membership warehouses and online.
  • The two fastest-growing areas are fresh foods and hardlines products such as hardware and large appliances.
  • The fastest-growing segment is International Operations.
  • The e-commerce business reported a 75.8% increase in comparable sales in Q2 FY 2021.

Costco's Financials

In Q2 FY 2021, which ended February 14, 2021, Costco posted year-over-year (YOY) gains in revenue and net income. Total revenue increased by 14.6% YOY to $44.8 billion. Net income (including net income from noncontrolling interests) climbed 2.5% YOY to $971 million. The company said that its comparable sales for e-commerce rose 75.8% YOY.

Foods and Sundries grew 17.6% in Q2 FY 2021. It comprises 40% of Costco's net sales, making it the biggest contributor to the company's total net sales. But Fresh Foods and Hardlines were the fastest-growing categories, with YOY increases in net sales of 23.1% and 22.6%, respectively. Fresh Food accounted for 14% of sales and Hardlines for 19% during the period. Softlines rose 20.3%, comprising 12% of net sales. Ancillary and other was the only product category that recorded a decline in sales, which fell 9.1% and comprises 14% of total net sales.

Costco also provides information about revenue generated through membership fees. Membership fees typically make up a much smaller portion of total revenue. For Q2 FY 2021, for example, the company reported $881 million in membership fees, or roughly 2% of total revenue.

Costco's Business Segments

Costco divides its business into three reportable segments, breaking out results geographically and by both revenue and operating income: United States Operations, Canadian Operations, and Other International Operations.

United States Operations

The bulk of Costco's business comes from its operations in the United States, making this the largest of the company's three reportable segments. For Q2 FY 2021, United States Operations reported roughly $32.1 billion in total revenue, a 12.6% YOY increase.

In the same time period, the segment reported $790 million in operating income, a 3.8% YOY decline. For Q2 FY 2021, United States Operations represented 72% of Costco's total revenue and 59% of operating income, company-wide.

Canadian Operations

Though significantly smaller than its U.S. operations, Costco still does considerable business through its Canadian Operations segment. This segment reported about $6.0 billion in total revenue for Q2 FY 2021, representing a 14.7% YOY increase. Canadian Operations also posted operating income for the quarter of $236 million, a 16.8% YOY increase. For this quarter, Canadian Operations represented 13% of Costco's total revenue and 18% of the company's operating income.

Other International Operations

Besides the U.S. and Canada, Costco operates membership warehouses in Mexico, the U.K., Japan, Korea, Spain, Australia, France, China, and Iceland, and these latter countries are represented in the Other International Operations segment. For Q2 FY 2021, Other International Operations generated total revenue of about $6.6 billion, a 24.9% YOY increase.

Other International Operations also posted Q2 FY 2021 operating income of $314 million, a 29.2% YOY increase. This makes this segment the fastest-growing in terms of both total revenue and operating income. It comprises 15% of revenue and 23% of operating income.

Costco's Recent Developments

On Feb. 25, 2021, Costco CEO W. Craig Jelinek, announced that it would be raising its starting wage to $16 an hour from the $15 an hour it had raised it to in 2019. The majority of Costco employees are paid more than $25 an hour. Jelinek said that paying higher wages "isn't altruism," and that it "makes sense for our business and constitutes a significant competitive advantage for us. It helps us in the long run by minimizing turnover and maximizing employee productivity."

Article Sources

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  1. Costco Wholesale Corp. "Form 10-K for the fiscal year ended August 30, 2020," Pages 3-4. Accessed Jan. 8, 2020.

  2. Costco Wholesale Corp. "Form 10-K for the fiscal year ended August 30, 2020," Page 4. Accessed Jan. 8, 2020.

  3. Costco Wholesale Corp. "Form 10-Q for the quarterly period ended February 14, 2021," Page 3. Accessed Mar. 11, 2021.


  5. Costco Wholesale Corp. "Form 10-Q for the quarterly period ended February 14, 2021," Page 18. Accessed Mar. 11, 2021.

  6. Costco Wholesale Corp. "Form 10-K for the fiscal year ended August 30, 2020," Page 63. Accessed Jan. 8, 2020.

  7. NPR. Costco To Raise Minimum Wage To $16 An Hour: 'This Isn't Altruism' Accessed Feb. 25, 2021.