How Costco Makes Money

The United States is Costco's biggest market

Costco Wholesale Corp. (COST) is a big-box retailer and a wholesale warehouse club operating roughly 847 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's core merchandise offerings include foods and sundries, such as dry groceries, candy, freezer, deli, liquor, and more; non-foods, including major appliances, electronics, health and beauty aids, hardware, automotive care, housewares, jewelry, and more; and fresh foods, such as meat, produce, service deli, and bakery. Costco also offers warehouse ancillary products and services, including gasoline, pharmacy, tire installation, and more.

The discount retailer also generates revenue through its e-commerce business and 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). The company also competes with e-commerce retailers like Amazon.com Inc. (AMZN).

Key Takeaways

  • Costco is a wholesale retailer selling discounted goods through membership warehouses and online.
  • Costco has three reporting segments: U.S. Operations, Canadian Operations, and International Operations.
  • Its U.S. operation is the biggest contributor to both revenues and operating income.
  • Foods and sundries account for the largest share of revenue among all of Costco's merchandise categories.
  • Costco increased its dividend per share in 2023 as well as announced plans to crack down on membership sharing.

Costco's Financials

Costco announced in May 2023 financial results for Q3 of its 2023 fiscal year (FY), the three-month period ending May 7, 2023. Net income attributable to the company's shareholders dropped 3.8% compared to the year-ago quarter to $1.3 billion. Revenue grew 2% year over year (YOY) to $53.6 billion. Operating income, which the company uses as a profitability metric for its individual business segments, decreased 6.3% YOY to $1.68 billion.

Costco's Food and Sundries merchandising category saw the biggest growth in sales followed by its Fresh Foods category. Its Non-Foods and Warehouse Ancillary and Other Businesses categories saw drops in sales. Revenues were up for two reporting segments: U.S. and International, while Canada's revenues remained static. Operating income for the U.S., the largest contributor to both revenues and income, took a hit, with a decrease of 14.8%.

Costco's Business Segments

Costco divides its business into three reportable segments: United States Operations, Canadian Operations, and Other International Operations. The company provides a breakdown of both revenue and operating income for these three segments.

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 Q3 FY 2023, United States Operations reported roughly $39 billion in total revenue, a 1.3% YOY increase. In the same time period, the segment reported $1.0 billion in operating income, a 14.7% YOY decrease. In Q3 FY 2023, United States Operations represented 72.8% of Costco's total revenue and 61.2% of total operating income.

Canadian Operations

Though significantly smaller than its U.S. operations, Costco still does considerable business through its Canadian Operations segment. Canadian Costco customers can not only shop for discounted groceries but can get discounted pet insurance as well. This segment reported about $7.3 billion in total revenue, which remained flat from the same quarter the previous year. Canadian Operations also posted operating income for the quarter of $327 million, a 0.93% YOY increase. For this quarter, Canadian Operations represented 13.5% of Costco's total revenue and 19.5% 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, New Zealand, Sweden, and Iceland. It also operates in Taiwan through a majority-owned subsidiary. This group of countries is represented in the Other International Operations segment. For Q3 FY 2023, Other International Operations generated total revenue of about $7.3 billion, a 7.9% YOY increase. Other International Operations also posted Q3 FY 2023 operating income of $325 million, a 24% YOY increase. The segment comprises 13.7% of revenue and 19.4% of operating income.

Costco's Recent Developments

In April 2023, Costco announced an increase in its quarterly cash dividend from 90 cents per share to $1.02 per share, on a quarterly basis.

In June 2023, Costco notified various media outlets that it would be cracking down on membership sharing as it had noticed an uptick in such behavior since it expanded its self-service checkout. It believes membership card sharing hurts the business and the company's ability to keep prices low.

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  1. Costco Wholesale Corp. "2022 Annual Report," Page 4 of PDF.

  2. Costco Wholesale Corp. "2022 Annual Report," Page 3-4.

  3. Costco Wholesale Corp. "2022 Annual Report," Page 5-7

  4. Costco Wholesale Corp. "Form 10-Q for the Period Ending May 7, 2023," Page 3

  5. Costco Wholesale Corp. "Form 10-Q for the Period Ending May 7, 2023," Page 17

  6. Costco Wholesale Corp. "Costco Wholesale Corporation Announces an Increase in Its Quarterly Cash Dividend."

  7. Gizmodo. "Costco Puts a Stop to Sharing Membership Cards."

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