Key takeaways
- Costco earned $9.23 billion despite thin margins
- Membership fees generated $5.91 billion in revenue
- Bulk purchasing and customer loyalty sustain profitability
Walk into a Costco warehouse, and the business model looks almost too simple. Products sit on industrial shelves, shoppers buy groceries in enormous quantities, and prices often undercut conventional supermarkets.
Yet behind those inexpensive products is one of America's most profitable retail businesses. Costco earned $9.23 billion in fiscal 2026 despite operating with a merchandise gross margin of just 11.09%.
The secret is not that Costco earns nothing from selling products. It combines billions in merchandise profit with recurring membership fees, enormous sales volumes and operating efficiencies that make small margins surprisingly valuable.
How Costco Turns an 11% Margin Into Billions
According to Costco's 2026 annual report, the company generated $297.25 billion in merchandise sales during the fiscal year ended August 30.
The merchandise cost Costco $264.28 billion, leaving approximately $32.97 billion in gross profit before store operations, employee compensation and other operating expenses.
That represents a gross margin of 11.09%. In practical terms, Costco retained approximately $11 in merchandise gross profit for every $100 of product sales.
What makes the model work is scale. Warehouses move large quantities of a relatively limited assortment, while bulk purchasing, efficient distribution and simplified store layouts help contain costs.
Costco also intentionally reinvests some financial benefits into prices. When it received $184 million in tariff refunds, management said much of the money would support lower prices for members rather than simply increasing reported profit.
Lower prices encourage more shopping, which helps maintain sales volumes despite narrow margins.
Why Costco Membership Fees Are So Valuable
Costco's second major advantage is collecting money before customers even enter its warehouses.
Membership fees generated $5.91 billion in fiscal 2026, up approximately 11% from the previous year. Those fees are separate from merchandise sales and do not carry the same direct product costs.
The company reported a 92.3% membership renewal rate in the United States and Canada, alongside an 89.8% worldwide renewal rate.
Membership fees amounted to approximately 64% of annual net income, although that is a comparison of different accounting measures. They do not represent 64% of profit earned directly from memberships.
The economics resemble other recurring-revenue businesses, including subscription-based financial platforms, where recurring customer relationships support profitability beyond individual transactions.
For Costco, shoppers who renew each year also have an incentive to keep purchasing enough products to justify the membership cost.
Why Rivals Struggle to Copy Costco's Model
Low prices alone do not guarantee a successful retail business.
Competitors must balance inventory costs, logistics, wages and consumer spending. Walmart's recent sales challenges show how closely investors monitor retail demand even at enormous companies.
Costco's model benefits from predictable membership income, but it still depends on selling merchandise efficiently. Annual selling, general and administrative expenses reached $27.19 billion in 2026, demonstrating that operating warehouses remains expensive.
Competition over prices can also attract regulatory attention. A recent grocery pricing investigation involving Costco and other major retailers highlights the scrutiny surrounding food costs and industry pricing practices.
Meanwhile, Costco continues using membership relationships to expand beyond groceries. Its planned healthcare partnership illustrates how an established customer base can support additional products and services.
