How Costco Is Able To Keep Its Prices Lower Than Most Other Retailers
One of the best parts of a Costco trip is the total cost that all of your groceries come out to, typically seeming much more cost-efficient than any other grocery store. That's because, over the years, Costco has remained affordable — it's one of the biggest draws of purchasing a yearly membership with the company. But how does it manage to keep its prices lower than most other retailers?
First, Costco prioritizes its low prices. In a 2005 interview with the New York Times, Jim Sinegal, the chief executive of Costco Wholesale, said, "We're very good merchants, and we offer value. The traditional retailer will say: 'I'm selling this for $10. I wonder whether I can get $10.50 or $11.' We say: 'We're selling it for $9. How do we get it down to $8?'"
As for how Costco is able to achieve this priority, it comes down to a few key details in how it operates its business. To begin with, the company saves money with a minimalist design. If you've been inside a Costco, you know it looks like a warehouse. While you may have assumed that this was its aesthetic choice, it actually has to do with cutting down costs. This is certainly an effective strategy, but it's not the only way that Costco is able to keep its prices low.
Costco limits its stock and relies on membership costs
If you've shopped at Costco, you know it may not have as many options as, say, Target or Safeway — a typical Costco sells about 4,000 products while the average grocery store sells about 30,000. Putting it this way, it's easy to see how the company saves money; it orders fewer products in bulk and is able to keep those items at a more valuable price. Further, the company does not mark up an item more than 15%, whereas the average grocery store will mark up an item about 25% and the average department store will even mark up an item up to a whopping 50%.
Costco makes up for what it loses in sales with its membership costs. A Gold Star Costco membership costs $60 a year and includes the ability to shop in-store and online, and two membership cards. For $120 a year, you get the Executive membership which adds on service discounts and an annual 2% reward (up to $1,000 on qualified Costco purchases). In 2022, nearly 119 million people paid for a Costco membership, a number that has only risen over the years.
We don't have to do the math to see that membership costs alone bring in a ton of money for the company. On top of all of that, non-members can buy liquor at Costco in 14 states, allowing the company to rack in even more revenue.