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Comment by Mathnerd314 | Hacker News Reader

The story seems to be more about the mythos of Costco than its actual business practices. Sure they work with suppliers to reduce costs but so do all their competitors like Walmart and Trader Joe's. And they pay better wages but they also have fewer employees per store. And at this point most stores have worked around the membership issue by using loyalty cards and digital discounts.

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75% of their profit is from the membership fees. They clearly aren't trying to work around the issue.

> 75% of their profit is from the membership fees

I've heard that before, but I can't see how it could be. My back-of-an-envelope calculation: Let's say I spend $1000 per year (I'm estimating low). According to the article, Costco's average markup is 11%. So they make $99.10 profit on my $1000 of spending. Let's assume that the $60 membership is 100% profit. The total profit from me is $159.10. My membership fees would be only 37% profit (60/159.10 = .37). Do vast numbers of people pay for $60 or $120 memberships and spend much less than $1000?

They make $100 of net revenue on your $1000 of spending. Markup isn't profit. They use that money to do things like pay their workers and heat their buildings.

So, if I put membership fees under operating revenue, and then factor out their liquor store as special revenue, I could say they make a huge amount of their profit from liquor sales, and say Costco is just a big liquor store that sells food, merchandise and memberships for fun. That doesn't make much accounting sense.

This is technically true, but sort of misses the mark. Costco does not price goods such that their Cost of Goods Sold + Operating Expenses = their Membership Fees + Non Alcohol Gross Revenue, Alcohol Gross Revenue to be their main source of profit. They do price goods such that their COGS + OPEX = Gross Revenue, leaving their membership fees to be the main source of profit.

In other words, you can say that any given vertical worth $Xbn of their revenue was their profit, if you are convinced that Costco actually models their pricing around that vertical section of their revenue. But in reality, everyone knows that the section they model around is membership fees - everything else is break even and the fees are profit.

You'll have to explain more slowly.

Are you saying that the way they account for memberships doesn't make much accounting sense?

(they break it out, page 37 http://investor.costco.com/static-files/05c62fe6-6c09-4e16-8... )

No, Costco is accounting for it normally by putting membership fees up there with gross revenue. I'm saying the gee-whiz description of memberships being 75% or more of profit is silly. The firm has gross margins on its sales. It also collects membership fees. Any one of its product lines could be a large portion of revenue that you could single out as being the driver of their profit. I just think it's silly to single it out like that. Gross margin pays for the stores to be open just as much as anything else, and with less margin the stores could be out of business despite collecting all those membership fees.

> According to the article, Costco's average mark up is 11%. So they make $99.10 profit on my $1000 of spending.

No, they are selling to you for $1000 something that they bought for $900. But they still have to pay all their operating costs.

Their revenue in FY 2019 was $149.4bn (+ $3.4bn in membership fees) and the cost of merchandise was $132.bn. Their gross margin is 11% but then you have $15bn in "Selling, General and Administrative" expenses.

It is incredible that Costco can essentially make a *aaS recurring profit model business from a physical goods store.

I wonder how immune it is to economic downturns/upturns?

Downturns: People shop there more because it (can be) cheaper

Upturns: People shop there because they have more $$$ to spend.

Most stores didn’t really work around anything.

Costco performs a credit check when you sign up for a membership. It requires a state ID to sign up for a membership. Like voter ID requirements, this has impacts on the people who shop there. Previously, they also tied the membership to qualifying for their partnered credit card. It is true that you can pay with cash. Ultimately, I'm trying to explain why Costco shoppers look the way they do. It may affect the bottom line to put up these obstacles, because people who meet these criteria can and do spend more.

Walmart only relies ownership of a car to target a richer shopper. Whole Foods and Trader Joe’s, often used for single people or non car owners, locates its stores nonetheless in certain wealthier urban locations. Loyalty cards do not achieve these ends.

The knock on effects are immense. Grocery stores, for normal people, are as much about the discounts as seeing your own kind there. That’s not just economic stratification, it’s also the ethnic groceries, some of them really big, expensive item enterprises (like H Mart).

These are experiences Amazon cannot provide. You don’t get to see the other Amazon shoppers, and you don’t get a sense of whether Amazon is a “cheap” or “expensive” store. And yet this is precisely an experience people want, just as psychologically important as 1 day shipping. Costco, like Amazon, occupies a valuable psychological niche. The question is if there exist any viable retail that does not.

I’m not sure what you’re talking about. A Costco membership is $60 and you can pay in cash. There’s no credit card needed. You don’t have to sign up for their credit card either, and it’s not really even pushed when you sign up for membership. What gave you the impression that you have to qualify for a credit card to shop there?

Until 2016, Costco and Amex had an exclusive partnership. You could pay either in cash or with Amex, usually the Costco Amex tied to your membership card.

Now they take any Visa card, and have converted Costco Amex cards to Costco Citi VISA cards.

The AmEx agreement was exclusive to credit cards, you could also pay with any debit card.

Oops you’re right - Amex, cash, or debit.

I’ve been a member for 10 years and have always used a Visa credit card.

There’s no credit card needed.

Until a few years ago, Costco didn't even take credit cards. They had an in-store ATM if you needed cash.

This article says they started accepting credit cards 20 years ago:

https://www.techradar.com/news/what-credit-cards-does-costco...

This isn't true. Before a few years ago, they accepted American Express credit cards. (You could also use a debit card at the check-out register.)

Before they accepted American Express they only accepted debit and cash. I remember having the American Express card and being excited that I could finally get cash back on Costco purchases and have a credit card vaguely backed by a company I trust.

>Costco controls the kind of shopper that shows up by tying a credit card (ie a credit check) to membership. Sure you don’t have to pay with a credit card, but you need to qualify for a good one to shop there.

I don't follow this logic at all. They take Amex and debit cards in the UK - so no Mastercard/Visa credit cards but debits are fine. They also take cash.

So, why do you need to be able to qualify for an Amex (the only CC they accept) to shop there? Everyone has a debit card. They're not doing a credit check when you sign up as a member - they don't extend you a line of credit when you shop in their stores as a consumer.

>Costco controls the kind of shopper that shows up by tying a credit card (ie a credit check) to membership

This is not true.

You don’t need a membership to eat there. Can get the cheap items at the food counter.

how do you get to the food counter though? Don't u need a card to get in?

Some California Costco’s have outdoor food courts. You can also enter through the standard entrance and tell them you are going to the food court or membership counter. At that point no membership is required to get food.

The membership counter/food court and exit are all next to each other at most Costco’s.

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