Costco: The Store That Won't Take One Extra Penny From You
Picture this: you and your parents pull up to a supermarket, and a guard at the door stops you. "Sorry, you need to show a card before you can come in." You get the card, walk inside, and your jaw drops. The shelves are stacked like mountains. Everything comes in giant, economy-size boxes — chips by the case, batteries by the case, absolutely everything is "extra-extra-large." A hot dog and a soda together cost $1.50, and the cashier tells you that price hasn't changed in forty-seven years.
You might think: "This store must be terrible at business. How do they make any money selling things this cheap?"
Here's the twist: they're not bad at business at all. This is Costco, and today it rings up close to $240 billion a year, runs 860 warehouses around the world, and has 124 million people carrying its membership card. It didn't get there with some secret trick — it got there with about fifty small, interlocking rules, all working together like an orchestra that has been rehearsing for decades. As one Acquired podcast host put it: "Nothing about Costco is an accident." Every strange little detail hides a very smart reason.
So let's rewind the tape more than a hundred years and watch this "weird supermarket" grow up.
Chapter 1: An Idea That Started With Splitting the Bill
Our first main character is Sol Price, born in 1916 in the Bronx, New York, into a poor family. His parents were Jewish immigrants who had fled Belarus with nothing — they arrived speaking no English and went straight to work at sewing machines in garment factories. New York had a famous factory fire around that time: the owners had locked the doors to stop workers from stealing, and 146 people couldn't escape. Sol's parents grew up around exactly that kind of factory. That history planted one belief deep in Sol from childhood: running a business should never mean squeezing every last drop out of other people.
Sol's family later moved to San Diego, where he studied law and became a small-town lawyer back home. In a small city, a lawyer isn't just someone who argues cases in court — he's more like an advisor who helps clients figure out how to run their businesses, almost a strategist.
Around then, about 800 postal workers in Los Angeles pooled their money to start a "buying club" called Fedco: pay a $5 lifetime membership fee, and you could all shop together for cheap goods, because buying in bulk meant a lower price per item. It's the same idea as splitting the cost of school supplies with your classmates — one person buying alone pays full price, but ten people buying together can negotiate a discount.
Sol thought this was a brilliant idea. He went to Fedco and said, "Let me franchise this." They said no. He asked again — even offering to hand over the entire company in exchange — and they still said no.
Chapter 2: Fired From His Own Company — and Starting Over at 60
Getting turned down twice didn't slow Sol down. He decided: if nobody will let me play, I'll build my own game. In November 1954, he borrowed a warehouse from his wife's family that had been sitting empty for years — roughly the size of four basketball courts — and opened the first FedMart. He'd guessed the store might do $1 million in sales its first year. It did $3 million — three times what anyone expected.
The second store opened in Phoenix, and the line on opening day stretched half a mile down the street. Somewhere in that line was a teenager working odd jobs who got hired on the spot to bag groceries. His name was Jim Sinegal. Nobody could have guessed it then, but this bag boy would go on to work for Sol for the next 22 years — and become the second main character of this whole story.
FedMart kept growing. It sold gas (a few cents cheaper than everyone else), ran its own pharmacies, and even had its own house brand. But trouble was coming: Sol went looking for an investor to help fund expansion, and he ended up with the opposite of what he wanted. A businessman named Hugo Mann bought up the majority of the company's shares. At their very first board meeting together, the two men exploded into a shouting match — and Mann literally changed the locks on the office doors. Overnight, Sol was locked out of the company he had built with his own hands.
Here's the thing about "who owns the most shares": think of it like a class election where whoever holds the most votes gets to make the calls. Sol thought he was just bringing in someone to help fund a bigger tree — he didn't realize he'd handed over more than half the votes, which meant he'd handed over the class president's seat too. The lesson: before you let someone invest in or partner with you, always ask exactly what they actually want out of the deal — otherwise you might lose your own seat at the table.
Most people would have given up right there. Sol wasn't most people. The very next day after being locked out, 60 years old, he rented a new office and said, "We'll do it again." This time, he'd figured something out: the part of FedMart that actually made money was never the flashy storefronts — it was the unglamorous central warehouse. So he stripped away everything else and kept only one thing: selling straight out of the warehouse. That store was called Price Club — and it's the true grandparent of Costco.
Chapter 3: The Bagger Grows Into the Star Pupil
Fast-forward to around 1976. That teenage bagger from Phoenix, Jim Sinegal, had spent years at Sol's side, working his way up from hauling boxes to running the entire warehousing and distribution operation. People who've studied this story describe Jim as having three identities at once: Sol's most loyal student, a natural-born talent for running large-scale operations, and — this is the key part — the actual guy who had personally run the warehouse department that inspired the entire business model.
Jim later said something that captures the whole relationship: "I didn't learn a lot, I learned everything. Absolutely everything I know, I learned from Sol."
In 1979, so many people were trading Price Club's stock that it accidentally tripped a rule requiring it to become a public company — without raising a single new dollar, it just started quietly trading over the counter. Then in 1982, something almost cinematic happened: Sam Walton — who would go on to run Walmart's warehouse-club rival, Sam's Club — had dinner with Sol, and twelve months later opened his own version. Around the same time, another entrepreneur named Bernie Marcus got Sol's entire playbook handed to him and went off to found Home Depot. Sol never hid his methods — when a rival once toured Price Club with a hidden tape recorder and security confiscated it, Sol mailed the recorder right back, with a note: "keep your notes, it's all good."
That same year, a father-and-son pair named Brotman asked to open a Price Club franchise and got turned down. They went instead to Price Club's head of merchandising, hoping he'd start something with them — and he told them, "It's not that your idea is bad. It's that Sol Price is my uncle." Then he pointed them toward someone else entirely: Jim Sinegal.
Chapter 4: Three Tries to Finally Get the Puzzle Right
In 1983, Jim Sinegal and Jeff Brotman raised $7.5 million (giving up half the company to do it) and opened the very first Costco in Seattle, bringing along eight veteran colleagues from their FedMart and Price Club days. Their original business plan was, more or less, a straight copy of Price Club.
How fast did Costco grow? Under three years to hit $1 billion in revenue. Under six years to hit $3 billion — the fastest any company had ever done it, full stop.
By June 1993, Costco merged with its own "grandparent," Price Club, becoming one company (52% to 48%). Why merge? Because if they'd waited any longer, Sam's Club would have pulled too far ahead to catch. Around the same time, the company launched a house brand that would later become a household name: Kirkland Signature, named after Kirkland, Washington, the small town where the old headquarters sat (lucky for the brand — the headquarters could easily have been in a town called Issaquah instead, and nobody wants to shop for "Issaquah Signature").
Line up the whole story and you'll notice something remarkable: Fedco (the buying club) → FedMart (the discount store) → Price Club (the membership warehouse) → Costco. It's the same people, the same story, leveling up again and again. Each generation fixed the last one's problem: a nonprofit club couldn't expand properly, so it became a real company; the storefronts weren't profitable, so they kept only the warehouse. Even the fact that all three CEOs in Costco's history came up through FedMart shows just how unbroken this chain really is.
Chapter 5: Why Selling Things This Cheap Doesn't Bankrupt the Company
Now for Costco's biggest secret.
Walmart's founder, Sam Walton, once bragged that he loved building pyramids of merchandise in the parking lot, selling them below cost to create a frenzy, pulling shoppers into the store — and then making the money back on everything else they bought. This tactic has a name: a "loss leader."
Costco refuses to do this. Other than that $1.50 hot dog combo (possibly the one true exception), the company barely sells anything it doesn't make money on. Why? Because, as the people who studied this business put it plainly: using a loss leader basically means treating your customers like they're stupid. You get a good deal on the "sale" item today, but tomorrow you're quietly overpaying on something else to make up for it — and once a customer catches on, they can never fully trust you again.
Here's the thing about gross margin, and why the 14% ceiling matters so much: imagine you're running a lemonade stand. A cup costs you 10 cents to make, and you sell it for 12 cents — that 2-cent difference is your "gross margin," and as a percentage of the price, that's roughly 17%. A regular department store might buy something for $10 and sell it for $20 — a 100% markup. Walmart buys for $10 and sells for $12.50 — a 25% markup. Costco set itself an iron rule: no item can ever be marked up more than 14% (electronics only 6–8%), aiming for around 11% on average. That means something Costco pays $10 for can never be sold for more than $11.40.
What does that ceiling actually mean in practice? If a supplier agrees to cut their price by a dollar, Costco hands almost 89 cents of that dollar straight back to you. One of Costco's own leaders put it bluntly: "You could raise the price of a bottle of ketchup to $1.03 instead of $1, and no one would know. Raising prices just 3% would add 50% to our pre-tax income. Why not do it? It's like heroin. You do it a little bit, and you want a little more." In other words, once you start raising prices, you can't stop next year, or the year after — and eventually you wreck the trust that built the whole business. Costco would rather tie its own hands than take that risk.
Chapter 6: That $60 Card Is the Real Secret Weapon
Okay, so if selling merchandise barely makes any money, how does Costco stay alive?
The answer is sitting in your wallet — that card you scan at the door.
Here's the thing about why a membership fee is basically a "bundled annual pass": have you ever had a season pass to an amusement park? Instead of paying per ride, you pay one lump sum up front and get unlimited visits all year — parks love this because they get the cash early, and it makes you want to come back again and again. Costco's card works the same way: about $60 a year, almost entirely pure profit (it costs Costco almost nothing to issue), and roughly 93% of members renew it the next year — a renewal rate higher than most streaming services manage in a single month.
Even better, that one card does several jobs at once. First, people willing to pay upfront tend to have more money and be more reliable customers — the data shows the average Costco member household earns about 70% more than the median American household. (Sounds backwards, right? The cheapest store in the country has some of the wealthiest customers.) Second, since you've already paid to be there, you're naturally more likely to shop often, which also keeps food from spoiling on the shelves. Third, the card itself turns an intangible feeling — "I trust this store" — into something you can actually sell.
In 1998, Costco introduced a pricier "Executive Membership": $120 a year, with 2% cash back on purchases, and the math works out so you break even right around $3,000 in spending — almost exactly what an average family spends at Costco in a year. In other words, the card is engineered so nearly everyone comes out even, and if the math doesn't work out for you, Costco will actually refund the difference.
Picture the whole company as two businesses sharing one roof: one sells merchandise and barely profits from it; the other sells memberships and is almost pure profit. Put together, roughly 70% of the company's profit comes from that little card, not from anything on the shelves. It's basically a subscription business in disguise — and Amazon Prime is said to have drawn some inspiration from exactly this model.
One more stubborn little detail: Costco's original business plan flatly stated it would only accept cash and checks — no credit cards — because card fees eat 2–3% off every sale, and the company's razor-thin margins couldn't absorb that. Years later, credit card companies were the ones begging to work with Costco, because its customers had become too valuable to ignore.
Chapter 7: Less Is More — Fewer Choices Than Your Pencil Case
Ever been to a big regular supermarket? Just the shampoo aisle can have a hundred different brands, enough to make your head spin. Costco does the exact opposite: a typical supermarket stocks anywhere from 30,000 to 250,000 different products. Costco carries only about 3,800 — and that number keeps shrinking.
This rule goes all the way back to Sol Price. At FedMart, they only sold the large jug of motor oil, never the small bottle. In Sol's own words: "We only carried the eight ounce can, even though there was a three ounce can out there. We lost some sales from customers that only needed one or two ounces... But it was worth it to us to forgo that."
Here's the thing about why selling less can mean making more: imagine packing your school bag with only the exact supplies on your schedule that day, instead of stuffing in every pen and notebook you might possibly need — the bag is lighter, you find things faster, and it's easier to check you have everything. Costco's buyers can only add 3 to at most 15 new products a year, and each one has to earn its spot: the single best-value, best-quality option in its category. Customers are essentially trusting Costco to do the choosing for them.
What's the payoff? Since there are only 3,800 "slots" total, whichever supplier wins one of them gets an enormous order — which lets Costco negotiate some of the lowest prices in the world. Here's a wild fact: Walmart's total US sales are roughly three times Costco's, but per individual product, Costco sells roughly ten times more than Walmart does.
The low-product-count strategy has a bonus effect too: because shelf space is so precious, the house brand Kirkland Signature often gets to be one of only 2 or 3 choices in an entire category — not buried among dozens of competing brands like at other stores. Last year, Kirkland alone sold about $1 billion more than the entire Nike company, making it one of the biggest consumer brands in America.
Chapter 8: Treat Employees Like Family, Treat Suppliers Like Partners
Costco pays its workers an average of about $26 an hour, well above Walmart's $19.50, plus solid retirement matching and health insurance. Sounds like the company is taking a loss here, right?
Here's the thing about whether paying people more actually pays off: imagine your class needs someone to water the plants. Pay them too little, and nobody bothers to do it well — the plants die and you're constantly training a new volunteer. Pay them fairly, and the same person sticks around for years, gets better and better at it, and the plants thrive — cheaper in the long run. At Costco, only about 7% of employees quit after their first year (the industry average is 20%), theft and shrinkage sit at a shockingly low 0.15%, and 36% of American employees have stuck around 10+ years. Almost every executive has been there 25+ years, and nearly all of them started at the bottom and worked their way up — the company's current top leader started as an hourly worker at FedMart back in the 1970s.
The company's published Code of Ethics is ordered very deliberately: first, obey the law; second, take care of members; third, take care of employees; fourth, respect suppliers — and "shareholders" is deliberately left off the list, or placed dead last. The founders said that if you get those first priorities right, rewarding shareholders takes care of itself. Plenty of companies hang similar slogans on their walls. The difference is whether you actually mean it.
Suppliers get the same treatment. Costco's buyers study every partner's business in real depth — if a supplier wants to raise prices, they have to explain why, and the buyer often knows commodity markets like cocoa, milk, and sugar better than the supplier does. People describe this as "tough but fair": tough, because the supplier on the other side of the table often gets half their business from Costco; fair, because once Costco squeezes out a lower price, it doesn't quietly pocket the savings for itself.
One more remarkable fact from the company's history: Costco has never had a layoff — not even after merging two nearly identical companies in 1993, which would normally mean tons of overlapping jobs. As one person who studied the company put it: "You only earn the right to be noble if your machine works."
Chapter 9: Hot Dogs, Rotisserie Chickens, and a Box of Wild True Stories
The FedMart pharmacy and its "mafia-style" threats: FedMart's pharmacies slashed drug prices so low they threatened traditional pharmacy owners who were used to big markups. The person running that department received real death threats, and rocks were thrown through his windows — "literal mafia stuff," in the words of one person who covered the story. It didn't scare FedMart off. That same person later trained a protégé who went on to found and run Costco's own pharmacy division — so cheap medicine has been passed down the family tree all the way to today.
The $1.50 hot dog: Around 1976, street vendors kept trying to set up hot dog carts outside the store, so Sol just decided to run the business himself. The supplier, Hebrew National, told him: "not only will we sell you hotdogs to sell, we'll supply the cart too." Forty-seven years later, the combo is still $1.50, selling 130 million a year. When a later executive floated the idea of raising the price, the founder reportedly shut it down instantly: "Raise the price on that hot dog combo, and you'll wish you hadn't." That line has become company legend.
Coffee with Bezos: In 2001, investors were pushing Amazon to raise prices and boost profits. Jeff Bezos personally sat down for coffee with Jim Sinegal to hear about Costco's philosophy — and the very next day, announced Amazon was scrapping its planned price increases. Bezos put it this way: "There are two types of companies in this world, companies that work hard to charge their customers more and companies that work hard to charge their customers less. Henceforth, as of today, Amazon is a company that works hard to charge its customers less."
The great chicken campaign: America has only four or five major chicken processors, which makes it easy for them to quietly push prices up together. Costco refused to just sit and take it — first leasing 100% of one factory's capacity to learn the entire chicken business inside out, then building its own fully-owned plant in Nebraska and partnering with 150 nearby farms, together capable of processing 200 million chickens a year. The point wasn't to cut ties with the original suppliers entirely — it was to make sure they knew: "We can do this ourselves too, so your pricing had better be honest." Today Costco sells roughly 500 million chickens a year — about as many as the entire population of the US and Canada combined.
Returns with almost no questions asked: Most items can be returned any time, no time limit, and electronics get a 90-day window. Last year a customer even returned a 10-carat diamond ring — full refund, no questions asked, which had the podcast hosts joking on air: "So... if you get divorced, you can return the engagement ring too?" For customers who return an unusual amount of merchandise, customer service has an unusually polite way of easing them out: "It seems like we're not providing enough value to you, let us refund the membership. We're so sorry, we couldn't do a great job."
The treasure hunt: About a quarter of all products are one-time surprise items — once they're gone, they're gone — which builds a sense of "buy it now or you might miss it forever." A lot of people describe shopping at Costco as feeling like a treasure hunt. Inside the warehouse, fresh food always sits at the very back, so you have to walk past everything else to reach it.
The walled garden: Costco sells $500 gift cards for $450 — which is basically buying money for less money. Plenty of brands agree to make special Costco-only versions of their products (a blender with a bonus cup thrown in, say), because the membership card acts like a wall — shoppers outside can't use Costco's price to compare against the brand's regular pricing anywhere else. That's exactly why even Nike, famously picky about discount retailers, is willing to clear out extra inventory through Costco.
Zero ads, all word of mouth: The founders understood early on how to create "lines around the block" and "unusual product" moments that made local news for free. Today, Costco's official accounts barely post any ads at all, while ordinary shoppers post their own "look what I got at Costco" videos online for fun. Whatever money would have gone to advertising shows up instead as a lower number on the price tag.
Buffett and Munger's dark joke: Two of the most famous investors alive, Warren Buffett and Charlie Munger, once told this joke at their own company's shareholder meeting: imagine their plane gets hijacked, and the hijackers mercifully grant each of them one last wish. Charlie says, "I would like to give my speech on the virtues of Costco one more time before I die." Warren immediately replies: "Shoot me first." It's obviously a joke — both men are genuinely huge Costco fans — they're just poking fun at how much Charlie loves talking about the company. After hearing that story, one podcast host threw up his hands and admitted: "I'm in. I capitulate. I am in love with this company."
Chapter 10: Why Has Nobody Ever Beaten Costco?
Here's the thing about "economies of scale": imagine you and nine classmates all go to the stationery store to buy the same notebook. Buy one, and the shop owner probably won't budge on price. Buy a hundred together, and the owner will likely cut you a group deal — the more you buy, the cheaper each one gets. That's economies of scale. Costco buys in such enormous volume that for many suppliers, it's their single biggest customer — bigger even than Walmart — which lets it lock in some of the lowest prices anywhere. But here's the truly clever part: Costco doesn't pocket those savings. It hands almost all of it straight back to members. The more it saves, the cheaper things get; the cheaper things get, the more members join; the more members it has, the more bargaining power it gets — and the cycle keeps snowballing. One investor's phrase for this — "scale economies shared with customers" — is considered by people who study the company to be maybe the single best description of what makes Costco tick.
Beyond that, Costco has a few more advantages nobody else has managed to copy:
It's a rare company running against the current in the age of e-commerce — while everyone else races to make sure you never have to leave your house, Costco practically insists you show up in person, because its total operating overhead is only 10–11% of sales, far below the industry's typical 20–30%. That ultra-low-cost structure comes from stacking "come to the store, buy in bulk, choose from fewer products" on top of each other — and it can't be copied overnight.
Its culture is nearly impossible to clone: decades of speaking in exact cents (ask anyone at Costco what something costs, and you'll hear "$3.89," never "about three dollars"), 160 store managers flying back to headquarters every single month to stay in sync, and a promote-from-within pipeline built over generations. None of that can be learned in a semester.
And people who already carry a Costco card tend not to bother getting a second membership somewhere else — they've already paid, so why pay again? That "sunk cost" quietly keeps them loyal.
Chapter 11: Costco Today, and Costco Tomorrow
By 2023, Costco sold roughly $240 billion worth of merchandise a year across 860 warehouses, with 124 million members and over 300,000 employees. In 2019, the first mainland China store opened, and within two years had racked up 400,000 members — far more than the roughly 68,000 an average, long-established US warehouse carries.
Of course, the company isn't perfect:
It arrived at online shopping roughly fifteen years late. Because its entire business model depends on rock-bottom operating costs, building out large-scale e-commerce and delivery infrastructure would likely have wrecked that cost structure — this looks less like a deliberate choice and more like a lucky accident that happened to dodge a bullet.
Some people also claim "young people don't shop at Costco anymore," but the data tells a different story: younger generations are signing up for memberships at basically the same pace their parents did — the core customer has always been, and still is, someone in their 40s or 50s settling down with a house and kids. That hasn't changed in decades.
Others worry the company grows too slowly — over the past decade, it returned 80% of its net income to shareholders instead of aggressively opening new stores. The reason is simple: hiring the right people, training them properly, and building a new warehouse all take time. Money can't buy speed.
Still, there are plenty of reasons people remain bullish on Costco: its biggest rival, Sam's Club, only pulls in about half the revenue per store that Costco does, and the gap keeps widening. The US market still isn't saturated — many cities already have three or four Costco locations, and management can open yet another one and still have it pay for itself quickly. International markets, especially China and other regions Costco hasn't fully entered yet, hold even more potential. And even in e-commerce, Costco has found its own angle — delivering big, bulky items like refrigerators and washing machines at a price that stays permanently low, rather than the "sale this week, back up next week" trick other retailers play.
Three Things This Story Teaches You
First, never treat people like they're stupid. Costco has never played the game of "trick you now, make it up to you later." It fights fiercely to guarantee the absolute lowest price, and that's exactly what earned it decades of customer trust. Trust builds up slowly — but break it once, and you might never get it back.
Second, sometimes less really is more. While everyone else races to cram more products onto the shelf, Costco does the opposite, keeping only the genuinely best of the best. It's the same idea as packing your school bag — it's not about how much you carry, it's about whether every single thing in there actually earns its place.
Third, taking care of the people around you always pays off in the long run. Whether it's paying employees more or dealing with suppliers "tough but fair," Costco has spent decades proving one thing: it's easy to grab a quick advantage, but a business only lasts when everyone around you feels like working with you is genuinely worth it — and that's the kind of thing nobody else can just copy.