Quote:
Originally Posted by opendoor
You can't just take membership revenue and assume it's 100% profit. There are costs involved with that system which reduce the net profit from memberships. The biggest one is the fact that all Executive Members get 2% of their spending refunded. So if someone with an Executive Membership spends $10K in a year, they get $200 back. And based on how they report their income, that would show as $120 revenue from their memberships and a $200 loss on their sales revenue. And that's not a small factor, as about 40% of Costco members have Executive Memberships.
Then there are the promotions that they're always running for memberships, often giving you $50 off of $100 (or $100 off $250) in spending if you buy a $60/$120 membership. Again, that will show up as $60/$120 in membership revenue on their Income Statement, but achieving that meant $50/$100 is cut out of sales revenue.
And of course there are the marginal costs of running the membership system (staff time, infrastructure, etc.).
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I think what people are alluding to is that the costs associated with the membership income is relatively negligible and it is the absolute bulk of the revenue Costco earns.
https://www.investorschronicle.co.uk...n-of-strength/
If you look at the 2019 chart:
Profit before membership fees = $1,471 vs Net sales of $149,351 or less than 1%.
Membership fees are slightly more than double the profit before membership fees and the admin costs and cash back are likely significantly lower than the overall costs for running a warehouse.
Overall operating profit is around 3.17% and that ratio is pretty consistent year over year almost like clockwork which in honesty is pretty damn low for companies of that size (albeit it's better than losses).
Semantically, there's a bit of confusion going on. It is not that Costco has zero margins on their product sales. Some are higher and some are lower and the argument is that typically they mark it up around 14-15% which is pretty low. But when you take into account the pool of product sales, cost of product and cost of sales/warehousing, it's nearly break even margins. That's what people are hinting at when they say there's no margin on the products you buy on Costco. Then when you look at the membership fees, even if it was 50% in cash back and admin costs, infrastructure costs overall, at 50%, that's significantly higher than basically break even on actual product sales.
This is in a nutshell how many business course case studies on Costco attempt to break it down.