Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Costco Turns Membership into an Unbreachable Moat
Transcript
- Lucas: Costco earned roughly four point two billion dollars from membership fees in its last fiscal year. That's more than its entire net income, because it actually sells merchandise at a loss — or close to it. Luna: Wait — they lose money on the stuff you buy? Lucas: Not exactly a loss, but the margins are razor thin. Costco caps its markup at about 14 percent on most items, and on Kirkland Signature products it's even lower. The profit engine is the membership fee. That's the moat. Luna: So the membership isn't just a perk — it's the product. Lucas: Exactly. You pay sixty dollars a year for the right to shop there. That changes your psychology. Once you've paid, you're incentivized to maximize the value of that card — so you buy more, you buy in bulk, you keep coming back. The renewal rate is around 90 percent in the US and Canada. Luna: That is insanely high for a subscription. Most media subscriptions lose a third of users every year. Lucas: Right. And the key difference is that Costco's membership is tied to a physical experience — you can't just stream content from home. You have to drive to a warehouse, push a cart through aisles stacked with giant jars of olive oil, and feel like you're getting a deal. That's sticky in a way Netflix can't match. Luna: So what happens if a competitor tries to copy the model? Sam's Club has been doing memberships for decades. Lucas: Great question. Sam's Club has about 60 million members globally, Costco has over 130 million. But the moat isn't just about scale — it's about the treasure hunt. Costco deliberately rotates inventory, keeps stock limited, and creates scarcity. You never know if that espresso machine you saw last week will still be there. That drives impulse buys and frequent visits. Luna: That's the behavioral lock-in. You go because you're afraid you'll miss out on something. Lucas: Precisely. And the membership fee reinforces that. If you don't visit often, you feel like you're wasting your sixty bucks. So you go more, you buy more, and the cycle tightens. Sam's Club has tried to replicate it — they even lowered their membership fee to forty dollars a few years ago — but they haven't matched Costco's renewal rate or per-store revenue. Luna: Let's talk numbers. What does a typical Costco warehouse generate? Lucas: A typical US Costco does over 200 million dollars in annual revenue. That's about double what Sam's Club does per store. And Costco's operating margin — if you include membership fees — runs around 3.5 percent. Without membership fees, they'd barely break even. The fee is the entire profit. Luna: So if someone wanted to compete, they'd need to build the same membership base from scratch. That's a chicken and egg problem. Lucas: Exactly. You need the scale to offer low prices, but you need low prices to attract members. Costco spent decades building that flywheel. And they've been smart about raising the fee only occasionally — they last raised it from fifty-five to sixty dollars in 2024. That's a 9 percent increase, but renewal rates barely budged. Luna: Which shows how inelastic the demand is. Once you're in the habit, sixty bucks feels like nothing. Lucas: Right. And they segment their membership — there's a 120-dollar Executive tier that gives 2 percent back on purchases. That tier now accounts for over 40 percent of US sales. Those customers are even more locked in because they're chasing the rebate. Luna: So the moat has layers. The base membership gets you in the door, the Executive tier deepens loyalty, and the treasure hunt keeps you coming back. Lucas: And all of it is reinforced by Costco's culture. They pay workers well — average hourly wage over thirty dollars — which reduces turnover and improves service. A happy employee stocks shelves faster and helps create that treasure-hunt vibe. That's hard to copy if you're trying to cut costs. Luna: If these conversations have moved your work forward in some small way, listener support is what keeps this show ad-free. We're grateful for every person who chips in at buy me a coffee dot com slash fexingo. It's a low-key way to help us keep digging into these stories. Lucas: Yeah, seriously — it makes a difference. And it lets us stay independent, focused on the strategy behind the numbers. So if you've gotten value from any of these episodes, that's the place. Now back to Costco: one more layer of the moat is real estate. Luna: How so? Lucas: Costco owns most of its warehouses. They buy the land and build the store. That's a massive capital investment, but it means they control the economics. Competitors like Sam's Club lease many locations. When you own the real estate, you're not at the mercy of rent increases, and you can use the property as collateral. Luna: So it's a capital moat on top of the behavioral moat. Lucas: Yes. And it's why Amazon hasn't been able to crack warehouse clubs. Amazon Fresh and Whole Foods are different models. They don't have the membership fee structure that forces behavioral commitment. And they don't have the physical experience — picking up a 48-pack of toilet paper is not the same as ordering it online. Luna: Walmart tried with Sam's Club, but they've never matched Costco's execution. What's the one thing Costco does differently that others can't replicate? Lucas: I think it's the discipline around SKU count. Costco carries about 3,700 SKUs per warehouse. A typical Walmart supercenter carries over 140,000. That limited selection forces them to be ruthless about what they stock — and it means each item turns over incredibly fast. They have immense negotiating power with suppliers. Luna: So suppliers compete to get into Costco, which drives prices down, which reinforces the value of the membership. Lucas: Exactly. And that's a moat that feeds itself. The more members Costco has, the more leverage they have with suppliers. The better the deals, the happier the members. It's a virtuous cycle that competitors can't enter without the initial member base. Luna: Final thought — is this moat durable in an era of e-commerce and delivery? Lucas: Costco is investing in e-commerce, but their core strength remains physical. They've started offering two-day delivery on some items, but they're not trying to become Amazon. They know their moat is the warehouse trip. As long as people want to push a cart through a treasure hunt, Costco will be fine. And with a 90 percent renewal rate, they've got proof. Luna: So the lesson for founders: don't just build a product. Build a behavior that's hard to break. Lucas: That's the episode. Next time — we'll look at a different kind of moat, one built entirely on network effects.