Most Americans have at some point in their lives gone to a Costco Wholesale location to shop for everyday items, including: groceries, appliances, furniture, and more. If one were to compare the pricing of Costco with other grocery stores, it would be very noticeable that the pricing in Costco is quite lower than other grocery stores.
There are many reasons why Costco can afford lower prices in comparison to other stores. Clearly, Costco is a successful chain, with about 600 locations in the United States alone. The reason for their success is certainly not because of overcharging items. In fact, Costco is very well known for its $1.50 hot dog and soda combo, which is famously known as a cheap option.
According to Sophomore Vincent Listerman: “The whole reason I like Costco is because of the cheap groceries.”
The $1.50 hot dog soda is a well-known justification for Costco’s success in such a competitive industry, where companies fight each other financially and boast of lower prices.
However, Costco has maintained their $1.50 hot dog despite rising inflation, meaning that they began to lose money on their hot dogs but are still steadily selling them. When a financial manager for Costco wanted to raise the price of the hot dog, the CEO stood firm on the $1.50 price tag.
According to Junior TJ Hicks: “I love going to Costco and buying the cheap hot dog after shopping.”
So clearly, Costco does not earn good money on their concessions, which would bring speculation to the next most important factor, the merchandise.
In order for the customer to reach the cheap hot dogs, they must first venture through the strategically engineered pathways to psychological purchasing in the beginning of the store. So one would assume that the profit margin for Costco comes mainly from selling.
This is likely incorrect because of the low pricing. Not only is Costco known for selling underpriced concessions, but they are also known for their underpriced merchandise, which can at times also result in negative revenue. A great example of this is the Costco Rotisserie Chicken, which is a whole chicken for 5 dollars that is already grilled and ready to eat. Despite this, Costco similarly loses money on this food item, so where does the revenue from their 600 locations come from?
The answer is surprising: Costco makes a profit mainly from membership fees. To shop at Costco, one must possess a membership. This permits Costco to do what no other grocery store could previously do, which is sell their items at a price so low that they break even. So all the money that Costco earns is mainly membership fees, as their merchandise is either break even or a tiny profit margin and many of their items are in the red.