Costco Wholesale (NASDAQ: COST) has achieved remarkable success on a global scale as a retailer. Since his initial public offering in the early 1980s, Costco stock has increased by 72,600%, resulting in enormous returns for shareholders.
A significant portion of Costco’s success has been attributed to the reality that virtually anything can be purchased there. The warehouse retailer’s economical rotisserie chickens and hot dog platters are likely its most recognizable products. In addition to stocking up on necessities such as toilet paper during their purchasing excursions, patrons appreciate the affordable refueling options provided by the company’s outdoor gas stations following their journey.
An additional aspect that contributes to the enjoyment of purchasing at Costco is the extensive selection of newly released products. Furnishings and gold bullion alike are being distributed through online marketplaces and warehouse floors.
It is reasonable to presume that Costco’s profitability is attributable to the way in which it stocks popular products. But retailers throughout the industry are well aware of how difficult it is to maintain high margins, particularly on readily available commodities. As a result, the fundamental factor underlying Costco’s success is a single, uncomplicated choice that is overlooked by almost all of its clientele, despite the fact that it generates an overwhelming majority of the company’s quarterly profits.
Selling merchandise does not generate much revenue for Costco.
Costco annually distributes a substantial volume of products for sale. Costco generated $237.7 billion in product sales during its fiscal year 2023, including the following: a billion rolls of Kirkland Signature Bath Tissue, hundreds of millions of poultry, more than a ton-and-a-half of gold bars, and the remainder of the company’s revenue.
However, Costco’s business strategy does not revolve around generating enormous profits through product sales. Conversely, the organization establishes prices at exceptionally low levels to stimulate high volumes of purchases, albeit at the expense of razor-thin profit margins.
Costco’s adjusted gross margin for the fiscal year 2023 was a mere 10.6%, calculated exclusively from merchandise sales and expenses. Including marketing and general administrative expenses as well as the reduction in income taxes by Uncle Sam, Costco’s profit margin for the previous year was a mere 2.6%.
