Think You Know Costco? Here's 1 Little-Known Fact You Can't Overlook.

Key Points

• Costco is a large chain of club stores.

• Costco's customers pay a fee for the privilege of shopping there.

• Membership fees are likely far more important than you think.

• 10 stocks we like better than Costco Wholesale ›

Most retailers are open to anyone who wishes to walk in and buy stuff. Costco Wholesale (NASDAQ: COST) limits access to its stores to people who have paid a membership fee.

This is a huge dynamic shift in retail, but the depth of the change this has on the business may be bigger than you think. Here's one little-known fact you can't overlook with Costco.

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Costco is a club store

Club stores aren't unique. Costco competes with others in the space, including Walmart's Sam's Club division. But overall, club stores are a niche of the broader retail sector. The big difference between a regular retailer and a club store like Costco is the membership fee that customers pay for the privilege of shopping at a Costco or any of its direct competitors.

This is not a small difference. In fact, it is gigantic. For investors, one of the most important metrics to watch with Costco is its membership renewal rate, which generally hovers around 90%. That makes the membership fees an annuity-like income stream.

If you look at the company's top line, however, you might think that this isn't a big deal. In the fiscal third quarter of 2025, Costco generated total revenue of roughly $63.2 billion. The vast majority of that came from product sales, with only around $1.2 billion, or less than 2%, derived from membership fees.

Digging into the details with Costco's costs

From a big-picture perspective, then, Costco's membership fees are barely a rounding error. But that's not the whole story. Membership fees don't really have any costs associated with them, while product sales do.

For example, the cost of the merchandise it sold in the fiscal third quarter of 2025 was just shy of $55 billion. Then there were the costs of operating the company's stores. Sales, general, and administrative costs came in at roughly $5.7 billion in the quarter. The gross profit here was just about $2.5 billion, with almost all of the costs coming from the products themselves and the cost of operating stores.

This is where things start to get interesting. If membership fees have little cost associated with them, then fee income basically drops right down into gross profit. Since the gross profit was around $2.5 billion and the membership fees tallied up to $1.2 billion, these fees accounted for around half of Costco's gross profit. And that income, assuming the company can keep its membership renewal rate high, is an incredibly valuable annuity-like income stream.

Membership fees and the model shift that really matters

Costco's membership fees give it the leeway to accept lower margins on the products it sells. That helps keep customers happy.

The company has long focused on having strong relations with its employees, too, with the goal of assuring high customer service. And that speaks to the little-known fact hidden right in plain sight here. Costco's business isn't really about selling products to customers, it's about keeping its customers happy so they keep renewing their memberships.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.