How Costco Makes Money, Despite $1.50 Hot Dog Combos

Warehouse retailer Costco (NASDAQ: COST) is famous for low prices on bulk products. It doesn't get much cheaper (or bulkier) than the $1.50 hot dog combo, a quarter-pounder plus drink. That's enough bang for your buck to suspect the obvious--that Costco is losing a ton of money on dogs.

However, the $1.50 hot dog combo isn't a loss leader; it's the canary in the coal mine, a perfect symbol of the entire Costco business model. If it disappeared, I'd be worried. Here's how Costco makes money, starting with the dogs.

Shopping at Costco.

Costco makes its own hot dogs

Costco owns two meat-processing plants that pump out quarter-pound hot dogs. This keeps costs low -- possibly low enough to just about break even on dogs. According to hot dog company Willy Dog, a hot dog with bun and condiments costs a vendor on average between 45 and 80 cents to prepare. Coke is even cheaper to prep. Estimates peg a cup of Coca-Cola at 10-20 cents. On the high end, that leaves $0.50 for Costco to cover other miscellaneous expenses.

It wasn't always this way.

In a story recounted during a 2018 presentation, Costco CEO Craig Jelinek said the hot dog was unsustainable. Costco co-founder Jim Sinegal said, "If you raise the [effing] hot dog, I will kill you. Figure it out." So Jelinek did. In 2008, Costco stopped contracting Hebrew National to provide dogs and built meat-processing facilities in the U.S. Today, these plants pump out Kirkland Signature hot dogs, including those sold at the food court.

The success of controlling costs with the hot dog plant points to a broader strategy that stretches beyond hot dogs. Enter Kirkland Signature.

Costco goes Kirkland

In 1995, Costco launched Kirkland Signature, its private-label brand. The goal was to consolidate over 30 privately owned products under a single label. Scattered brands like "Simply Soda," "Clout," and "Ballantrae" became simply Kirkland.

Costco's private-label products make up a large chunk of merchandise revenue. As of 2025, there are over 500 Kirkland Signature products, representing just 12.5% of Costco's assortment. Despite keeping selection limited, Kirkland products make up an outsized 23% of total 2024 revenue (not including Kirkland gas). Selling at up to 15% margins, we can infer that Kirkland products are a major profit driver.

Kirkland products are a big draw for shoppers, selling unusually well. One 2025 Numerator study estimates that a whopping 32% of Costco's sales (across 10 major categories) come from Kirkland products. Competitor Sam's Club also benefits disproportionately from private-label sales, with 33% of sales coming from private-label products. Most buyers (61%) believe private labels offer better value than public alternatives, making them a perfect fit for retail chains that advertise great value at low markups.

The allure of Kirkland products draws potential members to Costco's real money-maker -- the membership.

Costco sells high-margin memberships

Costco memberships account for most of Costco's net income. This is counterintuitive, as the vast majority of Costco's revenue comes from sales of its merchandise.

What it comes down to is margin, how much money Costco makes from sales. Margin on sales of Costco products is low -- Costco caps markups at 14% and 15% for non-Signature and Signature products. The reason: to delight customers. Costco co-founder Jim Sinegal says it best: "Do you know how tempting it is to make another $7 on a pair? But once you do it, it's like taking heroin. You can't stop."

Source: Costco 2024 annual report

Low markups cap how much Costco can profit from merchandise sales. But this cap doesn't apply to memberships. In Q3 2025, Costco made $1.24 billion from membership sales. These can be inferred to be nearly pure profit. (Costco still pays taxes on membership sales. There's also logistics to handle--it costs money to print membership cards, manage accounts, and handle customer service calls). All totaled, membership revenues were 65% of Costco's net income. The membership accounts for most of what Costco takes home, the company's golden goose.

The wheel turns on the combo

Costco hot dogs are emblematic of the whole Costco business model. It offers high-quality products at affordable prices. These prices are made possible through private labels that keep costs low, plus a sticky membership that guarantees high-margin profits. To sell more high-margin memberships, Costco keeps prices competitive.

What you end up with is a growing, profitable business with 90% membership renewal rates.

The $1.50 hot dog combo isn't a sign of fiscal irresponsibility. Nor is it a token concession to hungry buyers. It's proof that Costco remembers what got it here in the first place. So long as it stays true to its roots, I think shareholders will continue to benefit from holding Costco stock. On the flip, I'd be wary if Costco raised prices. It could signal a turnaround by management, one that puts short-term profits above Costco's special sauce, the flywheel.

The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.