A "boring" business, worth billions
This week Costco, the membership-only big-box retailer, announced that the company's revenue had jumped almost 19% in March, relative to the year before. That's fast growth for a sleepy retailer that doesn't pay for advertising and is most famous for huge no-frills warehouses and $1.50 hot dogs.
Members only
Technically, Costco is a private club. It's just not a very stuffy one. Shopping at Costco requires a membership, which starts at $60 a year. Once a member, Costco will pretty much sell you anything, at cut prices and preferably in bulk. That means that, like most retailers that compete on price, Costco lives with a slender profit margin, which last year was just over 3%.
That margin doesn't leave much room for error, but Costco has a secret: it almost doesn't care about making money on its merchandise sales. Although small in absolute terms, Costco's membership fees are almost pure profit. That smooths things out big time for a business that could otherwise be a bit of a roller coaster.
Indeed, if you assume Costco's membership fees are pure profit then they've accounted for 65-70% of the company's total operating profit over the last 20+ years.
Hot dogs for $1.50: always
The epitome of Costco's no-frills strategy is their $1.50 hot dog, which is a staple of the Costco experience and has been keeping customers coming back for 35+ years, charging $1.50 the entire time. Presumably at some point they began losing money with every hot dog sold, prompting the CEO to approach the founder, suggesting they raise the price, to which he was told "if you raise the [price of the] effing hot dog, I will kill you. Figure it out." — they figured it out.
