You Wouldn't Believe the Size of Costco's Membership Fee Income

You Wouldn't Believe the Size of Costco's Membership Fee Income

Costco (NASDAQ: COST) is the second largest retailer in the country, trailing only Wal-Mart in annual revenue. Yet the warehouse giant generates far less profit from its product sales than its bigger rival. Its gross margin was 13% over the past year, or about half of Wal-Mart's figure.

The gap almost disappears when it comes to net profit margin, though. And that overall success is thanks to Costco's large -- and growing -- pool of membership fees.

Costco's strategy is built around maintaining what management calls "price leadership". This approach boils down to delivering the lowest available prices on everything from groceries to gasoline. In many cases, the company warns in its annual report that it'll make pricing decisions that hurt gross profit in pursuit of the broader goal of signing up more members. "This format is designed to reinforce member loyalty and provide continuing free revenue," executives explain. 

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Source: Fool.com