How Does Costco Make Its Money? A Deep Dive into Costco Wholesale’s Revenue Engine in 2025

Costco Wholesale (NASDAQ: COST) has solidified its reputation as a retail powerhouse, boasting robust growth, stable margins, and a distinctive membership-based business model. As we analyze the company’s 2025 financials, it’s clear that Costco’s ability to generate revenue hinges on several strategic pillars—membership loyalty, efficient supply chain management, and targeted expansion. This article provides a comprehensive overview of how Costco makes its money, highlighting its revenue streams, cost structure, and long-term growth drivers.

The Membership-Driven Revenue Model: The Foundation of Costco’s Success

At the heart of Costco’s profitability lies its unique membership model. Unlike most traditional retailers, Costco requires shoppers to purchase an annual membership, creating a recurring stream of revenue largely independent of daily sales fluctuations. As of Q1 2025, the number of paid members and cardholders has grown by 7%, underscoring the enduring appeal and stickiness of the Costco value proposition. These membership fees, which contribute directly to the company’s bottom line, account for a disproportionate share of net income relative to product sales.

Despite a gross margin of 12.8% and a relatively modest free cash flow (FCF) margin of 2.7%, Costco’s recurring revenue from memberships enables the company to operate on razor-thin product margins while maintaining overall profitability. This model not only ensures a stable cash flow but also fosters exceptionally high customer loyalty and retention rates.

Revenue Breakdown: Food, Non-Food, and Warehouse Operations

Costco’s sales are broadly diversified across several product categories. 41% of total revenue stems from food products, which remain the core traffic driver for its warehouse locations. The fresh foods segment accounts for an additional 14%, highlighting the company’s ability to attract value-conscious shoppers seeking quality groceries at wholesale prices. Non-food items contribute 25% of revenue, offering a wide range of household goods, electronics, and seasonal merchandise. Meanwhile, warehouse services themselves represent 20% of total revenue, illustrating the importance of Costco’s unique “big box” retail format.

This diversified revenue structure insulates the company from volatility in any single segment and positions Costco as a one-stop shop for millions of members.

Geographic Focus: U.S.-Centric Growth

The bulk of Costco’s operations—and its revenue—remains firmly rooted in the United States, complemented by a significant presence in Canada and a smaller footprint in other markets. While this U.S.-centric focus provides exposure to one of the world’s most lucrative retail markets, it also poses risks tied to the domestic economic cycle. Any slowdown in U.S. consumer spending could have an outsized impact on Costco’s top and bottom lines.

Key Growth Drivers: Expanding Membership, Store Footprint, and Cash Flow

Costco reported a 3% increase in warehouse locations in Q1 2025, reflecting a measured yet consistent approach to physical expansion. This, in turn, supports organic revenue growth, with overall sales climbing by 8% and free cash flow surging by an impressive 20%. The company’s powerful customer value proposition—offering high-quality goods at low prices—drives both repeat visits and higher average spend per member.

The size and loyalty of the membership base remain Costco’s most formidable competitive advantages. Predictable revenue from annual fees not only cushions the company against market fluctuations but also provides management with the flexibility to invest in supply chain efficiencies, new store openings, and enhanced member experiences.

Operational Quality and Management Strength

Costco’s management team consistently receives high marks, earning a 4.0 out of 5 rating for leadership and a strong 4.0 for business “moat.” Product reviews (3.5/5) and employee satisfaction (3.3/5) signal areas with room for improvement, but the overall culture and brand reputation are key enablers of Costco’s sustained growth trajectory.

Challenges: Membership Dependence and E-commerce Weakness

Despite its strengths, Costco faces two primary headwinds. First, its heavy reliance on the membership model leaves it exposed to shifts in consumer sentiment or competitive offerings that could erode the base. Second, the company’s limited e-commerce presence is a clear disadvantage in an era where digital sales channels are growing rapidly. As online retail continues to disrupt the traditional brick-and-mortar landscape, Costco will need to accelerate its digital transformation efforts to maintain relevance.

Bottom Line: Valuation and Investment Considerations

According to current discounted cash flow analyses, Costco’s fair value is estimated at $449 per share—with the market price currently trading at a 58% premium. This premium reflects investor confidence in Costco’s durable business model, predictable cash flows, and leadership position. Nevertheless, prospective investors should weigh these strengths against the company’s relatively high valuation and exposure to U.S. consumer trends.

In summary, Costco’s success is anchored in a recurring revenue model, relentless focus on member value, and operational excellence. To sustain long-term growth, the company must address its digital gap while leveraging its unparalleled customer loyalty—a combination that will determine whether Costco can continue to outperform in the evolving retail landscape.