Membership fees, loss-leader pricing, and the Sam's Club rivalry

Sam Costco's whole reputation is built on cheap bulk stuff and that famous hot dog deal, but the actual engine of its profits seems to be something less obvious — the membership fee itself. So where does the money really come from?

Maya The membership fee is the key. In fiscal year 2025, which ended in late August 2025, Costco's own filing with the SEC reported net sales of $269.9 billion, with membership fees bringing in $5.32 billion. That fee revenue is only around 2% of total sales, yet because there's no cost of goods attached to it, a dollar of membership fee drops straight to the bottom line in a way a dollar of merchandise sales never does.

Sam So a tiny sliver of total revenue ends up carrying a massive share of the profit, because selling a membership card costs Costco almost nothing once the system exists.

Maya That's close to the picture. A financial analysis published in September 2026, working from Costco's own figures, found membership fees made up 51.3% of the $10.38 billion in operating income for fiscal 2025, and 50.6% of the $11.69 billion in operating income for fiscal 2026. The year before that, it was 56.4%, so the share has been drifting down slightly as the merchandise side gets a bit more profitable on its own.

Sam Half the company's operating profit from a fee most members barely think about once they've paid it feels like an odd foundation for a retailer this size.

Maya It explains the posture though — Costco needs members to feel the card is worth renewing, which is why the merchandise side stays priced so tightly. The phrase people use for that claim, that membership fees are essentially all of Costco's profit, was close to literally true in the early 2020s and has only loosened gradually, since the filing shows core-category gross margin rose to 11.12% in fiscal 2025 from 10.92% in fiscal 2024, helped by fresh foods and the co-branded credit card program.

Sam That tracks with the fee going up not long ago — did raising the price change how much of the profit comes from fees, or just how big the total pot is?

Maya The standard Gold Star membership went from $60 to $65 and the Executive tier from $110 to $120 in September 2024, the first increase in seven years. Because Costco recognizes that revenue gradually over each member's one-year term rather than all at once, the effect phased in slowly: fee income grew 10.1% to that $5.32 billion figure in fiscal 2025, and was projected near $5.9 billion for fiscal 2026, an increase of about 11%.

Sam A gradual rollout like that means the company is still feeling the effects of a price change from a year or two back, not just the latest one.

Maya By the fourth quarter of fiscal 2026, the CFO, Gary Millerchip, told analysts that a little more than a quarter of fee growth was still attributable to that 2024 increase, with its tailwind nearly used up by autumn 2026 as overall growth cooled into the high single digits. Alongside that, Costco had reached about 84.1 million paid household members and more than 145 million individual cardholders worldwide in 2025.

Sam With fees mattering that much, I'd expect renewal rates to be the number everyone inside the company watches most closely.

Maya They do watch it closely, and the figures from the 10-K were 92.3% in the U.S. and Canada and 89.8% worldwide at the end of fiscal 2025. The filing also flagged something worth noting — renewal rates were pulled down slightly by a growing share of memberships being sold online, which tend to renew at a somewhat lower rate than ones sold in warehouses.

Sam None of that fee money would mean much if the actual products weren't priced low enough to keep people coming back in the first place, which brings me to the markup rule I keep hearing about.

Maya There's a long-standing internal cap, described by former CEO Jim Sinegal and repeated throughout the company's history, limiting markups to 14% on national brand items and 15% on Costco's own Kirkland Signature label — far below the 25% to 50%-plus markups typical of conventional retail. Costco's 2018 annual report put the average markup across the whole store at only about 11%.

Sam A gap that wide between Costco and ordinary retailers makes the cap sound less like a pricing strategy and more like a rule the company has deliberately made hard to break.

Maya Former CFO Richard Galanti called the underlying philosophy "arrogantly simple" — hook members with high-quality goods at the lowest possible prices, funded by the membership fee and a deliberately narrow product range, while treating employees well. Sinegal liked to illustrate it with Calvin Klein jeans Costco sold for $29.99 when competitors charged $50 or more, and researchers studying the company's culture describe the markup cap as a kind of commitment device — a constraint leadership imposes on itself precisely so it can't be tempted to raise prices later, even when it could get away with it.

Sam The narrow product range keeps coming up, but it sounds almost backwards for a store this size — most retailers brag about having everything under one roof, and Costco seems to brag about having almost nothing.

Maya That's the strategy though. A typical Costco warehouse stocks somewhere around 3,800 to 4,000 distinct items, while a typical Walmart store carries roughly 120,000. Costco usually picks just one or two brands per category instead of stocking eight brands in a dozen sizes, which means each item it does carry sells in enormous volume.

Sam And presumably that volume is exactly what gives them leverage with suppliers — they can walk in and say we'll take an enormous order of this one brand, so give us your best price.

Maya Precisely the mechanism, and it shows up in how the warehouses themselves are built. They average around 145,000 to 147,000 square feet, and merchandise arrives on pallets that double as the display — nobody's unloading boxes onto shelves one at a time, which cuts labor costs. By the end of fiscal 2025 Costco was running 914 warehouses, with about 85% of them in the U.S., Canada and Mexico.

Sam With that few SKUs per store, the house brand must end up being a much bigger share of what's on the shelf than it would be anywhere else.

Maya It's become enormous. Kirkland Signature launched back in 1995, and according to reporting from Costco's 2026 shareholder meeting, it generated about $90 billion in sales in calendar 2025 alone — over $15 billion more than the year before — on only around 350 to 600 distinct items. That's now roughly a third of the company's entire revenue coming from a brand that barely registers as a fraction of the total product count.

Sam A third of all sales from a few hundred items feels like it should be squeezing out name brands people actually ask for by name.

Maya It has, in a number of categories. Trade coverage has pointed to brands like Kind, Planters, Huggies and Pampers losing shelf space as Costco swaps in its own label when a national brand underperforms. CEO Ron Vachris said in 2025 that Kirkland's "penetration" kept rising, and part of why Costco pushes it so hard is that private-label goods carry fatter margins for Costco while still being priced around 20% below the comparable branded product — a target the company states in its own annual report.

Sam So customers feel like they're getting a bargain against the name brand, while Costco is quietly making more money per unit than it would selling the name brand itself.

Maya That's the trade Costco is making, and it is working at a scale nothing else in retail really matches — Kroger's entire collection of private-label brands combined brought in about $32 billion, which is roughly a quarter of that chain's non-fuel sales, nowhere near what Kirkland does as a single label.

Sam Which makes the hot dog feel like the opposite instinct — instead of finding a clever way to make more margin, Costco seems to deliberately hang on to an item that loses them money, just to prove a point.

Maya It's been $1.50 for the combo since it launched sometime around 1984 or 1985, and multiple retrospectives note that if it had simply kept pace with inflation it would cost around $4.40 today. The story people tell is that Craig Jelinek once warned co-founder Jim Sinegal the company was "losing our rear ends" on it and wanted to raise the price.

Sam I take it Sinegal wasn't exactly receptive to that idea, given how much the brand still leans on that price point being untouchable.

Maya Not remotely — his reported reply was, "If you raise the effing hot dog, I will kill you. Figure it out." So instead of touching the price, Costco rebuilt its own supply chain around it: a hot dog plant outside Los Angeles around 2009, a second one near Chicago later, its own Kirkland-brand frankfurter replacing Hebrew National, and even a decade-long switch from Coca-Cola to Pepsi for the soda before Coke came back to the food courts in January 2025.

Sam All of that engineering just to protect a price tag that sounds almost like a promise to customers rather than a normal business decision.

Maya That's exactly how analysts describe it — Forrester's Brendan Witcher has framed it as Costco effectively buying loyalty by absorbing the cost itself, and it isn't a small gesture either, since the company sells well over 100 million of those combos every year.

Sam The hot dog story makes the chicken's price history feel almost predictable by comparison — did Costco ever even try to raise it the way they tried with the hot dog?

Maya Once, briefly. The chicken launched around 2000 at $4.99 and stayed there for more than two decades, with only one bump, to about $5.99, during the 2008 financial crisis before it got knocked back down to $4.99 in 2009, according to a retrospective by The Hustle. That same analysis found it would need to cost roughly $8.31 today just to keep pace with inflation.

Sam So the one time they touched it, during an actual crisis, they still reversed course — that sounds like more than stubbornness, like someone ran the numbers and decided the loss was worth eating.

Maya Former CFO Richard Galanti said as much on a 2015 earnings call, admitting Costco was willing to forgo "$30 million, $40 million a year on gross margin" to hold the price — a line widely cited since as confirmation the chicken is sold as a loss leader, meaning it's priced to draw people in rather than to turn a profit itself.

Sam Forgoing tens of millions a year on one item only makes sense if the volume behind it is enormous — how many of these birds are we even talking about?

Maya Over 100 million a year, with one widely cited figure putting 2023 sales at 137 million chickens. To control costs at that scale, Costco opened a $450 million vertically integrated poultry plant in Fremont, Nebraska, in 2019 — meaning Costco itself raises and processes the birds rather than buying from an outside supplier, which is unusual for a retailer rather than a meat producer.

Sam Building your own poultry plant just to protect a chicken price feels like the same instinct as the hot dog frankfurter factories — rebuild the supply chain rather than touch the number on the sign.

Maya Rutgers Business School professor John Longo described the real payoff to The Hustle this way: shoppers rarely just buy the chicken and leave — "they probably shop for other items that provide higher profit margins." That's the whole economics of a loss leader — sacrifice margin on one famous, easy-to-compare item to pull people through the whole warehouse.

Sam Though a plant this big and a product this famous must also draw more scrutiny than the hot dog ever did, given how much more vulnerable a live animal and packaged meat are to legal and ethical questions.

Maya It has. In January 2026 a proposed class action was filed in federal court in Southern California alleging that the "No Preservatives" labeling on the Kirkland Signature Seasoned Rotisserie Chicken was misleading, because it contains additives such as sodium phosphate and carrageenan. It's a live case, separate from the cost side, but it shows the chicken carries reputational exposure the hot dog mostly hasn't.

Sam All of this depends on an enormous workforce actually running these warehouses and poultry plants — and Costco's reputation on pay seems to be almost as famous as the chicken itself.

Maya It's well earned by the numbers. Costco set a company-wide starting wage of $19.50 an hour in July 2024, up from $17 in 2021. A new three-year labor agreement took effect in March 2025, raising the minimum to $20 and pushing the average hourly wage for U.S. and Canada workers above $31, with CEO Ron Vachris calling it a reflection of Costco's "continued commitment to provide industry-leading pay and benefits for our employees."

Sam Did that agreement come together easily, or was there friction behind it the way there sometimes is with big retail contracts?

Maya There was real friction. In January 2025 the Teamsters, representing about 18,000 Costco employees, threatened to strike over wages, and a tentative agreement was only reached on January 31, 2025, averting the walkout, though terms weren't disclosed right away. By March 2025, top-of-scale clerks were earning $31.90 an hour and assistants $30.20, with two more dollar-an-hour raises already built in for March 2026 and March 2027.

Sam That's a lot of built-in cost for a company that already runs on razor-thin markups — does leadership talk about it as a burden, or as something that pays for itself?

Maya CFO Gary Millerchip told analysts both the July 2024 raise and the March 2025 contract each added mid-to-high single-digit basis points of pressure to operating expenses. But Costco points to what it gets back: turnover among employees who've stayed at least a year sits around 6-7%, against a retail industry average the National Retail Federation puts near 60%. And only about 5% of the workforce is unionized, according to CFO Dive's coverage of the raise.

Sam With prices this disciplined and wages this high, I'd assume Costco has to spend a fortune convincing people to walk through the doors.

Maya Almost the opposite — Costco spends next to nothing on traditional advertising and has no official ad budget, relying instead on targeted member emails, coupons and word of mouth. What replaces advertising inside the store is something retail analysts call the "treasure hunt": rotating pallets of discounted, often unexpected goods — electronics, jewelry, seasonal items — placed deliberately through the warehouse, including near the back past the chickens, to stretch out how long people linger and spend.

Sam The treasure hunt makes sense as a strategy without a marketing budget, but let's turn to the rival everyone brings up whenever Costco comes up — how does Sam's Club stack against all of this?

Maya Sam's Club, owned by Walmart, is the direct competitor in the warehouse-club format. As of Walmart's fiscal 2025 filing, Sam's Club ran 600 clubs across 44 states and Puerto Rico and posted net sales of $90.2 billion for the year ending January 31, 2025, up 4.7% from $86.2 billion the year before, with membership income rising to $2.32 billion from $2.05 billion.

Sam Ninety billion sounds like a serious business on its own, but set against Costco's $269.9 billion it looks almost like a different weight class entirely.

Maya It is roughly three times the size, and the membership engine shows the same gap — Costco's $5.32 billion in fee income is more than double what Sam's Club brings in, which traces back to Costco's larger average warehouse footprint and higher per-member fees.

Sam Higher fees being the opposite of what I'd expect from the challenger brand — I'd have guessed Sam's Club undercuts Costco on price to pull customers away.

Maya It does undercut on the fee itself. Reporting from late 2025 put a basic Sam's Club membership around $50 against Costco's $65 Gold Star, and the premium "Plus" tier near $110 versus Costco's Executive tier — Sam's Club runs roughly 8% cheaper to walk in the door.

Sam And on the ground, with actual store counts, is Costco's advantage in warehouse size enough to offset having fewer locations than Sam's Club?

Maya As of December 2025, reporting put U.S. Costco warehouses at 578 against 602 for Sam's Club, so the location counts are close, though Costco's warehouses tend to run larger and carry more international locations outside the U.S.

Sam With their own house brand, is Sam's Club trying to copy the Kirkland playbook item for item, or going after a different part of the shelf?

Maya Their private label is called Member's Mark, and it's frequently reported as pricing somewhat below Kirkland on comparable items. The difference reviewers point to is placement — Sam's Club spreads Member's Mark items throughout the store, while Costco concentrates Kirkland and is generally seen as carrying a stronger assortment of name brands in its bulk categories. One comparison write-up put it plainly: "many of my favorite Costco buys carry the Kirkland Signature label."

Sam Given how much this whole model runs on the membership fee rather than markup, I'd guess Wall Street treats fee growth as the number to watch for both chains, not just sales.

Maya That's precisely why the fee engine matters beyond Costco's own income statement — it's what lets the company hold the hot dog and chicken flat for decades, pay wages well above the retail floor, and still grow operating income from $9.29 billion in fiscal 2024 to $10.38 billion in fiscal 2025 and $11.69 billion in fiscal 2026. With the 2024 fee increase now largely cycled through, future growth depends on new sign-ups, Executive-tier upgrades, and any further price increases Costco is willing to risk — all while Sam's Club, with its lower entry fee and slightly more locations as of December 2025, keeps competing for the same bulk-shopping household.

Sam After everything we've gone through today, if you had to leave a listener with just one thing to hold onto about how this whole business works, what would it be?

Maya The hot dog and the chicken aren't quirks, they're the clearest proof of the whole model — Costco makes its money from the membership card, not the merchandise, which frees it to price goods almost at cost, pay employees more than the industry average, and still turn a healthy profit, because the fee itself is nearly pure margin.

Sam That's a genuinely clarifying way to end it, and I suspect a lot of listeners will think about that $1.50 combo differently next time they're standing in line for one.

Maya Thanks for having me walk through it, and I'll just add that this show is AI-generated with synthetic voices, built from source reporting whose authors have no connection to this production. Everything today drew on Costco's SEC filings, The Hustle, CFO Dive and a range of other industry and financial reporting.