Costco's Membership Magic: How the Retail Giant's Fee Model Fuels Growth Amid Economic Headwinds
Inside a sprawling Costco warehouse on a Thursday afternoon, Jessica pushes an oversized cart past pallets stacked with everything from organic produce to 70-inch televisions. The mother of three from suburban Chicago isn't just shopping—she's executing a carefully planned strategy.
"With prices everywhere else still climbing, my $130 Executive membership pays for itself in the first two months of the year," Jessica explains, examining a package of organic chicken breasts. "Where else can I save on essentials and still afford small luxuries for the family?"
This consumer calculus lies at the heart of Costco's remarkable third-quarter performance, announced yesterday. The warehouse retailer reported earnings of $4.28 per share on revenue of $63.21 billion, handily beating Wall Street's expectations of $4.24 per share and $63.19 billion in revenue. The results sent shares modestly higher in after-hours trading to $1,008.74, extending the stock's 10% year-to-date gain.
The Subscription Shield: How Membership Fees Create Retail Resilience
The earnings spotlight falls squarely on Costco's membership revenue, which surged to $1.24 billion—up from $1.12 billion a year earlier. This critical metric reflects the first full quarter of results since the company implemented its September 2024 membership fee increase, the first such hike since 2017.
The membership model—raising basic Gold Star memberships from $60 to $65 and Executive memberships from $120 to $130—acts as both revenue engine and competitive moat. These fees now fund 118% of Costco's total operating profit, creating a financial buffer that allows the retailer to maintain razor-thin margins on merchandise.
"The membership model is essentially Costco's superpower," notes a retail analyst who follows the company closely. "When you've already collected your profit up front through fees, you can focus on delivering value rather than extracting margin on every item."
This strategy appears to be working. Despite initial concerns about potential customer attrition following the fee increase, Costco's worldwide renewal rate held steady at an industry-leading 93%—suggesting the price adjustment caused minimal membership churn.
Digital Transformation Accelerates as Online Sales Surge
Another standout in Costco's earnings report was e-commerce performance, with online sales jumping 14.8% year-over-year—marking the third consecutive quarter of accelerating digital growth.
The company has methodically expanded its digital ecosystem through initiatives like Costco Next, which now features products from 50 third-party brands, and same-day grocery delivery services. Management acknowledged for the first time that online basket profitability is "approaching warehouse levels"—a significant milestone for a business historically dependent on in-person shopping.
This digital transformation represents more than just an additional sales channel. It's increasingly becoming a complementary membership benefit that reinforces customer loyalty.
"We're seeing members use digital and physical shopping interchangeably," said CEO Ron Vachris during the earnings call. "Members have placed even more emphasis on the value of high-quality items at Costco, and our teams will continue to rise to that challenge by leveraging our global buying power, supplier relationships, and innovation."
Margin Expansion Defies Retail Headwinds
Perhaps most impressive was Costco's gross margin expansion in a quarter when many retailers struggled with pricing pressures. The company reported gross margins of 11.25%—an increase of 41 basis points year-over-year, with more than 70% of that improvement coming from core merchandising operations rather than gasoline sales or one-time factors.
Fresh foods led the charge with a 70 basis point margin improvement, partially offset by a 20 basis point drag from gasoline operations.
This margin strength reflects Costco's unique operational flexibility. The company's massive purchasing power and willingness to quickly discontinue underperforming products allow it to navigate supply chain disruptions and inflationary pressures more nimbly than traditional retailers.
"Costco's delete-and-replace approach to merchandise gives them a competitive advantage during periods of economic volatility," explains a supply chain expert familiar with the company's operations. "They can shift suppliers or product mix faster than conventional grocers, who typically have longer-term commitments to specific SKUs and brands."
The Global Growth Horizon
While U.S. operations continue to drive results—with domestic comparable sales growing 6.6% compared to 2.9% in Canada and 3.2% in other international markets—Costco's global expansion strategy represents its most significant long-term growth lever.
The retailer now operates 905 warehouses worldwide, with 281 locations outside the United States. Management targets opening approximately 30 new warehouses annually, with half planned for the Asia-Pacific region.
These international locations initially generate about 70% of the revenue of their U.S. counterparts but typically match U.S. store-level operating profits within three years—creating a predictable path to earnings growth as these locations mature.
Upcoming openings include Shanghai's fifth location, Shenzhen's second warehouse, and a highly anticipated market entry into India through a Delhi joint venture expected in fiscal 2026.
The Premium Price of Excellence
Despite the strong results, some investors question whether Costco's premium valuation—trading at 59 times trailing earnings—leaves room for further appreciation.
This valuation represents the widest gap versus Walmart (37.1x P/E) in five years and dwarfs other retailers like BJ's Wholesale Club and Target .
Skeptics point to Costco's free cash flow yield of just 1.5% at its current $1 trillion market valuation—significantly below the large-cap consumer staples average of 4%, suggesting the stock already prices in considerable future growth.
"The current valuation embeds flawless execution," cautions a portfolio manager who holds Costco shares. "While the quality of the business is undeniable, new investors might consider waiting for pull-backs to the $900-$940 range before adding positions."
The Kirkland Effect: Private Label Strength
Another bright spot in the earnings report was the continued penetration of Costco's Kirkland Signature private label, which now represents 29% of total sales—up 60 basis points year-over-year.
This private label expansion serves multiple strategic purposes: it improves gross margins, creates product differentiation, and gives Costco additional leverage in negotiations with national brands.
"Kirkland isn't your typical store brand," notes a consumer goods consultant. "Costco has positioned it as a premium alternative that often exceeds national brand quality while maintaining a significant price advantage. This creates a virtuous cycle where consumers specifically seek out Kirkland products rather than viewing them as compromise purchases."
Navigating Future Headwinds
Despite the strong quarter, Costco faces several potential challenges. Analysts highlight three primary risks: possible tariff escalation on Chinese imports that could compress gross margins by approximately 80 basis points; wage inflation that might increase selling, general and administrative expenses; and the potential for valuation compression from the current 59 times earnings to a more historically typical 45 times multiple.
However, the company's $13.8 billion net cash position—representing about 2% of its enterprise value—provides significant financial flexibility. This balance sheet strength, combined with $6.9 billion in trailing twelve-month free cash flow, positions Costco to potentially announce another special dividend by calendar year 2026.
As shoppers like Jessica continue filling their oversized carts, Costco's unique business model demonstrates how membership economics can create resilience in an uncertain retail environment. The question for investors isn't whether Costco will continue executing its winning strategy, but whether the premium price of admission already reflects the company's exceptional qualities.
"In an era where most retailers are fighting for survival, Costco is thriving by doubling down on what it does best," concludes a retail industry consultant. "The membership model turns customers into stakeholders, creating a level of loyalty that traditional retailers simply cannot match."