Revenue, Operating Income, and the Two Businesses of Costco

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Costco has over $230 billion in revenue and generates seven and a half billion dollars of operating income. This is largely due to their highly defensible and capital-efficient business model. Costco operates as two different businesses under one roof - the retailer and the membership business. While customers perceive it as one experience, financially, it is two distinct entities. About 70% of the company's operating income comes from membership fees, with the remaining 30% coming from retail. This highlights the razor-thin margins of the retail business, prompting questions about the significance of growing retail sales compared to increasing member retention. Despite the significance of the retail business's contribution to profits, the focus remains on retaining members due to the high margin of membership fees.

Costco is not only Charlie Munger’s favorite company of all time (plus he’s on the board, natch), it’s an absolutely fascinating study in how seemingly opposite characteristics can combine to create incredible company value. For instance: Costco has the cheapest prices of any major retailer in America — and also the wealthiest customer base. They pay their hourly workers 30% above the industry norm (and give them excellent healthcare + 401k benefits) — and are almost 3x more profitable on labor than Walmart. Speaking of Walmart, Costco stocks 40x fewer SKUs than their Bentonville-based rivals — yet sells an average of 15x more volume of each. And oh yeah, practically all of Costco’s C-Suite started their careers as baggers and checkout clerks! Tune in for a mind-bending exploration of one of the world’s most iconic — and iconically unique — companies.

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