How Costco masters the economics of exclusivity (2024)

From a food retail perspective, Costco has made significant strides in recent years.

Costco Canada is doubling down on its commitment to membership exclusivity, signaling a shift towards a more disciplined and controlled shopping environment. The retail giant is currently piloting advanced membership card scanners at several locations across Ontario, Alberta, Saskatchewan and British Columbia. These scanners, positioned at store entrances, mandate that shoppers authenticate their membership before entry. For non-members, access is restricted unless accompanied by a valid cardholder.

Nevertheless, there remain limited avenues for non-members to gain entry. A one-day pass, obtainable twice annually, offers temporary access, while those in possession of gift cards or seeking pharmacy services can also bypass the membership requirement.

This strategic move is entirely congruent with Costco's distinct and highly profitable business model. Unlike traditional retailers, Costco derives a substantial portion of its profitability from membership fees rather than retail markups. By monetizing access to its vast inventory—predominantly financed by suppliers—Costco has effectively transformed its customer base into a revenue stream. With over five million active members in Canada, the company generates approximately $325 million annually from membership fees alone, before a single product is sold. This speaks volumes about the financial acumen behind Costco's operations.

From a food retail perspective, Costco has made significant strides in recent years. The company has augmented its in-house food processing capabilities, expanded its offerings of locally sourced products, and enhanced the quality of its Kirkland Signature line. Once regarded as a mediocre food retailer, Costco has evolved into a formidable contender across numerous categories. This is particularly evident with its two iconic loss leaders: the $1.50 hot dog, positioned strategically at the entrance, and the $7.99 rotisserie chicken, located at the far end of the store—both designed to drive foot traffic and maintain customer loyalty.