Costco Doesn’t Win on Choice. It Wins on Flow.
“If you raise the effing hot dog, I will kill you.” - Jim Sinegal
Everyone talks about the $1.50 hot dog. I’m more interested in how Costco built a $242 billion business by saying “no” to more products than it said “yes” to.
This isn’t a story about bulk groceries or tire centers. It’s about logistics. It’s about discipline. And it’s about how fewer SKUs, better flow, and repeatable systems created one of the most durable retail machines in modern history.
Memberships Power the Model—Not Just the Margins
Let’s start here: Costco makes more profit from membership fees than from selling goods.
In 2023, Costco earned $4.6 billion in membership fees—representing over 75% of its total operating income. That’s because gross margins on product sales are razor-thin: just 10.6%, compared to 24–35% for traditional retailers.
It’s not that they’re leaving money on the table. It’s that they’re building a flywheel.
Memberships bring recurring revenue (MRR is king; right after cash. of course)
Recurring revenue funds low pricing
Low pricing drives high traffic
High traffic increases volume leverage
Volume leverage improves supplier terms
And the cycle starts again
Every time Costco gets more efficient, it lowers prices. Every time it lowers prices, it becomes harder to compete with.
This is not margin expansion. This is moat reinforcement.
The Power of SKU Discipline: Less Is More
Costco carries around 3,800 active SKUs. Compare that to:
Target: 80,000
Walmart Supercenter: 120,000
Amazon: Infinite shelf
But while others chase endless choice, Costco goes narrow and deep. It doesn’t want 15 versions of olive oil. It wants one it can move by the pallet.
This SKU constraint creates leverage at every level:
Better volume-based pricing from suppliers
Faster inventory turns—12.4x annually, compared to Walmart’s 8–9x
Simplified store layouts—no over-merchandising
Reduced spoilage and markdowns
And most importantly: clean data, with fewer outliers to model or manage
This is what makes “less is more” work. It’s not curation for aesthetics—it’s compression for velocity. Remember, Costco is not trying to be an “everything store”. Costco buys work hard to understand what their demographic needs; you will notice that there are excessive amounts of staples within the store, but some other items are seasonal and recurring. This builds up customer anticipation and secures demand.
Limited Quantities, Intentional Scarcity
Costco adds another layer on top: tight inventory. Not only are SKUs limited—they’re not guaranteed to stay in stock.
The treasure-hunt model (especially in general merchandise and seasonal goods) keeps shoppers engaged and inventory moving. Customers know: if it’s here today, it might not be tomorrow. That urgency isn’t just psychological. It’s operational.
By holding leaner quantities, Costco:
Keeps carrying costs low
Increases turns
Reduces the risk of long-tail inventory
And stays agile across categories
This strategy isn't just about finding deals—it's about maintaining liquidity in physical product. The faster it moves, the more control Costco has over what it buys next.
Cross-Docking as Logistics Core
Over 75% of Costco’s inventory flows through cross-dock facilities. That means products don’t sit in storage—they move directly from inbound trailers to outbound store shipments, often within 24 hours.
This model does three things exceptionally well:
Reduces inventory holding costs
Eliminates double-handling and warehouse labor
Shrinks lead time between supplier and shelf
Because Costco already knows where everything is going before it arrives, it can move high-volume SKUs with minimal storage and maximum predictability.
It’s not fast fashion. It’s fast movement.
The Kirkland Lever: Private Label as Negotiation Tactic
Kirkland Signature isn’t just a store brand. It’s a strategic asset. Kirkland now accounts for roughly 27% of Costco’s total sales. It spans everything from almonds to dog food to diesel. But the real power is in how it gives Costco negotiating leverage.
When a national brand balks at pricing terms, Costco doesn’t flinch. It just shifts volume to Kirkland—or creates a Kirkland equivalent. However, the creation of a Kirkland equivalent is a long process, and final products have to be cleared by the CEO himself prior to deployment.
Even better, most Kirkland SKUs are co-manufactured by top-tier suppliers (Duracell, Niagara, Henkel, etc.), meaning Costco gets premium quality at lower margin requirements.
This dual dynamic—national brand or house brand, but always Costco’s terms—keeps suppliers honest and pricing consistent.
Kirkland isn’t about branding. It’s about cost control.
The Warehouse as an Operating System
Costco warehouses are designed for flow, not browsing.
No elaborate displays
Pallet-first layout
Products stacked high and sold in bulk
Minimal restocking (most items are placed directly on sales pallets)
60%+ of SKUs live at or near floor level for fast turnover
Labor efficiency is built into the physical environment. Employees move less, lift less, and touch product fewer times. That’s not just good ops—it’s how you keep SG&A at 10% while offering the lowest prices in the market.
Each store is part retail, part fulfillment, part throughput terminal. Nothing is optimized for beauty. Everything is optimized for volume.
Costco Online: Built for Relevance, Not Speed
Costco’s e-commerce presence isn’t trying to be Amazon. It’s designed for Costco members who want Costco goods online—especially bulky, seasonal, or big-ticket items.
Online sales were 6.6% of revenue in 2023, and growing steadily—but they’re not chasing speed. They’re offering:
Large appliances
Furniture
Tires and automotive services
Same-day groceries via Instacart and Uber (in select markets)
Fulfillment is handled through dedicated e-commerce DCs, not store inventory. That keeps SKU velocity high in stores, while online expands the catalog without slowing the core.
This hybrid approach preserves Costco’s in-store throughput while adding e-comm convenience without operational drag.
My Final Thoughts: The Logistics Flywheel
Costco isn’t a retailer in the traditional sense. It’s a throughput engine with just enough storefront to let the model work.
What looks like constraint—limited SKUs, limited inventory, tight formats—is actually leverage. Every decision Costco makes around product, price, and placement reinforces flow.
Flow becomes pricing.
Pricing becomes loyalty.
Loyalty becomes scale.
Scale becomes power.
And all of it runs on discipline.
