The Company That Makes Billions By Losing Money on Everything

Added: 2026-06-01

[00:00:00]Costco sells a hot dog and soda for $1.50 and they lose money on every single one. They sell rotisserie chickens for $5. Lose money on those, too. In fact, Costco barely makes any profit selling products at all. So, how are they worth $200 billion?

[00:00:19]Because while you're loading up your cart with cheap toilet paper and bulk snacks, Costco is quietly making billions from something you already paid for before you even walked in. This is how they do it. That $150 hot dog, it hasn't changed price since 1985.

[00:00:37]40 years through inflation, recessions, pandemics, still $1.50.

[00:00:44]When Costco's CEO suggested raising the price, the co-founder told him, "If you raise the price of the hot dog, I will kill you." This wasn't a joke. This is Costco's entire strategy in one sentence. Keep prices impossibly low.

[00:01:02]Make customers feel like they're getting a deal and profit from something else entirely.

[00:01:07]Today, Costco has 130 million members who pay just to shop there, and they're one of the only retailers that Amazon can't destroy. This is the story of how Costco built a secret money machine. To understand Costco, you need to understand one man, Jim Synagal. In 1954, when Jim was 18 years old, he got a job unloading mattresses at a warehouse store in San Diego. The store was called FedMart and it pioneered a radical idea, membershiponly shopping.

[00:01:42]Instead of marking up products to make profit, FedMart charged a small membership fee and sold everything at near cost. The membership was the profit. The products were just the reason to join. Jim Synagal worked at FedMart for 26 years. He learned everything about wholesale retail from the founder, Soul Price. And when Fedmart was sold in 1975, both Jim and Soul moved on to create their own warehouse clubs. Soul Price founded Price Club in 1976.

[00:02:14]Jim Synagal founded Costco in 1983.

[00:02:18]For years, they competed. Two warehouse clubs, same business model, same founder lineage. But then they realized something. They weren't really competitors. They were fighting the same enemy, traditional retail. So in 1993, Price Club and Costco merged and modern Costco was born. But here's what made Costco different from every other retailer. Most stores follow a simple formula. Buy products for cheap. Mark them up high. Sell to customers. Keep the markup as profit. A typical retailer marks up products by 25 to 50%, sometimes more. Costco has a hard cap.

[00:03:02]They never mark up any product by more than 14%.

[00:03:06]Ever. For branded products, the average markup is just 11%. When executives find a product they could mark up by 16%, they're not allowed to stock it. It violates company policy. Why? Because Costco doesn't make money on products, they make money on memberships.

[00:03:26]Now, before I reveal exactly how much Costco makes from memberships, do me a quick favor. If you're enjoying this breakdown, hit that subscribe button. It takes 1 second and it helps me make more videos like this. And let me know in the comments, are you a Costco member? Do you love it or hate it? I read every single comment. Now, back to the money.

[00:03:50]In 2023, Costco brought in $4.6 billion from membership fees. That's pure profit. No costs, no overhead, just membership revenue. Their profit from actually selling products around $7 billion.

[00:04:07]So, memberships represent 40% of their total operating income from a fee that costs 60 to $120 per year. This creates a psychological flip. When you pay for a membership, you feel invested. You want to get your money's worth, so you shop there more often. You spend more. You stay loyal. And because Costco keeps prices absurdly low, you feel like you're winning. That $1.50 hot dog, Costco loses money on every single one.

[00:04:39]But it reinforces the message, we're on your side. The $5 rotisserie chicken also a loss leader. They sell 100 million of them per year and lose money on every single bird, but it gets you in the door. And once you're inside, you're a captive member who's already artificial scarcity. Walk into a Costco and you'll notice something. The products change. That pallet of Kirkland socks you bought last month, gone, replaced by something else. Costco intentionally rotates inventory. They call it the treasure hunt. You never know what you'll find. Maybe it's a 75-in TV. Maybe it's a casket. Maybe it's a 27lb bucket of mac and cheese.

[00:05:21]This does two things. First, it creates urgency. If you see something you want, you buy it now because it might not be there next week. Second, it keeps shopping exciting. People come back just to see what's new. Traditional stores stock the same items forever.

[00:05:37]Predictable, boring. You only go when you need something. Costco turns shopping into an event. But there's a deeper strategy at play. By limiting selection, Costco gains massive leverage with suppliers. Most grocery stores carry 30,000 to 40,000 different products. Costco carries around 4,000.

[00:05:55]When Costco decides to stock a product, they buy in enormous volume. They become the supplier's biggest customer. This gives Costco pricing power. Suppliers compete to get shelf space, and Costco demands the lowest possible price. If a supplier won't negotiate, Costco drops them. No exceptions. When Coca-Cola wouldn't lower prices in 2009, Costco stopped stocking Coke products for a month, Coca-Cola came back to the table.

[00:06:21]This is why Costco's prices beat almost everyone. Then there's Kirkland Signature. Kirkland is Costco's private label brand, and it's one of the most successful brands in the world. In 2023, Kirkland Signature generated over $50 billion in revenue. That's more than Nike, more than Coca-Cola. Here's how it works. Costco finds premium manufacturers. They negotiate to produce Kirkland branded versions of their products. Same quality, lower price.

[00:06:49]Because there's no marketing budget and no middleman. Kirkland batteries are made by Duracell. Kirkland diapers are made by Kimberly Clark. Kirkland vodka is rumored to be made by Grey Goose.

[00:07:00]Same product, half the price. This creates incredible value for customers and huge margins for Costco. Now, let's talk about why Amazon can't kill Costco.

[00:07:10]Over the past 20 years, Amazon has destroyed countless retailers. Borders, Toys R Us, Sears, Circuit City, the list goes on. But Costco is thriving. Why?

[00:07:21]Because Costco sells an experience, not just products. Yes, you can buy toilet paper online, but you can't replicate the Costco treasure hunt, the free samples, the $150 hot dog, the feeling of finding a deal. Costco warehouses are designed to feel exciting. Giant pallets stacked high, forklifts moving around.

[00:07:41]It feels like you're shopping at the source. Amazon sells convenience. Costco sells value and discovery. And here's the key. Costco's membership model creates loyalty that Amazon can't touch.

[00:07:52]Once you pay for a Costco membership, you're incentivized to shop there.

[00:07:56]That's $60 to $120 you've already spent.

[00:07:59]You want to justify it. Amazon Prime has a similar model, but Costco had it first and they perfected it. Costco's renewal rate is 93% in the US and Canada. That's insane. Once someone joins, they almost never leave. But Costco isn't perfect.

[00:08:15]They've faced criticism. Some people argue the treasure hunt model is manipulative. It press on impulse buying. You go in for milk and leave with a kayak. Others say the membership fee is regressive. It benefits people who can afford bulk shopping and have space to store it. Low-income families often can't take advantage, and Costco's limited product selection means less choice. If you want a specific brand, you might not find it. But despite the criticism, Costco keeps growing. They've expanded internationally. They're huge in Japan, South Korea, Taiwan. They're growing in China, and they're investing in e-commerce, not to replace warehouses, but to complement them. So, what can we learn from Costco's success?

[00:08:57]First, loyalty beats transactions.

[00:08:59]Costco doesn't optimize for one-time sales. They optimize for lifetime customers. Second, transparency builds trust by capping markups and pricing everything low. Costco signals, "We're not trying to rip you off." Third, creates scarcity and urgency. The treasure hunt model keeps customers coming back and buying impulsively.

[00:09:20]Fourth, private labels are powerful.

[00:09:22]Kirkland Signature gives Costco control over pricing and quality. And finally, culture matters. Jim Sagal built a company that treats employees well.

[00:09:32]Costco pays above minimum wage, offers benefits, promotes from within. Happy employees create happy customers. Today, Costco is one of the most valuable retailers in the world. They've proven that you don't need to maximize every margin. You don't need to squeeze customers. You just need to offer real value money on hot dogs and chickens >> because the real profit was never in the products. It was in the membership you paid before you even walked through the door.

[00:10:00]>> If you made it this far, you're my kind of viewer. Hit that like button if you learned something new today and subscribe so you don't miss the next breakdown. New videos drop every Monday, Wednesday, and Friday. I want to know what you think. Drop a comment below.

[00:10:14]Would you rather have Costco's membership model or Amazon's convenience? I'll be reading every comment. And if you want to see more business breakdowns like this, check out my video on why Nokia collapsed from a 150 billion empire. That story will blow your mind. Link is right here. Thanks for watching the Breakdown channel. See you in the next one.