Costco Isn't Just a Retailer -- It's a Subscription Business in Disguise

When most people think about Costco Wholesale (COST 0.29%), they picture oversized shopping carts, pallets of bulk goods, and weekend crowds hunting for bargains. It's an easy image to latch onto: Costco is a big-box retailer, through and through. However, that view overlooks the broader narrative. Costco isn't just selling groceries or paper towels -- it's selling access. The warehouse model operates more like a subscription business than a traditional store. For investors, this distinction is crucial. Image source: Getty Images. Membership at the core Everything Costco does starts with membership. Shoppers pay an annual fee to join, and in fiscal 2025 (year ended Aug. 31, 2025), these fees generated $5.3 billion in revenue. And since the costs of running this membership are minimal, nearly all of that goes straight to the bottom line. In the fourth quarter of fiscal 2025, the company had 81 million paid memberships (up 6.3% year over year), contributing to a 14% year-over-year growth in membership revenue. The total membership revenue growth rate came in higher because the company raised its fees by $5 and $10, respectively, for its two types of paid memberships on Sept. 1, 2024. The best part? Membership income is remarkably steady, even after Costco raised its fees last year. Renewal rates run at 90% globally -- it's even higher in the U.S. and Canada. That's the kind of stickiness most businesses dream about. It's hard not to see the parallels to streaming services or Amazon Prime. Once customers buy in, leaving feels like walking away from the value they've already paid for. That dynamic makes Costco's membership base unusually resilient. A self-reinforcing model It's nice to have a high-margin, recurring revenue source like Costco's membership. But memberships do more than generate profit -- they power Costco's entire strategy. Fee income gives the company financial breathing room to keep prices low. Those low prices attract more shoppers, which in turn boosts sales volume. Higher volume improves Costco's leverage with suppliers, resulting in even better prices. It's a loop that strengthens over time. Unlike many retailers that chase traffic with promotions or ads, Costco benefits from a system that encourages customers to return on their own. For investors, this means greater predictability and reduced dependence on fickle consumer behavior. Besides, as Costco increases its comparable sales over time, it gains enormous operating leverage thanks to the more efficient use of its fixed assets. Operating leverage flows directly into margins, which Costco recycles back further into enhancing customer value -- again, with even lower prices. In other words, there is a self-reinforcing virtuous cycle that makes Costco's business model more attractive over time. Total membership numbers are well-positioned to rise further in the future Costco already has 145 million cardholders -- there are 81 million paid memberships, and every paid membership is entitled to two membership cards. But despite its scale, the giant only has 914 stores. As it opens new stores -- typically 20 to 30 per year -- these memberships will naturally grow over time. International markets are the clearest growth lever. In China, for example, the opening of Costco's first warehouse in Shanghai drew hours-long lines. Renewal rates in newer places are already approaching North American levels, suggesting the model is effective across cultures. Each new warehouse doesn't just add sales -- it adds recurring fee income that compounds year after year. Digital initiatives are another key driver of membership growth. Services like e-commerce cost less for members than non-members, and members get access to the full inventory. In other words, it makes sense for non-members to eventually convert to benefit from the full scope of services that Costco has to offer, at a lower price. What does it mean for investors? Costco might appear to be a traditional warehouse chain on the surface, but beneath the surface, it operates like a subscription-based business. Memberships create sticky, recurring revenue, power a self-reinforcing cycle of low prices and high traffic, and provide Costco with a solid foundation to continue growing both domestically and internationally. Investors often prize subscription businesses for their stability and potential for compounding returns. Costco deserves to be in that same conversation -- not because it sells digital content, but because it sells something just as valuable: everyday savings that customers are eager to renew. For long-term investors, that's the kind of business model worth paying attention to.