Costco Wholesale generated $254 billion in net sales in its fiscal year 2024. It operates 897 warehouses across 14 countries. Its membership renewal rate in the United States and Canada is 92.2 percent — a number that most subscription businesses would consider fictional. And here is the detail that makes the entire model counter-intuitive: Costco makes almost no money on the products it sells.

In its most recent fiscal year, Costco's net income was approximately $7.4 billion. Its membership fee revenue was $4.8 billion. Strip out the membership fees and the retail operation barely breaks even. The products — the 48-packs of batteries, the industrial quantities of olive oil, the rotisserie chickens — are not the business. They are the bait. The membership card is the business.

Every week in this series, I study one entity — a musician, a company, a family, an institution — that has built something genuinely durable. I pull apart how they did it. I extract the principles. And then I apply them — because every rule that built a retail operation where customers pay for the privilege of shopping applies equally to your newsletter, your product, and your business.

I'm calling it The Costco Code. Five principles. Counter-intuitive. Brutally effective.

The conventional retail model is simple: buy a product at wholesale, mark it up, sell it at retail, keep the margin. Every dollar of profit comes from the spread between cost and price. The incentive is to mark up as much as the market will bear.

Costco inverted the model entirely. Its internal rule is that no product can be marked up more than 14 percent above cost. Most products carry a markup of 10 to 11 percent. For comparison, traditional grocery stores operate on markups of 25 to 50 percent. Department stores mark up 100 percent or more.

The products are sold at near-cost. Sometimes below cost. The $4.99 rotisserie chicken — unchanged in price for over a decade despite rising input costs — is a deliberate loss leader. Costco loses an estimated $30 to $40 million per year on rotisserie chickens alone. It built an entire poultry processing plant in Nebraska to keep the price at $4.99.

Why? Because the chicken gets people through the door. And once they are through the door with a membership card in their wallet, Costco has already been paid. The annual membership fee — $65 for a basic membership, $130 for Executive — is the revenue. Everything else is theater designed to make the membership feel like the best deal the customer has ever made.

The lesson: if you can charge for access rather than product, you decouple revenue from volume. The membership model creates predictable, recurring income that does not depend on any single transaction.

Costco's average hourly wage for its US employees is over $29 per hour. Starting wages begin at $19.50. The company provides health insurance to the majority of its workforce, including part-time employees. In an industry where low wages, high turnover, and minimal benefits are standard, Costco pays substantially more than competitors.

The conventional wisdom says this is bad for shareholders. Higher wages mean lower margins. Lower margins mean lower returns. The market should punish this.

It does not. Costco's employee turnover rate is roughly 8 percent for employees who have been there more than a year. The industry average is between 60 and 80 percent. Replacing an employee — recruiting, hiring, training — costs thousands of dollars per position. At Costco's scale, low turnover saves hundreds of millions of dollars annually. It also produces better customer service, lower shrinkage, and higher productivity per employee.

Co-founder Jim Sinegal said it plainly: "Paying good wages is not in opposition to good profits. They go together." The numbers bear him out. Costco's revenue per employee is significantly higher than Walmart's Sam's Club, its closest competitor in the warehouse segment.

The lesson: underpaying people is expensive. Turnover, retraining, and low morale cost more than the wage savings. Pay above market and keep the people who make your operation work.

A typical Walmart Supercenter carries approximately 120,000 SKUs. A standard grocery store stocks 30,000 to 40,000 items. Costco carries approximately 3,700.

That number is not a limitation. It is the strategy.

Costco's buyers do not ask: what should we stock? They ask: what is the single best option in this category? If the answer is one brand of olive oil, Costco stocks one brand. If the answer is two brands of laundry detergent — one premium, one value — Costco stocks two. There is no aisle of 47 toothpaste options. There is one. Maybe two.

This does three things simultaneously. First, it simplifies the buying decision for the customer. The paradox of choice — the well-documented phenomenon where too many options paralyze decision-making — is eliminated. You do not browse at Costco. You buy. Second, it concentrates purchasing volume into fewer SKUs, which gives Costco extraordinary bargaining power with suppliers. When you are the only buyer offering a supplier access to 130 million cardholders through a single SKU slot, you dictate terms. Third, it reduces warehousing complexity, inventory costs, and spoilage.

The lesson: more choice is not better service. Curated choice — where someone has already done the filtering — is what customers actually want. Edit ruthlessly.

Kirkland Signature is Costco's private label. It accounts for roughly 25 percent of total sales. And here is what makes it unusual: Kirkland products are not cheap alternatives. They are frequently the best product in the category.

Kirkland vodka is widely reported to be produced by the same distillery that makes Grey Goose. Kirkland batteries consistently match or beat Duracell in independent tests. Kirkland olive oil has won international awards. The strategy is not to offer a budget option. It is to offer a premium product at a fraction of the branded price — and put the Costco name on it.

This accomplishes something that most private labels fail to do: it builds brand loyalty to the store, not the product. A customer who trusts Kirkland trusts Costco. And a customer who trusts Costco renews the membership.

The private label also gives Costco leverage over branded suppliers. If a supplier's price rises too high, Costco can replace them with a Kirkland alternative. The threat alone keeps branded prices competitive.

The lesson: if you curate products for your audience, consider building your own. A house brand that genuinely competes on quality — not just price — becomes a reason to stay in your ecosystem.

Wall Street analysts have repeatedly asked Costco's management to raise the membership fee more aggressively. The fee has been increased only a handful of times in the company's 41-year history. Each increase has been modest. Each has been followed by a period of years before the next.

The rotisserie chicken stays at $4.99. The hot dog and soda combo stays at $1.50 — a price unchanged since 1985. When a former CEO suggested raising the hot dog price, co-founder Jim Sinegal reportedly said: "If you raise the effing hot dog, I will kill you."

This is not sentimentality. It is strategic patience. The $1.50 hot dog is a symbol. It tells every member, every visit, that Costco is on their side. It communicates that the company will absorb inflation rather than pass it on. It creates trust. And trust is what drives a 92.2 percent renewal rate.

Most companies optimize for the quarter. They raise prices when they can, cut costs where they can, and harvest every margin available. Costco operates on the principle that the most profitable thing it can do is make the customer feel like they are getting an absurdly good deal — because a customer who feels that way renews, shops more frequently, and tells other people.

The lesson: protecting a symbol of value is more important than extracting every available dollar. The trust generated by a $1.50 hot dog is worth more than the margin on any individual product.

Charge for access. If your product is good enough, people will pay for the right to buy it. Membership models create predictable revenue and align your incentives with the customer's experience.

Pay above market. The cost of turnover exceeds the cost of higher wages. Retention is cheaper than recruitment, and experienced employees produce more value per hour.

Limit choice. Curation is a service. Fewer options, better selected, reduce decision fatigue and concentrate your purchasing power.

Build your own brand. If you are curating for an audience, the strongest move is to become the product — not just the platform.

Protect the symbols. Some prices, some promises, some gestures exist not because they are profitable in isolation but because they communicate what you stand for. Guard them.

A warehouse with concrete floors. A membership card that costs $65. A hot dog that costs $1.50. A markup capped at 14 percent. A renewal rate of 92.2 percent. Revenue of $254 billion.

That is not a store. That is a code.

Next edition of The Alun Hill Business Code: Edition #12 examines Patagonia — the company that told its customers not to buy its products.