Costco: The Company That Refuses to Make Money

Walk into any Costco and you will find, near the exit, a hot dog and a soda for a dollar fifty. That price has not changed since 1985. Through four decades of inflation, through recessions and booms, through the price of everything else on Earth roughly tripling, the Costco hot dog combo has stayed at a dollar fifty. The story, possibly apocryphal but told inside the company as gospel, is that when an executive once suggested raising the price, the founder, Jim Sinegal, told him that if he ever did, he would be dead.

The hot dog is a joke, a loss leader, a marketing curiosity. But it is also the entire philosophy of the company compressed into a single item. Because Costco’s radical idea, the thing that makes it one of the great businesses of the modern age, is that it does not really try to make money on the things it sells. It makes money on the membership, on the simple annual fee you pay for the right to shop there at all. And once you understand that one inversion, the whole strange genius of Costco snaps into focus.

This is a company whose moat is, of all things, self-restraint. In a world of businesses straining to charge as much as customers will bear, Costco built a giant by charging as little as it possibly could, and the discipline to keep doing that, year after year, decade after decade, turns out to be almost impossible for any competitor to match.

The World Before Costco

To see why Costco is radical, you have to understand the assumption it violated.

Retail, for its entire history, ran on markup. You buy a thing from a supplier for a dollar, you sell it for a dollar fifty or two dollars, and the difference is your gross profit, the lifeblood of the business. Department stores marked goods up by enormous multiples. Supermarkets ran thinner, but still made their living on the spread between what they paid and what they charged. The entire art of retail was managing that spread: charging as much as the customer would tolerate while keeping enough traffic to move volume. Every retailer’s instinct, bred over centuries, was to protect and expand the markup.

The warehouse-club idea, which a man named Sol Price pioneered in San Diego in 1976 with a store called Price Club, attacked that assumption at its root. What if you slashed the markup to almost nothing, sold goods nearly at cost, and made your money somewhere else entirely? It was a heresy against the basic mechanic of the trade. And it would become one of the most powerful business models ever built.

The Founders

Costco’s intellectual father was Sol Price, the inventor of the membership warehouse club, whose principles, obey the law, take care of your customers, take care of your people, respect your suppliers, became the moral DNA of everything that followed. But the man who built Costco into a giant was Sol Price’s protégé, Jim Sinegal.

Sinegal had learned the warehouse business at Price’s side, and in 1983, with the Seattle retailer Jeffrey Brotman, he opened the first Costco. The company grew at a ferocious pace, reaching a billion dollars in sales within about three years, going public in 1985, and in 1993 merging with Price Club itself to unite the two nearly identical businesses. By then it was a retail powerhouse.

The trait that defined Sinegal, and that defines Costco to this day, is not vision in the dramatic, world-changing sense of a Jobs or a Musk. It is discipline. An almost religious, self-denying discipline about price. Sinegal imposed a rule that became the iron law of the company: Costco would cap its markup on any item at around fourteen percent, fifteen for its own Kirkland Signature label, no matter what. A traditional retailer might mark an item up fifty percent, or a hundred, or more. Costco, by rule, would not. Even when it could have charged more, even when customers would happily have paid more, even when raising prices would have boosted profits next quarter, Costco held the line. That self-imposed ceiling, the deliberate refusal to take money that was sitting right there for the taking, is the foundation of the entire moat.

The Radical Bet

Costco does not have a near-death moment in the way Apple or Amazon does. There is no ninety-days-from-bankruptcy, no ninety-percent crash. Its place among legendary companies is different: the risk Costco took was not a crisis it survived but a business model that, on paper, sounds like it should not work at all.

Imagine pitching it to investors. “We will sell goods at almost no markup, barely above what we pay for them. We will deliberately leave enormous amounts of potential profit on the table, every single day, forever. We will stock only a few thousand items instead of the tens of thousands a normal store carries. And we will charge people an annual fee just for the privilege of shopping with us.” A reasonable person would call it commercially insane. Why would customers pay to shop? Why would you refuse profit you could easily take?

The genius is in how the pieces lock together. The membership fee, only a small slice of total revenue, perhaps two percent, covers the company’s operating costs and provides the bulk of its actual profit. That single fact liberates everything else. Because the fee pays the bills, Costco does not need to make money on the merchandise, which means it can sell goods at razor-thin margins, which means its prices are genuinely, dramatically lower than anywhere else, which means members feel they would be foolish not to renew, which they do at rates above ninety percent, which guarantees the fee income, which pays the bills. The flywheel turns. The radical bet was that customers would pay for access to honesty, and they did.

The Inflection

If the membership model was the engine, two further moves turned Costco from a clever idea into an unstoppable machine.

The first was scale discipline through a deliberately tiny product range. A typical supermarket carries thirty thousand or more distinct items; Costco carries only around four thousand. This sounds like a weakness and is in fact the source of enormous power. By concentrating all of its buying into a few thousand products, Costco buys each one in staggering volume, which gives it overwhelming leverage with suppliers to extract the lowest possible price, a price it then passes almost entirely to members. Costco generates many times the revenue per product that a sprawling competitor does, and that concentrated buying power is a weapon no full-range retailer can match.

The second was Kirkland Signature, the private label Costco launched in the mid-1990s. The idea was simple and ruthless: make a house brand as good as or better than the national brands, and sell it for meaningfully less. Kirkland grew into one of the largest consumer brands on the planet, accounting for something approaching a third of Costco’s sales, and it deepened the moat in two ways at once. It improved Costco’s margins on those products, and it gave members a reason found nowhere else, a trusted, high-quality, lower-priced brand they could only get by remaining members. The flywheel spun faster.

The Moat

Costco’s moat is scale and cost, like Amazon’s, but with a distinctive twist that makes it perhaps the most defensible in all of retail: it is built on a foundation of trust, and trust is the one thing a competitor cannot simply buy.

Consider why a rival cannot copy Costco. A traditional retailer makes its profit on markup. To match Costco’s prices, it would have to slash that markup to almost nothing, which would obliterate the profit its entire business depends on. It cannot suddenly switch to making its money on membership fees, because its customers have no reason to pay a fee to a store that has always made its money the normal way. The competitor is trapped by its own model. Costco’s low prices are not a promotion that can be matched for a quarter; they are the permanent structural output of a completely different machine.

And underneath the structure sits the deepest layer: members trust Costco. They believe, correctly, that the markup is capped, that the company is not trying to squeeze them, that the price is genuinely as low as it can be. That trust, built over decades of disciplined self-restraint, including never raising the price of a hot dog, is the real moat. It is why renewal rates sit above ninety percent, why members feel loyalty bordering on affection for a warehouse, and why the model has proven so resilient through recessions, the pandemic, and waves of tariffs. The discipline created the trust, and the trust is the fortress.

This is why Costco was a favorite of some of the most respected investors in the world, including Charlie Munger, who sat on its board for many years and spoke of it as close to an ideal business. Munger’s praise points at exactly the right thing: the rare company whose competitive advantage comes from the integrity of its model rather than the cleverness of its marketing.

The Wealth Created

Costco’s story for the investor is not the lottery-ticket asymmetry of a Nvidia or the catastrophic-drawdown survival test of an Amazon. It is something quieter and, in its own way, just as instructive: the steady, decades-long compounding of a disciplined, durable business.

A patient shareholder who bought Costco in its early public years and simply held, through forty years of relentless, unglamorous execution, would have multiplied their investment many, many times over, as the company grew from a single Seattle warehouse to a global giant with over two hundred and seventy billion dollars in annual revenue, well over a hundred million members, and hundreds of warehouses on multiple continents. The returns came not from a single dramatic inflection but from the remorseless, compounding turn of the flywheel, year after year after year.

The lesson Costco teaches the investor is therefore about a different kind of opportunity. Not the terrifying bet at the moment of maximum fear, but the recognition of a genuinely durable competitive advantage and the patience to own it for decades. The greatest returns in markets do not all come from catching a crash; many come from identifying a business with an unbreakable moat and a disciplined culture, and then doing the hardest thing of all, which is nothing, for a very long time.

What Everyone Got Wrong

Mistake #1: Assuming a retailer that refuses to profit on goods cannot be a great business.
Reality: by routing profit through the membership fee, Costco made its thin merchandise margins a feature, not a bug. The model that looked broken was the source of the moat.

Mistake #2: Treating low prices as a promotion competitors could match.
Reality: Costco’s prices are the structural output of a fundamentally different machine. A markup-dependent rival cannot match them without destroying its own profit, so the advantage is permanent, not promotional.

Mistake #3: Underrating self-restraint as a strategy.
Reality: the discipline to leave money on the table, the hot dog held at a dollar fifty, the markup capped at fourteen percent, looked like leaving value uncaptured. In fact it was buying something far more valuable: the trust that produces ninety-percent loyalty and an unassailable position.

The Alternative Timeline

A counterfactual, clearly hypothetical.

Picture the world where Jim Sinegal, or a successor, gives in to the obvious temptation. Quarter after quarter, the pressure is always there: nudge the markup from fourteen percent to eighteen, raise the hot dog to three dollars, add a few thousand higher-margin products, squeeze a little more from each member. Each individual increase would be invisible, easily justified, immediately profitable.

In that timeline, Costco slowly becomes an ordinary, if well-run, retailer. The prices creep up toward the competition’s. The members notice, dimly at first, that the magic is fading, that Costco is no longer dramatically cheaper, just another store with a fee attached. Renewal rates drift down. The trust, built over decades, erodes in years. And the moat, which was never made of anything but discipline, quietly fills in. Costco survives, but it is no longer Costco. It is just a warehouse that used to be special.

It did not happen that way, because the company treated its own pricing discipline as sacred, refusing the easy money again and again, for forty years. The lesson is the rarest one in business: the hardest competitive advantage to build, and the hardest to copy, is the willingness to not take profit that is sitting right in front of you, in the knowledge that the restraint itself is the asset.

Why Costco History Matters to Investors

Costco fits the thesis in its own quiet register. The improbable idea: a store that refuses to profit on what it sells and charges you a fee to enter. The stretch where failure looked inevitable was less a crisis than a permanent skepticism, the decades in which sober analysts insisted the margins were too thin, the model too strange, the discipline impossible to sustain at scale. And the point where success looks obvious: one of the most admired and durable retailers on Earth, beloved by its members and by the greatest investors. The opportunity lived, as always, in the long middle, in the patience to believe the strange model would endure.

The reason to study Costco is that it widens the definition of a legendary opportunity. Not every great investment is a phoenix rising from a ninety-percent crash. Some are tortoises: businesses with a structural, trust-based moat that compound quietly for decades, available to anyone with the patience to recognize durability and hold it. The asymmetry is gentler but no less real, and the discipline it demands of the investor, to buy quality and wait, mirrors the discipline that built the company.

Lessons in Order of Depth

On the surface — the move

Build a flywheel where restraint feeds loyalty. Low markup creates low prices, which create loyal members, whose fees fund the low markup. The trader’s analogue is a system whose discipline is self-reinforcing, where following the rules in the lean times is what earns the rewards in the rich ones.

Below the surface — the Money

Find the second revenue stream that frees you to be generous on the first. The membership fee is what lets Costco sell goods at cost. The investor’s version is structuring things so that your fixed costs are covered independently, freeing you to be patient and disciplined with the rest, rather than forced to extract maximum profit from every position.

Below that — the Mind

The discipline to not take available profit is harder, and more valuable, than the drive to capture it. Anyone can raise a price; almost no one can hold it for forty years against constant temptation. The trader’s parallel is the discipline to not overtrade, to not chase the extra return, to leave money on the table in service of a larger, longer game.

At the deepest level — the question

Costco’s moat is trust, and trust is made of restraint repeated until it becomes identity. So the deepest question Costco poses is about advantage and integrity together: can you build something so honest that the honesty itself becomes uncopyable? Costco’s competitors cannot match it not because they lack the capital or the scale, but because they are unwilling to give up the markup, unwilling to subordinate this quarter to the next forty years. The deepest edge is not cleverness or aggression but a kind of integrity sustained so relentlessly that it compounds into a fortress. The company that is genuinely, structurally on its customer’s side, and stays there when it is tempting not to, builds something no rival can take, because the rival would have to become a different kind of company to do it.

The Legendary Scorecard

Category	Score	Notes
Founder Vision	10 / 10	Saw that refusing to profit on goods could be the moat
Innovation	8 / 10	Not technological; a profound business-model inversion
Execution	10 / 10	Forty years of relentless price discipline
Moat	10 / 10	Scale-and-cost flywheel built on uncopyable trust
Capital Allocation	9 / 10	Disciplined growth, special dividends, steady reinvestment
Wealth Creation	9 / 10	Decades of steady compounding from a single warehouse
Durability	10 / 10	Resilient through recessions, the pandemic, and tariffs
Historical Importance	9 / 10	Defined the warehouse-club model and member-first retail
Overall Legendary	9.5 / 10	The masterclass in moats built from discipline

Scores are an editorial verdict on the standard eight-category scale used across the Greatest Companies series. The overall is a judgment, not a weighted average.

Company Timeline

• 1976 — Sol Price founds Price Club in San Diego, inventing the membership warehouse club
• 1983 — Jim Sinegal and Jeffrey Brotman open the first Costco in Seattle (Sept 15)
• 1985 — ~$1B revenue within three years; IPO; the $1.50 hot dog combo debuts
• 1993 — Costco merges with Price Club to form PriceCostco
• 1995 — Kirkland Signature private label launches
• 2019 — Opens first mainland China warehouse
• 2024 — Kirkland reaches ~27–30% of total sales
• 2025 — Revenue ~$275.2B; net income ~$8.1B; ~145M members; ~924 warehouses

Key Numbers

Founded	1983 (Seattle); HQ Issaquah, Washington
Founders	Jim Sinegal, Jeffrey Brotman (model from Sol Price)
Markup cap	~14% (15% Kirkland) vs 25–100% traditional
Product range	~4,000 SKUs vs 30,000+ at a supermarket
Renewal rate	above 90% (North America)
FY2025 revenue	~$275.2B; net income ~$8.1B
The hot dog	$1.50, unchanged since 1985

Related Reading

More Greatest Companies

• Amazon: The 94% Crash and the Cost of Being Right (the same scale-and-cost flywheel, online)
• Berkshire Hathaway: The Dying Mill That Compounded for Sixty Years (Munger’s other great love)
• Visa: The Toll Bridge of the Global Economy (another durable, fee-based compounding machine)

Lesson Hubs

• Competitive Moats (why trust and discipline are the hardest moats to copy)
• Capital Allocation (the patient compounding of a durable business)

Across the Library

• Charlie Munger and Warren Buffett (Greatest Traders — lifelong admirers of the Costco model)

This article is part of the Greatest Companies series, adapted from the book Greatest Companies, now available on Kindle. Explore the wider framework in The Complete Trader’s Edge.

Frequently Asked Questions

When was Costco founded and by whom?

Costco opened its first warehouse in Seattle in 1983, founded by Jim Sinegal and Jeffrey Brotman. The membership warehouse-club model was pioneered earlier by Sol Price, whose Price Club (1976) Costco merged with in 1993.

How does Costco actually make money if its prices are so low?

Mostly from membership fees. Costco caps its markup on goods at around 14% (15% for Kirkland Signature), far below traditional retail. The annual membership fee, only a small share of total revenue, provides the majority of its profit, which is what lets it sell merchandise at razor-thin margins.

Why can’t competitors just copy Costco’s low prices?

Because a traditional retailer makes its profit on markup. To match Costco’s prices it would have to gut that markup, destroying its own profitability, and it cannot easily switch to a membership-fee model its customers have no reason to accept. Costco’s low prices are the structural output of a different machine, not a promotion.

What is Kirkland Signature and why does it matter?

Kirkland Signature is Costco’s private label, launched in the mid-1990s, designed to match or beat national brands on quality at a lower price. It has grown to roughly a third of Costco’s sales and is among the largest consumer brands in the world, deepening both margins and member loyalty.

What is the investing lesson of Costco?

That a durable, trust-based moat built on discipline can compound quietly for decades. Costco is not a dramatic turnaround or crash-and-recovery story; it is a steady compounder whose competitive advantage comes from the integrity of its model, the kind of business legendary investors like Charlie Munger prized.