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Comment by markost | Hacker News Reader

Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales?

In fact, a little known feature of Costco's business model is their ability to sell all their stock well before their suppliers require payment for goods (Net 30)? This means they have an effectively _negative_ cash conversion cycle, or in other words, their suppliers are paying to stock their products.

Everything about Costco's business model is backwards.

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> Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales?

That $1.7 billion is net income, which is after subtracting out the income tax. You have to compare to pre-tax income, which in the case of Costco is essentially just operating income.

75% of Costco's income came from membership fees in the last fiscal year, and similar or higher percentages in other recent years.

From Costco's FY 2012 annual report, page 25 (in millions of dollars):

         Membership   Operating income
  2008      1,506          1,969
  2009      1,533          1,777
  2010      1,691          2,077
  2011      1,867          2,439
  2012      2,075          2,759

PDF file: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

The membership fee, of course, serves another purpose. It reduces patronage by lower-income shoppers, and therefore helps to reduce shoplifting. The receipt-check is another deterrent. Since Costco has such a tight margin on its merchandise, it cannot tolerate industrywide shrinkage rates.

The receipt check is generally there to catch crooked cashiers not crooked customers. Without it a cashier could fake scan items and their accomplices walk out undetected. The check means at least two employees have to collaborate to steal.

>>Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales?

I'm pretty sure the revenue isn't net. It would mean they have absurd retail margins on their members and negative ones on every other product sold; which doesn't make a lot of sense.

>>In fact, a little known feature of Costco's business model is their ability to sell all their stock well before their suppliers require payment for goods (Net 30)? This means they have an effectively _negative_ cash conversion cycle, or in other words, their suppliers are paying to stock their products.

That could just be their way of handling stocking fees. They handle a lot of merchandise they can't afford to stick into inventory.

No, they make money on their products, but the costs of workers/rent/etc. is what costs them more than the profit on the goods

This argument only makes sense if you consider 100% of membership revenue to be profit with absolutely no associated costs. However, clearly Costco's customers would not be willing to pay $60 annual dues if there were no benefits.

AFAIK most supermarkets run this model; when I was in school in Ireland in the 90s, this model was explained to me with reference to the main Irish chains. They end up with a big chunk of free cash that they invest.

Is the $2 billion in membership figured into the net? It seemed like it was separate in the article's table.

It includes all the revenues, including sales, membership fees, and interest income. Minus all the expenses, including cost of goods, sales and marketing, corporate overhead, debt service, and taxes.

Net income is literally the "bottom line" number on the accounting statement. It's the number that coes out after accounting for everything in the business.

Cool, thanks. I wasn't sure if the author was trying to separate the concerns to make some kind of a point about the different types of revenue. The membership revenues were also listed after the net, iirc, which I thought was strange. That makes sense, though.

This seems to be the same model as most gaming consoles.

The opposite model as Xbox and Playstation.

The console is the up-front purchase, which equates to Costco's membership fee. But Xbox and Playstation lose money up-front.

Instead, Costco operates on the Wii or the iPhone model, where you take most of your profit up-front and then operate the rest at a much smaller profit. (Though still positive.)

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