Strategies for Recovering Profitability in Italian Distribution: The Costco Model

There is a question that, sooner or later, all companies ask themselves, almost as an automatic reflex: how can we sell more?

It is a legitimate question, inevitable, often even necessary during phases of growth. And yet, precisely because it is so widespread, it risks dragging the business into a short-term logic made up of continuous promotions, aggressive discounts, and constant pressure on commercial results.

Costco, instead, consciously chose not to start from there. From the very beginning, its founders allowed themselves the luxury, and the courage, to change perspective, asking a very different, almost counterintuitive question: what if profit was not in the products, but in the customers?

Costco was founded in 1983 in Seattle by Jim Sinegal and Jeffrey Brotman, partly inheriting the warehouse club format that Price Club had introduced in the 1970s. Sinegal, in particular, came directly from the experience with Sol Price and had absorbed a radical philosophy: the customer must be treated as a member, not as a consumer to be maximized. This founding vision is not a biographical detail, but the root of all the strategic choices that would follow.

In traditional retail, everything revolves around the product: companies work on assortment, compete on prices, and seek margins that are increasingly difficult to defend. Competition is played out through the expansion of the offer, the intensification of sales, and a continuous race for volume. Costco decided to completely overturn this logic.

It did not build its model on the sale itself, but on access. To enter its stores, in fact, one must be a member, and to become one, one pays an annual fee. At first glance, this may seem like a simple, almost banal choice, but in reality it profoundly changes the economic balance of the entire system. With membership, Costco generates revenue even before selling a single product, building a predictable, stable, and recurring revenue base.

This mechanism is so powerful that membership fees effectively cover almost all fixed costs. It is precisely thanks to this structure that Costco can afford to apply a maximum markup of around 14%, declared transparently. This is a drastically lower level than in traditional American retail, where markups range between 40% and 50%.

The numbers confirm the solidity of the model: in fiscal year 2024, Costco recorded membership revenues of more than 4.8 billion dollars, with a renewal rate in the United States and Canada exceeding 93%. This figure is not only a satisfaction metric: it is proof that the perceived value of the membership consistently exceeds the fee paid, year after year. In practice, the model validates itself every time a customer renews.

And it is precisely this recurrence that changes everything. It means not having to chase every single sale as if it were decisive. It means being able to afford lower margins on products. It means, above all, building a stronger and less opportunistic relationship with the customer. In this context, products cease to be the end and become a means: they serve to demonstrate, day after day, the value of the fee paid, making the renewal of the membership natural and almost inevitable.

Another surprising element of the Costco model is the choice to drastically reduce the assortment. In a market where many competitors focus on thousands, if not tens of thousands, of references, Costco deliberately chooses to offer far fewer. A more limited, but extremely curated selection. This choice allows it to increase operational efficiency, reduce costs, and strengthen its negotiating power with suppliers. The result is a clear and coherent positioning: competitive prices and high value. It is not a renunciation, but a precise strategic choice.

In numerical terms, this choice translates into about 1,600 SKUs, an extremely limited number for a retailer of this size. The assortment is also partially regionalized, with decision-making autonomy distributed across eight geographical areas. This allows the offer to be adapted to local specificities without compromising the overall efficiency of the model.

To give a sense of the contrast: a traditional supermarket such as Walmart offers an average of 150,000 SKUs, while Amazon counts tens of millions. Costco manages about 1,600. This radical compression of assortment does not impoverish the offer — it disciplines it. Every product present has passed a rigorous selection process and must earn its space on the shelf. The result is that suppliers compete to enter Costco’s catalog, and not the other way around: a position of negotiating power that few retailers in the world can claim.

Over time, this approach has generated something even more precious than margins: trust. Those who enter Costco do so with a clearly defined, almost implicit expectation: to always find the best possible value for money. There is no need to compare, verify, or doubt. It is a different, deeper form of loyalty, one that does not arise from attachment to a brand, but from the certainty of value.

This positioning becomes even more evident in high-value categories, where the advantage for the customer grows significantly. It is no coincidence that Costco is now the world’s leading seller of diamonds and one of the main players in wine. With such limited markups, the consumer perceives extraordinary convenience even on premium products; just think that wines such as Tignanello can be purchased for around 70 dollars.

The private label Kirkland Signature deserves a separate mention in this context. Launched in 1995, today it represents more than 30% of Costco’s total revenue and generates volumes comparable to those of some of the world’s largest consumer goods companies. Kirkland’s strategy is exactly symmetrical to that of membership: instead of competing in the market, Costco creates its own rules. Kirkland products are often made by the same suppliers as premium brands — from Duracell batteries to Parmigiano Reggiano — but sold at significantly lower prices. It is the tangible certification of the value promise.

Completing the picture is another often underestimated aspect: attention to people. Costco invests significantly in its employees, offering better conditions than the industry average. This translates into lower turnover, higher productivity, and, above all, a more coherent and higher-quality customer experience. It is not an additional cost, but an investment that is directly reflected in the overall efficiency of the system.

A figure that rarely appears in financial analyses: Costco’s annual employee turnover is around 6%, compared with a retail industry average that exceeds 60%. Replacing an employee costs on average between 1.5 and 2 times their annual salary, considering recruitment, training, and the drop in productivity during the transition period. Multiplied by tens of thousands of positions, the systemic savings resulting from workforce stability are enormous — and are directly reflected in the quality of the in-store experience.

The sales format also contributes to this economic balance. Costco favors large-size packages, multipacks, or “party size” formats, which encourage high volumes per single visit. This is reflected in a particularly high average receipt, often exceeding 300 dollars, further strengthening the efficiency of the model.

In this way, each new store does not simply represent an increase in sales, but an expansion of the member base. And therefore an increase in recurring revenues, greater stability, and more solid growth. The model does not merely scale: it progressively strengthens itself, because it is built on structural foundations, not on opportunistic dynamics.

What makes the model even more distinctive is the strategy known as treasure hunting. Assortments are not static, but constantly evolving: every quarter, a significant portion of the products is replaced with new offers. This introduces an element of discovery and surprise that stimulates visit frequency and customer engagement. In the store, alongside the usual products, one can find unexpected items — from ethical goods to camping tents, and even agricultural machinery.

This dynamism also has a direct impact upstream: suppliers and buyers are constantly engaged in developing new proposals. Innovation is not episodic, but structural, and makes Costco one of the most effective channels for launching new products, especially for brands capable of offering distinctive value to an affluent customer base with a high propensity to spend.

Treasure hunting is not random. Temporary scarcity — knowing that a product might not be there on the next visit — creates a psychological mechanism of urgency that traditional retailers struggle to replicate. It is the same logic as the “drop” in luxury fashion applied to the aisles of a warehouse. The practical result is that customers visit Costco more frequently than is strictly necessary for their usual restocking, increasing the likelihood of spontaneous purchases and the average value of the visit.

The Costco case, ultimately, leaves open a question that applies to any business, regardless of sector: are we building a business to sell, or a system to last? Because the difference between pushing products and creating value over time is substantial, and often invisible until it is too late.

Costco did not become a case study because it sells more than others. It became a case study because it had the courage to change the rules of the game, shifting the focus from product to relationship, from sale to recurrence, from price to value. And above all, it demonstrated that a business can be designed not only to grow, but to be sustainable, predictable, and solid over time.

A final note worth adding for those who look at the Costco model as a source of inspiration: its replicability is partial, and must be understood with clarity. The model works because it has been built with absolute coherence at every level — from pricing structure to personnel policy, from assortment to logistics. It is not possible to take one piece of it and graft it onto a different system expecting the same results. The deepest lesson Costco offers is not “adopt membership,” but “build a system in which every choice reinforces the others.” It is a form of strategic thinking that requires discipline, patience, and the willingness to give up short-term margins in exchange for long-term structural solidity.