The Devious Reason Why Costco’s Food Court Is So Cheap
George Li
2424

Sorry, George, but I think you’ve misunderstood how Costco works. A few facts: 1) The food court is located in the only section of the warehouse that’s accessible to people WITHOUT a Costco card. Anyone who wants to enjoy that $1.50 hot-dog & soda is welcome. Many patrons are not there to shop the rest of the warehouse at all. 2) Most Costco shoppers who do plan to patronize the food court do so before rather than after shopping. After all, once you’ve shopped, you have a big basket full of things, many perhaps perishable. There’s no room in the food court for these baskets, and no way to keep your stuff cold even if you could find a spot to park it (which is nearly impossible). Next time you’re there, take a count of people with baskets in tow vs. not. 3) Costco’s bottom-line revenue is all about membership fees. Indeed, their entire business model is driven to acquire and retain members. I learned about how they work when doing business with them as a vendor. Their entire orientation is to create value for members, and their retail offerings, their ever expanding array of services, and the food court are amenities designed to promote and retain paying members. Costco used to publish their gross-margin guidelines — I’m not sure if they still do. But at the time, their ceiling for Gross Margin % was about 14%. That margin is adequate to support the cost of operating the warehouse, but is not a big contributor to bottom line. Membership fees, by contrast, have essentially no incremental cost associated with them and so represent nearly pure profit. And finally, as regards the $1.50 deal in particular — that is an iconic offering that at this point probably makes them little — perhaps even negative contribution. The street-vendor’s hot-dog you reference by way of comparison is about 1/3 the weight of the Costco dog.