Costco Wholesale: The Model of Scalable Simplicity

What began as two separate warehouse clubs in the late 20th century would eventually merge into one of the most admired and efficient retailers in the world, Costco Wholesale. From the start, its success has been rooted in a deceptively simple business model: membership-based access, razor-thin markups, and a relentless focus on customer value. But behind that simplicity lies a system of operational discipline and fiercely protected pricing principles that have created a wide and lasting moat. Let's get into the details of a company that Charlie Munger once called “one of the most admirable capitalistic institutions in the world”.

• A new kind of retail store: Founded in 1976, Price Club was one of the first membership-based warehouse stores in the U.S. and would later become half of what we now know as Costco.

• The perfect match: In 1993, Price Club and Costco merged, combining their store networks and setting a new course for the modern warehouse club model.

• Mastering scale: Few companies leverage scale economics as effectively as Costco, using its size to drive down costs and pass savings directly to its members.

• A popular investment: Costco's unwavering strategy and deep moat have earned the admiration of investors like Charlie Munger and Nick Sleep of the Nomad Partnership.

The story of what eventually led to Costco Wholesale began in 1976 when father and son, Sol and Robert Price, opened a store named Price Club in San Diego. Although warehouse club stores are more common now, Price Club was among the first to open in the U.S. Price Club targeted primarily small business owners who, for a membership fee, could get access to discounted prices of items sold in bulk.

The store's success prompted the owners to expand, growing their one location into a chain and going public in 1980. During the following decade, expansion continued with its membership growing to over a million members and its store count stretching to 94 stores by 1993, when its path would meet with another fast-growing membership club retailer.

The other part of what would eventually turn into one of the largest retailers in the world began in 1983 when Jim Sinegal and Jeffrey H. Brotman opened the very first Costco store in Seattle. The store was similarly a membership-based club retailer and saw growth from the start, expanding into three locations already by the end of the first year.

In 1985, the same year the company went public with a store count of 17, it debuted its legendary hot-dog offer for $1.50 – an offer that remains at every location four decades later. Success continued as the chain continued to add new warehouse stores across the country in the years that followed.

In 1993, Price Club and Costco merged, combining their store networks to form a retail giant with nearly 200 locations. Notably, prior to this deal, Price Club had turned down a merger proposal from Sam Walton and Walmart's Sam's Club, citing a preference for a partner that shared its approach to growth and more closely aligned in scale. The merger with Costco proved to be a natural fit, unlocking clear operational synergies and significantly broadening the companies' collective footprint.

Initially, the company operated under the name PriceCostco, but reverted to Costco Wholesale just a few years later. Ever since, it has continued to expand its successful concept, not only across the U.S. but also internationally, operating its warehouse stores worldwide.

The roughly 200 locations Costco operated in 1993 have grown into a robust global network of over 900 warehouse clubs as of 2025. These massive stores average around 147,000 square feet, truly embodying the term big-box retailer. Inside, Costco offers everything from fresh produce, electronics, and apparel to pharmacy services, furniture, and even diamond rings – all under one roof and at highly competitive prices.

Over two-thirds of these club warehouses are located in the U.S., while the remaining third is spread across 14 countries around the world, including Japan, the United Kingdom, China, Australia, and Sweden, to name a few.

At the heart of Costco's success lies its relentless focus on low pricing. Behind these low prices is a tightly integrated ecosystem developed over decades of operational discipline, all working together to uphold that promise.

Costco's membership-based model is a cornerstone of this strategy. Members pay an annual fee for access to the warehouses, creating a recurring revenue stream that helps offset operating costs and allows the company to price goods with razor-thin markups. The club structure also creates a sense of exclusivity and commitment, encouraging repeat visits and high basket sizes.

The company's no-frills shopping environment – with concrete floors, pallet-stacked merchandise, and minimal decor – is another key ingredient. By avoiding the costs of traditional retail presentation, Costco cuts overhead and passes those savings directly to the customer.

Operationally, Costco's scale unlocks significant efficiencies across logistics and supply chain management, driving down costs at every stage of the retail process. It sources globally, limits SKUs to roughly 4,000 per store, and negotiates hard with suppliers to secure the best possible terms. However, in some cases, Costco even moves upstream with in-house production.

Few examples capture Costco's pricing philosophy better than its unwavering stance on the $1.50 hot dog and soda combo – a price that hasn't changed since 1985. The hot dogs were originally outsourced, but the rising cost of ingredients and supply chain pressure eventually made the deal difficult to sustain. Rather than increase the price, Costco took the extraordinary step of bringing production in-house.

Under its Kirkland Signature private label, Costco built its own meat processing plants to ensure long-term control over cost and quality. This wasn't just about hot dogs – it was a strategic move to preserve customer trust and uphold the company's broader commitment to value.

Founder Jim Sinegal famously drew a hard line on the issue. In 2013, when former CEO Craig Jelinek suggested raising the price of the combo to $1.75, Sinegal reportedly snapped: “If you raise the effing hot dog, I will kill you. Figure it out.”

The Costco business model has earned the admiration of some of the sharpest minds in investing, including Charlie Munger, who served on its board for over two decades and famously called it “one of the most admirable capitalistic institutions in the world.” Munger saw in Costco a rare blend of customer obsession, pricing discipline, and operational excellence – a company that does fewer things better than anyone else. This long-term, customer-first mindset has also deeply influenced other investors, most notably Nick Sleep of the Nomad Partnership.

One of the most compelling case studies of Costco's business model comes from Sleep and Nomad. Sleep praised Costco as a near-perfect example of “scale economies shared” – a strategy where cost savings from growth are passed directly back to the customer. This consistent low-markup model (typically 14-15%) earns customer loyalty, drives high volume, and creates a powerful feedback loop.

Founder Jim Sinegal famously resisted even small markup deviations, reinforcing Costco's commitment to trust and long-term thinking. While competitors chase short-term gains through fluctuating prices, Costco's transparent, low-margin approach results in industry-leading sales per square foot and a wide economic moat. Sleep argued that Costco's success lies not in one advantage, but in countless small, disciplined choices that together form a self-reinforcing system, making it both resilient and exceptionally hard to replicate.

Further reading: Investing Mastery with Nick Sleep: Nomad's Costco Investment

From its beginnings as two pioneering warehouse clubs, Costco has grown into a global retail powerhouse by staying true to its founding principles. Through consistent focus on low prices, operational discipline, and customer-first thinking, Costco has built a business model that not only scales but deepens its competitive moat as it expands. Its model may look simple, but it's this simplicity, executed with precision, that makes it stand apart.