Why are prices in stores like Costco and Sam’s Club much cheaper than your average grocery store?

Question

Why are prices in stores like Costco and Sam’s Club much cheaper than your average grocery store?

In: 226

Answer 1

Say a distributor sells apples to stores. Their apples are sold to the store for 80 cents and sold to customers for $1. Now this store says we’ll buy 1 ton of apples because that’s how much product they can sell to customers reliably.

Now Costco comes in and cuts a deal with the distributor. Sell me that same apple for 70 cents, I’ll sell them for 75 cents to customers but they’ll buy 10 tons of them. The distributor makes a smaller margin but more in guaranteed sales doing this. Costco will also bring in more traffic because they sell apples 25% cheaper than big grocery store.

Now Costco can sell this apple at considerably less than all these stores because they only sell to customers who pay an annual fee to shop at costco. Imagine you charge $100 a year to a million customers, no matter the flow of commerce, Costco is assured to make $100m for essentially nothing.

There’s much more behind that but this is the eli5 version