Why are prices in stores like Costco and Sam’s Club much cheaper than your average grocery store?
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They are whole sale stores.
Essentially the way stores work is you pay more every step of the way
So manufacturer charges much less than everywhere.
Then whole salers buy in bulk and pay more.
They then sell lesser amounts to normal stores who then sell it to you.
Each step of this chain the cost is passed on to you.
If manufacturer charges $1 a box. The whole saler probably charges $1.50 a box.
So the normal retail store charges $2.50 a box
Costco and Sam’s club bypass the retail store aspect.
They don’t sell just anything, you will notice that while the core offerings are fairly consistent, the overall items they sell changes throughout the year. They are spot buying what they can get at a large discount.
Because they offer far less “choice” than a regular store, they will buy significantly larger lots of a smaller number of items. This kind of bulk buying gets them discounts because the manufacturer that sells it to them is assured a large transaction. The seller has a streamlined process to only ship to a small number of stores and the buyer (Costco, etc) can receive fewer but larger shipments. Much more efficient.
They in turn sell to consumers in larger lots. Big boxes, full cases, big bottles. They eliminate the inefficiencies of lots of small things, and only stock, inventory, and process at checkout large efficient units.
The stores are also designed to be very efficient with bulk storage right where it’s needed. It not fancy, but makes their jobs of managing inventory much easier.
Lastly some charge membership. The people who are shopping are willing to stake $50 a year to do so. They want be there and quickly learn the drill. That gets them in and out of there more efficiently.
(Edited to clarify 1st paragraph)
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
Part of the price for an item is the cost to sell it. These stores have lower prices because their cost to sell what they sell is lower. Why?
They carry less items, force you to buy larger portions (items cost $10+), they charge membership fees which somewhat deters shoplifters since just to enter you may need to pay $100 (or whatever) annual membership, they have fewer locations, each location is bigger, they turn over stock rapidly, they buy in bulk and may have monopsony pricing power, if you return too many items they cancel your membership to limit abuse, …
Many factors like that allow them to have lower prices and better return policies yet still make reasonable profits on top.
Food industry guy here. Most conventional grocers mark their goods up 40 – 50%. Costco marks their goods up an average of 14%. Their membership fee is a big part of their overall profitability.
Additionally to other answers, they don’t spend money on marketing, which is usually 10 to 40% gross revenue which you then mark up to recoup
Most commenters here don’t even understand whats happening or get it wrong on the “why”.
Costco and Sam’s Club are not in the same business as grocery stores, not at all. I know how odd that sounds as they both sell similar, if not often fairly identical items to grocery stores or big box stores (like a Best Buy).
However, Costco isn’t in the same business at all. Grocery stores, etc. companies make their money by marking up goods at significant rates, enough to create a profit for them. Their business model is buying these goods and upselling them. They act more as a middle man for the distribution of household goods. And that middle man makes their profit on upcharging the final customer at fat amount.
Costco is not in that business. Costco is in the subscription business. Its more like Netflix or a phone company than a grocery store. Costco buys goods and sells you them at only a limited markup. They aren’t interested in making profit on these goods, just enough to make their costs. They make their profit on you subscribing to this service. Their profit is from your membership fees. All of this is done just to make the $50-$100/year profit from each customer by selling them a membership for their service.
Now there are some really complicated stuff regarding how Costco pays its suppliers late that allows this to occur more smoothly for them, but thats way beyond ELI5.. but its also again, a totally different business than grocery stores, which do not have this luxury of essentially not paying their bills
So always think, Costco is Netflix, they sell a subscription to be able to purchase goods, they don’t really sell goods. Its not a “bulk” offering. Thats not their model. Their model is subscription. They are Netflix. They sell memberships, not huge bags of peanuts.
They have a very aggressive buying team. If a company wants to sell product in Costco then they need to lose our on some profit. Costco gets away with it because they move a lot of product. Also, except for the core items (which is mostly Kirkland branded) they tend to dump items quickly if they do not sell well.
They also feature products with in-store demos or even company reps. During these “roadshows” they tend to move a lot of product.
Where I live, Costco is only cheaper on a few items. WinCo has better prices on nearly everything we regularly buy.
Most of their revenue comes from the membership, they sell their product for essentially what they pay for it themselves and because they can buy in bulk they get better deals. Their store also serves as their warehouse so they save money there as well.
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