Costco Stocks 4,000 Items on Purpose

Walk into a typical Walmart supercenter and you're looking at roughly 120,000 different items on the shelves. Walk into a Costco warehouse of similar size and you're looking at about 3,800. The skew isn't a failure of merchandising. It's the business.

By restricting the assortment, Costco gives each SKU enormous sales volume. Only one brand of paper towel is usually present — or the Costco-brand Kirkland Signature version. Suppliers lobby to be the single item in their category, because a single listing at Costco can mean moving a year's worth of pallets in a month. That volume gives Costco very aggressive cost-of-goods-sold negotiations, and a razor-thin retail markup on top — the company caps markup at 14 percent on branded goods and 15 percent on Kirkland, considerably lower than most retailers' 25 to 50 percent.

Costco's profit doesn't come from the markup. It comes from the annual membership fee. In fiscal 2023, member fees generated $4.6 billion, which is about half the company's $6.3 billion net income. The retail operation breaks close to even; the club business is what pays.

Rotating out SKUs aggressively — roughly a quarter of non-staple items turn over each year — also trains the customer. A member who sees the sea salt they like on an endcap learns that if they don't buy it now, it might not be there next month. That urgency lifts basket size without changing shelf tag prices.

Jim Sinegal, the co-founder, was explicit in interviews that narrow assortment was the deliberate inverse of the hypermarket model. Most retailers add SKUs to widen appeal. Costco subtracted them, and the scale on what remained paid for everything else.