Annual Report Form 10-K FY 2024

Costco caps its markup at 14% on branded items and 15% on Kirkland Signature—no exceptions, no matter what customers would pay. This isn't just pricing discipline; it's costly signaling in its purest corporate form. The 10-K documents how this self-imposed constraint generates trust that competitors can't replicate.

The numbers tell the story: 73% of Costco's gross profit comes from membership fees, which constitute only 2% of revenue. The company operates at a 10.92% gross margin and roughly 2% net profit margin—razor-thin by retail standards. Meanwhile, they pay average hourly wages of approximately $31 per hour (with $19.50 minimums), achieving 93% retention among employees with over one year of tenure. Walmart's average hourly wage is $19.50.

Biologically, this is the handicap principle in action. Male peacocks drag around enormous tails that actively impede survival—but that's precisely the point. The tail signals 'I'm so fit I can afford this burden.' Costco's margin cap says the same thing: 'We're so confident in our model that we voluntarily limit profit extraction.' The signal works because it's costly to fake. Any competitor could match the wages tomorrow, but matching the margin cap would destroy their business model—Walmart's gross margin is 25%, nearly triple Costco's.

The result is a trust flywheel: low margins attract members, membership fees fund operations, high wages reduce turnover (93% retention vs. industry average ~60%), experienced staff improves service, better service justifies membership, renewal rates hit 90.5% globally. Costco built a moat from a self-imposed handicap.