What One Retailer's Accounts Say About How Businesses Make Money

Ask how a business makes money and the usual answer describes what it sells. A retailer sells goods; an airline sells seats; a gym sells access. That answer is about revenue, and revenue is the least informative line in a set of accounts.

What a business sells and what it earns from are frequently different things, and the gap between them is usually visible in a public company's own filings for anyone willing to subtract. This article works through one case where the gap is unusually stark, using figures the company reported itself, and then sets out how to run the same check on any business you are looking at.

The case is Costco Wholesale, chosen because it files clearly and because the arithmetic needs no interpretation. All figures below come from its annual report on Form 10-K for the fiscal year ended 31 August 2025, and are in millions of US dollars.

What the filing says

Costco reports revenue in two lines. Net sales — the merchandise — came to $269,912m in fiscal 2025. Membership fees came to $5,323m. Together they make total revenue of $275,235m.

By revenue, then, the membership programme is a rounding error: 1.93% of what the company took in. Anyone describing this business from its top line would say it is a retailer that happens to charge a small entry fee.

Operating income for the year was $10,383m. Membership fees were $5,323m of it — 51.3%.

What happens when you subtract

The ratio above is striking on its own, but the more useful exercise is to separate the two businesses and see what each contributes.

Start with merchandise alone. Net sales of $269,912m less merchandise costs of $239,886m leaves $30,026m — a gross margin of 11.1% on the goods, which is deliberately thin and is the point of the model. From that, subtract the company's selling, general and administrative expenses of $24,966m, and $5,060m remains.

Membership fees that year were $5,323m. In other words, the fees collected for the right to shop there exceeded the operating contribution of the entire merchandise operation — every warehouse, every pallet, every employee — by $263m.

That is what a business model looks like when it is written down honestly. The goods are close to a service provided at cost; the fee is the product. Everything visible to a customer — the size of the trolleys, the limited range, the low prices — follows from the fee being the thing that has to be renewed.

The trend says more than the headline

A single year's ratio invites a tidy conclusion that is usually too tidy. Three years is more honest, and it points the other way from the obvious story.

The membership share of operating income has fallen: 56.4% in fiscal 2023, 52.0% in 2024, 51.3% in 2025. That is not because fees shrank — they rose from $4,580m to $5,323m. It is because the merchandise operation improved faster. Run the same subtraction across the three years and merchandise contribution goes $3,534m, $4,457m, $5,060m.

So the accurate version of the story is not "this is a membership business wearing a retailer's clothes." It is that the two halves are converging, and the half everyone talks about is currently the one growing more slowly. A reader who stopped at the headline ratio would have the shape of the business right and its direction wrong.

Three questions this suggests for any business

Which line pays the fixed costs? Rent, salaries and systems are paid in currency, not in revenue share. Find the line that covers them and you have found what the business actually runs on. Here, membership fees are roughly the size of the entire remaining operating profit after SG&A.

Is the biggest line a volume engine or a profit engine? Some large revenue lines exist to create the conditions for a smaller profitable one — cheap goods that make a fee worth renewing, free tiers that feed a paid tier, hardware sold near cost to sell services. A line can be strategically essential and financially marginal at the same time.

What would break first? If the profit sits in one concentrated line, that line is the fragility. A business earning most of its operating income from renewals is exposed to anything that interrupts renewal — a competitor, a price rise that goes too far, a change in what the membership entitles you to. The concentration that makes the model elegant is the same concentration that makes it vulnerable.

What this does not tell you

Four limits are worth stating, because an analysis like this is easy to over-read.

It is one company in one sector, and the pattern does not generalise by itself — it is a demonstration of a method, not a rule about retail. The figures are historical: three fiscal years that have already happened, with no bearing on what follows. Operating income is an accounting measure shaped by the company's own presentation choices, and it is not the same as cash. And none of it says anything about whether the shares are worth owning; understanding how a business earns is a separate question from what it is worth, and this article takes no view on the second.

Running this yourself

The filings are free. For US-listed companies, annual reports on Form 10-K sit on the SEC's EDGAR database; UK companies file accounts with Companies House. In both cases the consolidated income statement is the place to start, and the segment note is where a multi-business company shows its hand.

One check is worth doing before you trust your own reading. Add the revenue lines and confirm they equal reported total revenue; subtract the cost lines and confirm they equal reported operating income. Every year quoted above reconciles exactly. If yours does not, something has been misread or a line has been missed — and finding out which is more instructive than the ratio you were trying to calculate.

The habit this builds is a small one. Before accepting any description of how a company makes money — including the company's own — find the line that produces the profit, and check whether it is the same line that produces the revenue. It usually is not, and the gap is where the business actually lives.

For more on reading what a company reports, our explainer on how to read a stock's price-to-earnings ratio covers the most quoted number in investing, and customer acquisition cost, explained with real numbers applies the same subtract-and-check discipline to a smaller business.