Chapter 095　What Did Costco Redefine?

Prescription for Incumbents What did Costco redefine? Among the cases in Chs. 081–100, this question is the odd one out. Every company treated so far rewrote the premises of an industry through technology. Costco did not. It stacks goods in a warehouse and sells them to members. Since 1983 that form has barely changed. It is strong anyway. This series has argued that an enterprise must keep redefining itself. This company looks like the strongest counter-example to that argument. We begin with the counter-example rather than walk around it.

1 What makes this enterprise worth a question

Start with the figures we could confirm. Figures are not the conclusion. They are where the question starts. Read the annual report filed with the U.S. Securities and Exchange Commission. Fiscal 2025 ended August 31, 2025. Net sales were $269.9 billion, up 8 percent on the prior year. Membership fee revenue was $5.3 billion, up 10 percent. Operating income was $9.8 billion and net income was $8.1 billion. The gross margin was 11.12 percent. In the same document the company states that its gross margin is significantly lower than that of many retailers. The structure of this enterprise appears there in its shortest form. Against operating income of $9.8 billion, membership fees brought in $5.3 billion. Membership fees are more than half of operating income. The profit earned by selling goods and the revenue earned by selling the right to be a member stand side by side at close to the same scale. Retail common sense cannot explain that. Retail is the business of buying goods and selling them with a margin on top. This company puts almost no margin on top. By not putting it on, it earns its income somewhere else. There are three reasons this enterprise is worth a question. First, it moved the place where its income is generated. Most companies rewrite what they sell. What this company rewrote was where it makes money. The layer of the rewriting is different. Second, as a result of that rewriting, the interests of the enterprise and the interests of the customer came to point the same way. The cheaper the goods, the more members. The more members, the more membership fees. This company designed a structure in which low prices do not eat its own profit. Third, this company has barely changed. For more than forty years it has been strong in the same form. As long as our theory says keep redefining, this case has to be taken head-on.

2 Conventional answers and their limits

Three explanations of this company circulate widely. Each is partly right. Each drops the part that matters. The first conventional answer: “It is strong because it is cheap” This is the most widely repeated explanation. Prices are low, so customers gather. They gather, so inventory turns. It turns, so prices can go lower still. The loop is real. The annual report explains the company’s own thinking in the same terms: pricing a limited selection low produces high sales volumes and rapid inventory turnover. But low prices are not a competitive advantage. Low prices can be copied. If a well-capitalized rival matches the price, the advantage disappears. If cheapness itself were the advantage, this company could not have held it for forty years. The question to ask is why it still makes a profit while cutting prices. The answer sits not in the pricing policy but in the revenue structure. The second conventional answer: “The membership subscription model is superior” This is the explanation in fashion. Recurring charges give stable revenue. Renewal rates are high. Prepayment brings in cash. The fiscal 2025 renewal rate was 92.3 percent in the United States and Canada and 89.8 percent worldwide. Paid members numbered 81 million. This explanation is also right. But being a membership business is not in itself an advantage. Retailers and restaurants that charge a fee are legion. Most of them do not work. The decisive point is whether a company charges a fee and sells goods dear, or charges a fee so that it can sell goods cheap. In the first case the customer pays twice. The fee is a loss to the customer. In the second case the fee is an investment for the customer. The same word, membership, names two opposite structures. Imitating the form fails because it does not look here. The third conventional answer: “Scale makes procurement cheap” This is the purchasing-power explanation. At scale, unit procurement costs fall. That is true as well. But the scale explanation has an order problem. Scale is a result. Before scale can grow, there has to be a reason for it to grow. And retailers with larger sales than this company exist. If scale alone were the reason, the largest company would be the strongest. Further, this company did not widen its assortment after it gained scale. The annual report records fewer than 4,000 active stock keeping units per warehouse. It has not converted scale into selection. That is not how a company chasing economies of scale behaves. What all three answers miss All three ask how to sell cheaply. But the second dimension of Enterprise Redefinition does not ask what a firm sells. It asks what value the firm delivers. Change the question and what you can see changes. The value this company delivers to a member is not merchandise. It is the state of not losing out without having to check. The member gives up the time spent comparing and the risk of choosing badly, and pays a fee in return. The goods are only the means by which that state is produced.

3 What was redefined — an analysis across the five

dimensions We read along the five dimensions of Enterprise Redefinition. The order follows the canon: Purpose, Business, Organization, Capital, and Leadership. What follows is what can be read from public information. It is not an assertion about internal decisions. Purpose — from seller to the buyer’s agent The reason this enterprise exists is not to sell goods. It is to buy on behalf of its members. Retail normally stands on the supplier’s side. It asks how to sell as much of its purchased stock as possible. This company inverted that position. The fee a member pays is close to a mandate fee for purchasing by proxy. That is why the assortment is narrow. Narrowing looks like an act that reduces the member’s choice. In practice it is an act that supplies a state in which choosing is unnecessary. The canon notes that Core Purpose can remain stable while its expression and realization evolve. This company’s Core Purpose reads as barely moving in more than forty years. What moved is the range of its realization. Countries, formats, and e-commerce. Ecommerce was about 7 percent of net sales in fiscal 2025. Business — from product margin to membership fees The rewriting of the business dimension is the core of this case. In ordinary retail, gross margin is the source of profit. Price is held up to protect the margin, and selection is widened to hold up the price. This company cut that chain. It keeps the gross margin deliberately low and returns the difference to price. Members increase as a result, and membership fees accumulate. The fiscal 2025 figures show the structure. Membership fee revenue of $5.3 billion against operating income of $9.8 billion. Without membership fees, the profit of this business would look entirely different. What matters is that the structure carries the incentive to cut prices on the inside. In normal retail, a price cut eats profit. Here, a price cut raises member value and supports the renewal rate and the member count. A price cut fattens the source of income. The company built into its business design a structure in which the more the customer gains, the more the enterprise gains. Organization — treating labor cost as the cost of producing trust In the organizational dimension, two features can be read from public information. The first is an explicit policy on employee treatment. The annual report states the company’s philosophy that it does not seek to minimize wages and benefits. Its explanation is that achieving longterm goals requires pay above the industry average. In March 2025 the starting hourly wage in the United States and Canada was raised by $0.50, to more than $20.00. The average hourly wage of U.S. hourly employees at the end of that fiscal year is recorded as about $32. The second is the distribution of headcount. Employees worldwide at the end of fiscal 2025 numbered 341,000. About 95 percent of them belong to the warehouses and the distribution operation. The head office layer is thin. The two together read as a design that treats the organization as a production device rather than an expense. What a member pays for is the whole of the experience obtained on the floor. That experience is made by people on the floor. Cut labor cost and the experience degrades, and the degradation returns as the renewal rate. Capital — the membership base and trust as capital The capital dimension is hard to see from the financial statements. The center of the capital this company accumulated over forty years is not its equipment. It is its relationship with members. The 81 million paid members, the 145.2 million cardholders, and the renewal rate near 90 percent are not carried on the balance sheet as assets. Yet that accumulation is what generates the profit. The third equation of the canon defines capital as follows. Future Capital = Financial × Human × Learning × Trust × AI × Knowledge × Ecosystem × Purpose This is multiplication. If any single term is zero, the whole product is zero. In this company’s case the Trust term held a high value over a long period. A membership fee is a prepayment against value not yet received. Prepayment only works where there is trust. On the AI term we do not have sufficient public information. How this company embeds AI cannot be assessed from outside. We leave the space blank. Leadership — deciding again each year not to change What stands out in the leadership dimension is not the drama of change. It is restraint. The assortment is not widened. The gross margin is not raised. Membership fees are not revised often. The most recent revision confirmable in public information took effect on September 1, 2024. U.S. Gold Star and Business memberships went to $65 a year, with Executive membership an additional $65 a year. The fourth equation of the canon defines leadership as follows. Leadership = Purpose × Question Design × Capital Allocation × System Architecture × Trust This equation is multiplicative as well; a zero in any term empties the whole. What stands out here are the System Architecture and Trust terms. Hold the structure once it is built. Holding looks passive. In practice it is an active decision made every period. Raise the gross margin by 1 percent and short-term profit certainly rises. Continuing to decide not to raise it is the substance of this management.

4 Structure — maturity and the value chain

4.1 Where it sits on the Enterprise Redefinition Maturity Model

Here we enter the part of this chapter that demands the most care. Set against the definitions of the Enterprise Redefinition Maturity Model (ERMM), this company’s business dimension looks at first glance like Level 2, the Improvement Enterprise. The source paper describes that stage as actively pursuing operational excellence. Improvement, however, remains incremental, and existing business models are rarely questioned. Organizations at this level become increasingly efficient while remaining fundamentally unchanged. A company that has raised efficiency on nearly the same model for forty years appears to fit the description. Two qualifications are needed before that fit is accepted. First, the model must not be misused. The Enterprise Redefinition Maturity Model evaluates organizational coherence rather than isolated excellence. An organization may possess Level 4 AI capability while remaining Level 2 in leadership; purpose may operate at Level 5 while business remains at Level 3. This company’s purpose, business, organization, capital, and leadership do not contradict one another. On the axis of coherence it reads as high. Forcing it into a single level is itself a misuse. Maturity is also assessed across all five dimensions in balance: exceptional technological capability with weak leadership redesign does not produce higher maturity, and strong purpose without adaptive organizational systems remains insufficient. Second, the source paper is explicit. Level 5 must not be treated as a target to be reached as fast as possible. The appropriate level differs by industry and environment. This case shows what that note means in the concrete. On that basis we still have to ask the question rather than avoid it. Does this company maintain its model having doubted it? Or does it maintain the model because it has not doubted it? The two cannot be distinguished from outside. The financial results are, for now, the same either way. The meaning is entirely different. In the first case, maintenance is an exercise of redefinition capability. In the second, maintenance is inertia. Inertia collapses the moment the environment breaks the premises of the structure. There are clues for telling them apart. Assortment was not widened as scale grew. The gross margin was not raised. Labor cost was not cut in the phases when cutting it was available. Each is the kind of item that drifts the other way if left alone. That they did not drift reads as a force pushing back. This is an inference. We do not assert it.

4.2 Where in the Future Value Chain the value was created

The causal order fixed by the canon is as follows. Purpose → Learning → Redefinition → Creation → Enterprise Value Lay that order over this company and a shape appears that differs from the other cases. Redefinition happened early in the life of the business. Whom do we buy for, and where do we make money? Once those two were settled, the structure was complete. The forty years since have been a repetition of Creation. New warehouses, new countries, and turnover in the items carried. The structure itself has not been rewritten. So this is not a company that redefines often. It is a company that redefined once, at a deep layer, and then ran for a long time on top of it. That is where the tension with this series’ proposition sits. We resolve the tension this way. Redefinition has depth. A company that redefined at the surface has to redefine again every time the environment moves. A company that redefined in the deep layer has a structure that holds when the environment moves. Low frequency does not mean low redefinition capability. This must not be turned into a general rule. Deep redefinition does not guarantee permanence. What is guaranteed lasts only as long as the premises live.

4.3 Time as a term

The fifth equation places time as an independent term. Future Value = Future Time × Future Capability This is multiplication as well; where time is zero, no Future Value appears however high the capability. This company’s Future Time was accumulated on one structure for more than forty years. The renewal rate is close to the integral of it. Betray the trust for a single year and the term shrinks. The Value Equation says the same thing. Value = Purpose × Trust × Capability × Time Trust and Time stand side by side, and here too a zero in any term empties the product. Trust cannot accumulate without time. And First Principle 8 states, Trust Compounds Faster Than Capital. Trust compounds faster than capital and becomes the last durable advantage. This company is the state of that compounding after forty turns.

5 What it looks like in practice — the strength of not

changing, and what makes it hold

5.1 Is the observation that “nothing has changed” accurate?

First, make the facts precise. Has this company really not changed? Line up the public information and the answer is half. The structure has not changed. On top of it, change continues. In fiscal 2025 the company opened 27 warehouses, of which three were relocations, for a net addition of 24. Warehouses at year-end numbered 914. By the end of the second quarter of fiscal 2026 the count had risen to 924. E-commerce accounts for about 7 percent of net sales. Membership fee levels were revised in 2024. The membership mix is moving too. Executive members at the end of fiscal 2025 numbered 38.7 million, close to half of the 81 million paid members. Sales to Executive members account for about

73.6 percent of worldwide net sales. Paid members in fiscal 2023

numbered 71 million. That is 10 million added in two years. So “nothing has changed” is partly a question of the resolution of the observation. Because the core does not move, movement at the edges does not stand out.

5.2 What the most recent results show

As of August 1, 2026, the most recent filing we could confirm is the quarterly report filed March 11, 2026. Figures from the third quarter of fiscal 2026 onward could not be confirmed, so this chapter does not treat them. According to that quarterly report, net sales for the 12 weeks ended February 15, 2026 were $68.2 billion, against $62.5 billion in the same period a year earlier. Membership fee revenue was $1.3550 billion, up 13.6 percent year on year. Total revenue was $69.6 billion, operating income was $2.6 billion, and net income was $2.0 billion. For the 24 weeks to date, net sales were $134.2 billion, membership fee revenue was $2.684 billion, and net income was $4.0 billion. What deserves attention is that membership fee revenue grew faster than net sales. That reads as the effect of the fee revision overlapping with growth in the member count. In this quarter too, membership fees account for roughly half of operating income.

5.3 What it means for trust to become a competitive advantage

This company is a working instance of trust becoming a competitive advantage. But the general remark that trust matters explains nothing. Trust has to be examined as a mechanism: how exactly is it converted into advantage? The first conversion is the assumption of search cost. A member does not verify each time whether the price is fair. The premise that verification is unnecessary raises the frequency of visits. From the company’s side, that amounts to obtaining demand without spending on promotion. The second conversion is prepayment. The fee is received at the start of the year. Cash arrives before the goods are handed over. Trust shows up in the finances in the form of working capital. The third conversion is tolerance for price increases. If the renewal rate does not break badly when the fee is revised, revenue rises directly. This is also a measuring instrument for trust. At every revision, the company tests the market’s trust in it. The second equation of the canon defines Future Value Creation Capability as follows. FVCC = Purpose × Learning × Redefinition × AI Integration × Ecosystem × Capital Allocation × Trust Seven terms, multiplied. In this company’s case Trust stands out over a long period. That is precisely why the whole holds a high value while the other terms are average. Multiplication has that property.

5.4 The conditions under which this structure breaks

Praise is not analysis. We set out four conditions under which this advantage breaks. All are matters of the future, and none can be asserted. First, the balance between fee and benefit gives way. The fee can be revised. But at every revision the member compares it against the benefit. If the benefit does not grow as fast as the fee, the renewal rate falls. If the renewal rate falls, the source of income thins directly. Second, the asymmetry of price information disappears. Part of this company’s value lies in the member not having to check for himself. If AI makes price comparison in personal shopping cheap enough, the value of buying by proxy falls in relative terms. This issue is not specific to this company. It reaches every business whose value lies in intermediation. Third, supply-side conditions change. A low-margin structure has a thin buffer against swings in procurement cost. If tariffs, logistics costs, or labor costs move structurally higher, the company faces a choice between passing the cost into price and cutting the margin. Either one tests the relationship with members. Fourth, the discipline loosens. Widen the assortment. Raise the margin a little. Cut labor cost a little. Each certainly increases shortterm profit. Forty years of restraint will not break on one lapse. But if lapses become normal, the premises of the structure disappear. Three of the four are external. The last is internal. And the most realistic is probably the last.

6 What transfers, and questions for the executive

What transfers from this case, and under what conditions? Not the introduction of a membership fee. There are four things to take. First, the design of interests. Does your profit rise when the customer loses, or when the customer gains? For most businesses it is the former. Price increases, lock-in, and friction in cancellation. In each, profit rides on the customer’s loss. What this company did was place inside its business a source of income that grows the more the customer gains. The form of a membership fee is not what matters. The direction of interests is what matters. Second, the decision to narrow. Holding the assortment under 4,000 items is an unnatural choice for a growing company. Find a product that sells and you want to add more. Most incumbents carry a strong bias toward adding businesses and adding items. Adding is not a capability. Narrowing is a capability. And you can narrow only when what you exist for has been settled. Third, the position of labor cost. This company writes in a public document that it does not minimize wages and benefits. Having written it, it actually raised the hourly wage. Do you see labor cost as an object of reduction, or as the cost of producing trust? First Principle 3 states, Capital Exists to Create Possibility. Capital exists to create possibility, not merely to maximize return. Capital allocated to people is no exception. Fourth, the conditions under which not changing works. This is the most important point for an incumbent. Many long-established companies have not changed for decades. Most of them do not have this company’s strength despite not changing. Where is the difference? The difference is whether the core has been put into language. This company can explain, in public documents, what it exists for, where it makes money, and what it will not do. That is why not changing is a choice. In a company whose core has not been put into language, not changing is not a choice. It is merely the status quo. From outside, both look like the same constancy. When the environment moves, the two behave nothing alike. One warning about imitation. This company’s structure works only when the membership base, the inventory turnover, the procurement scale, and the pay level hold at the same time. Introduce the fee alone and leave the product margin where it is, and the customer pays twice. Partial imitation often produces the inverse of the original structure. Finally, three questions. Each can be answered at your next executive meeting. Question 1 — Does your profit rise when the customer loses, or when the customer gains? If it is the former, the relationship with the customer is structurally strained. Sales effort will not close that gap. It closes only when the source of income is moved. Question 2 — Is what you have not changed something you chose not to change, or something you cannot change? If you cannot tell the two apart, that is itself the answer. If it is a choice, you can explain the reason for not changing. What cannot be explained is inertia. Question 3 — Can you state your core in one sentence? If you cannot, not changing will not become a strength. And changing will have no direction. This connects to the question of Recognize, the first stage of Enterprise Redefinition. What assumptions about our enterprise are becoming obsolete? To answer that, you have to know first which assumptions do not become obsolete. What Costco redefined was neither its merchandise, nor its stores, nor its prices. It was the single point of where profit comes from. Rewriting that point produced a structure in which selling cheap does not wound the seller. The interests of customer and enterprise came to point the same way, and trust compounded. For forty years the structure has not moved. That it has not moved is not a denial of redefinition capability. It means that a redefinition performed once, in a deep layer, is still working. That holds only while the premises live. The moment the work of checking the premises each year stops, constancy turns into inertia. What we should learn from this case is not the courage not to change. It is the discipline of deciding again, every year, not to change.

In brief

What Costco redefined is neither merchandise, nor stores, nor prices. It is where profit comes from.
It has barely changed and is strong anyway. Within public information the business looks like an Improvement Enterprise, but coherence across the five dimensions is high.
Value was created in the early Redefinition. A low frequency of redefinition does not mean low redefinition capability.
If the discipline of deciding again each year not to change loosens, constancy turns into inertia and the advantage breaks.

Key concepts

Enterprise Redefinition / the Enterprise Redefinition Maturity Model / Future Value Chain / Future Time / the Ownership-to-Usage Pattern (→ Vol. VI, Ch. 059)

The chain of ideas

Core Purpose → Redefinition (moving the source of income) → Trust

→ Future Time → Enterprise Value

Related first principles

Principle 1 — Purpose Precedes Profit. Principle 3 — Capital Exists to Create Possibility. Principle 6 — Enterprise Exists to Redefine Itself. Principle 8 — Trust Compounds Faster Than Capital.

Related chapters

Vol. V, Ch. 050 “What Does It Mean to Redefine Customer Value?” — designing the customer’s interests and your own to point the same way
Vol. V, Ch. 044 “What Is the Enterprise Redefinition Maturity Model (ERMM)?” — why forcing a firm into a single level is a misuse
Vol. VII, Ch. 068 “Does Trust Become Enterprise Value?” — the mechanism converting trust into renewal rates and prepayment
Vol. VI, Ch. 054 “What Does It Mean to Redefine Corporate Culture?” — what it takes to hold the decision not to change as an institution

Papers and companion volumes

Kadowaki, N. (2026). Future Value Theory: A Management Framework for Enterprise, Capital, and Society in the Age of AI. VURA Working stract=7120980 / Paper. Zenodo: SSRN: https://ssrn.com/abhttps://doi.org/10.5281/zenodo. 21255662
Kadowaki, N. (2026). Enterprise Redefinition: Toward an Enterprise Evolution Theory for the Age of AI. VURA Working Paper. (Published on Zenodo; under review at SSRN)
100 Questions on Management in the Age of AI, #076 “Why Does Trust Become Capital in the Age of AI?”

Chapter 095 What Did Costco Redefine?