Costco's Long-Term Growth Engine: Membership Momentum vs. E-commerce Risks

Costco's global membership renewal rate slipped to 89.8% in Q4 2024, below the 92.3% rate in the U.S. and Canada. This dip is primarily attributed to a surge in online sign-ups and a Groupon-driven influx of younger members, who tend to renew less frequently than traditional members. Despite this renewal challenge, membership fee income remained robust, climbing 14% year-over-year to $1.72 billion. Growth was fueled by digital expansion and an increasing base of members under 40 years old.

To recoup rising operational costs, Costco implemented a fee increase effective September 1, 2024. Gold Star, Business, and Executive membership rates rose by $5 to $10 across the board. The hike applies to new sign-ups, renewals, and auto-renewals starting mid-July 2024. Executive members also saw their 2% rewards cap increase to $1,250 annually. While these adjustments provide necessary revenue relief, they carry inherent retention risks, particularly for price-sensitive newer or younger members acquired through online and Groupon channels.

Costco executives view the current renewal rate dip as a temporary challenge tied to its broader membership growth strategy. They expect membership renewal rates to stabilize following the fee adjustments, though the impact on the younger, more price-sensitive segment remains a key monitoring point. The resilience of fee income growth, despite the renewal rate contraction, underscores the strength of Costco's membership model and the effectiveness of its strategic pricing approach in offsetting the volatility.

E-commerce Growth and International Expansion

Costco's digital sales surged 14.8% year-over-year in Q3 2025, propelled by targeted campaigns and personalized recommendations, with online apparel and electronics sales rising double digits. Though this growth represents a significant portion of revenue, thin margins remain a challenge. The company operates on razor-thin product markups typically in the low 14-15% range, constraining its ability to absorb additional costs while maintaining market competitiveness.

International expansion has accelerated alongside digital growth. Costco now operates 905 warehouses across 14 countries, including 7 locations in China and 29 in the U.K., with e-commerce platforms active in eight markets. The company plans to open more than 30 new warehouses internationally each year, though exact regional growth figures for 2024 (Canada +8.1%, Other International +8.4%) aren't specified in current reports.

Revenue drivers include the Kirkland Signature brand, which delivers 15-20% cost savings on private-label goods. However, tariff pressures continue testing margins. Costco has responded by shifting production sources, prioritizing American-made goods, and securing long-term shipping contracts to mitigate costs. While these strategies have helped maintain pricing power, persistent tariff challenges and thin operational margins mean profitability remains inherently vulnerable to supply chain disruptions or accelerated inflation.

Membership growth remains strong, with paid subscribers rising 6.8% YoY to 79.6 million and renewal rates holding steady at 92.7% in the U.S. and Canada. This customer loyalty supports digital expansion but doesn't fully offset the margin pressures from global operations.

Financial Performance and Balance-Sheet Resilience

Costco delivered steady financial results in FY2024, demonstrating resilience amid inflation. Net sales reached $249.6 billion, up 5% year-over-year, with operating income climbing to $9.29 billion, representing a 3.7% operating margin. Net income held firm at $7.37 billion, supported significantly by $4.83 billion in membership fees, which remained stable throughout the year. International expansion, particularly in Canada and other global markets driving 8.1% and 8.4% sales growth respectively, underpinned this performance as the warehouse club added 891 locations worldwide, including new entries in Mexico and the UK. The company achieved this growth while maintaining cost discipline, keeping operating margins within a narrow 3.40% to 3.67% range throughout 2024.

Costco's revenue momentum accelerated in 2025, climbing to $275.235 billion, an 8.17% increase from 2024's $254.45 billion. Quarterly revenue hit $86.156 billion in August 2025, reflecting sustained growth across its U.S., Canadian, UK, and international footprint. This expansion underscores the scalability of its membership model and e-commerce penetration, which grew to 16.2% of sales in 2024. However, these strong top-line figures masked increasing pressure on profitability later in the year. By mid-2025, operating margins had dipped to 2.91%, a clear signal of the challenges associated with scaling operations rapidly. This compression suggests rising costs related to store expansion, wage pressures, or competitive pricing intensifying, factors that began absorbing some of the gains from earlier cost management efforts.

Despite the margin dip, Costco's core financial pillars remain strong. Membership fees, a highly predictable and recurring revenue stream, grew only modestly but demonstrated remarkable stability, contributing significantly to the company's overall profitability. The ability to maintain net income at $7.37 billion in a year of significant expansion and inflation highlights underlying balance-sheet resilience. While the margin pressure in mid-2025 warrants monitoring, it reflects the natural friction of scaling a large global operation rather than a fundamental breakdown in the business model. The company's focus on controlled cost growth alongside revenue expansion remains intact, though the margin compression indicates that the path to sustaining previous profitability levels may require navigating tighter cost controls as the scale increases further.

Membership Volatility and Margin Pressure: Core Challenges

Costco faces a dual challenge: a dip in global membership renewal rates and persistent operating margin pressure. The company's Q4 2024 global renewal rate fell to 89.8% (still 92.3% in the U.S. and Canada), attributed to higher online sign-ups and a Groupon-driven influx of younger members who renew at lower rates. This trend, analysts view as temporary amid broader membership growth. Yet, the margin picture is equally complex. While Costco's 2024 operating margin historically fluctuated between 3.40% and 3.67% – stable compared to its multi-year average of 2.8% to 3.5% – a concerning decline occurred. By August 2025, the margin had compressed to 2.91%, signaling significant pressure in the latter half of 2024 and into 2025.

This pressure exists alongside rising fee income. Membership fees climbed 14% year-over-year to $1.72 billion in Q4 2024, driven by digital expansion and a growing under-40 member base. However, the lower renewal rate among newer members inherently challenges the sustainability of this fee growth model. The core tension is clear: maintaining membership value while generating revenue from a larger, potentially less loyal cohort. Furthermore, the margin compression to 2.91% threatens profitability, especially if offsetting cost efficiencies become harder to achieve. While Costco's efficient supply chain (with 3,700 SKUs and rapid turnover) helps sustain low markups, any disruption to this model could amplify margin weakness.

Heightened e-commerce scaling and aggressive physical expansion are critical to offsetting brick-and-mortar slowdowns and alleviating margin pressure. Evidence shows strong momentum here. E-commerce sales surged 20.5% in Q1 2026, while membership grew 6.8% YoY to 79.6 million. Crucially, Costco plans to open 30+ new international warehouses annually. This aggressive footprint expansion aims to capture market share and diversify revenue streams, potentially countering any stagnation in traditional store performance. However, rapid scaling, especially internationally, carries inherent execution risks, including regulatory hurdles in new markets and the operational complexities of managing a vastly larger network. Revenue rose 8.2% to $65.98 billion in Q1 2026, demonstrating scalability, but sustaining this pace globally is non-trivial.

Investors note the high valuation, with a forward P/E of 56.82. Despite this, analyst sentiment, reflected in a Zacks Rank of "Hold", often views pullbacks – potentially fuelled by renewal or margin data – as opportunities. The argument hinges on Costco's proven ability to deliver consistent growth and efficient operations. The risk remains that margin pressure proves more persistent than anticipated, or that scaling costs overshadow the benefits of new members and e-commerce gains, particularly if execution in new markets falters. The path forward depends heavily on successfully translating these ambitious expansion plans into profitable growth.