Costco's TAM Capture Play: How Executive Perks Fuel Scalable Growth

Costco's membership model is its moat, and its latest moves are a high-conviction play to capture more of that value. The core investment thesis is simple: by doubling down on its most valuable customers, the company is accelerating growth in its highest-margin revenue stream. The numbers prove the disproportionate impact. While Executive Members make up approximately 47% of Costco's total membership base, they generate 73% of the company's sales. This isn't just a loyalty program; it's a direct lever to boost the entire business's top and bottom lines.

The new early-access shopping hours are a behavioral economics tactic designed to justify the $65 annual premium. By giving Executive Members a tangible benefit that addresses a core pain point-crowded stores and long lines-Costco creates perceived value that can drive conversions from its base-tier Gold Star members. This is a calculated gamble to deepen engagement and loyalty among its most profitable segment, turning a premium fee into a sticky, high-spending community.

The financial results from this strategy are already material. In its 2025 fiscal year, membership fee revenue grew at a double-digit rate, reaching approximately $5.3 billion. This growth was driven by a combination of higher-tier memberships and a fee increase implemented in late 2024. With nearly 81 million paid memberships and renewal rates near 90%, the engine is firing. The company's ability to grow this recurring, high-margin income stream steadily, even in a challenging macro environment, underscores the durability of its model.

Viewed another way, Costco is using its Executive Members as a TAM (Total Addressable Market) accelerator. By investing in perks that drive upgrades and increase spending per household, it's not just monetizing its current base-it's expanding the addressable market for its own premium offerings. This focus on membership fee growth, which accounts for a disproportionate share of profits, is the key to sustaining its premium valuation and delivering durable earnings power.

TAM and Market Penetration: The Scalable Growth Engine

Costco's growth story is built on a simple, powerful equation: dominate a growing market by relentlessly expanding its physical footprint. The company's Total Addressable Market (TAM) is expanding, fueled by high inflation and a successful push into younger demographics, while Costco's own aggressive expansion plan is the direct channel to capture that new share.

The warehouse club sector is in a growth phase. High inflation has brought the value proposition of bulk buying into sharper focus, while retailers have successfully attracted Gen Z and millennial shoppers with trendier brands, low-priced meals, and a more enjoyable shopping experience. This demographic shift is critical, as it signals a broader, more sustainable TAM beyond traditional cost-conscious families. The sector's expansion is already visible, with all three major players-Costco, Sam's Club, and BJ's-opening new locations. This collective growth validates the model's scalability and creates a larger pie for the dominant player to claim.

Costco's dominance within this expanding pie is structural. The company commands an estimated 77% share of the warehouse club industry, a position of immense strength. Its competitive pressure is evident in the visit share data, where it holds 54% of combined visits among the three major clubs. This isn't just about market share; it's about disproportionate revenue generation. Executive Members, who make up roughly half the membership base, drive 73% of Costco's sales. This outsize spending power justifies the company's investment in premium perks, like exclusive early shopping hours, which are designed to lock in and upgrade its most valuable customers.

The direct path to capturing more of this growing TAM is through physical expansion. Costco has stuck with an aggressive expansion plan of opening about 30 clubs per year. This pace is accelerating, with the company aiming for 35 new warehouses by the end of fiscal 2026. This strategy is a classic market penetration play. By opening new locations, Costco increases its geographic reach and access, directly converting the growing number of new members into paying customers. It also allows the company to open in existing crowded markets, addressing a key customer pain point and potentially driving membership upgrades. The expansion is global, with just over half of new units planned for the U.S. and the rest in other parts of the world.

The bottom line is a scalable engine. Costco isn't just riding a sector growth wave; it's actively engineering its own growth by building new warehouses. Its dominant market position provides a massive base, while the expanding TAM and aggressive rollout plan create a clear path to increasing membership and sales. The company's focus on premium members and new store formats, like showrooms and gas stations, further diversifies its revenue streams within this expanding footprint. For investors, the setup is straightforward: Costco is using its scale and capital to capture a larger share of a larger market.

Financial Impact and Scalability: From Perks to Profit

Costco's financial engine is built on a simple, powerful formula: high-margin membership fees fund low retail prices, creating a self-reinforcing cycle of volume and efficiency. The first quarter of fiscal 2026 delivered a clear validation of this model, with membership fee revenue growing 14.0% year-over-year to $1.33 billion. This high-margin stream is the profit cushion that allows Costco to offer aggressive product pricing while maintaining its renowned operational discipline. It also provides a critical buffer against any deceleration in core retail sales, a vulnerability that became starkly apparent in 2025 when even strong operational results failed to justify its premium valuation.

The company's latest strategic perk-the extended early access for Executive Members-demonstrates how operational tweaks can directly enhance this efficiency. By opening an hour earlier for these high-value customers, Costco has successfully reduced traffic concentration during late-morning and afternoon peaks. The data shows a measurable shift: visits lasting 30 to 45 minutes increased while longer, potentially more congested trips fell. Crucially, this improvement in the shopping experience was achieved without assigning additional staff hours. The perk has made members more efficient, allowing Costco to manage a smoother flow of visitors and maintain its lean staffing model. This is a textbook win-win, boosting member satisfaction while protecting the core profit margin.

This operational finesse is the hallmark of Costco's entire business. Its extreme efficiency is quantifiable in staggering metrics. Each U.S. employee generates an estimated $850,000+ in annual revenue, more than double the industry average. Sales per square foot are several times higher than traditional retailers, a direct result of its high-volume, low-frills model. This productivity allows Costco to run a vast network of 629 warehouse locations with remarkably lean staffing, turning its real estate footprint into a powerful profit engine.

The bottom line is that Costco's strategy scales profitably because it is built on a foundation of high-margin, recurring revenue and operational leverage. The membership fee growth provides the financial flexibility, the early-access perk optimizes the shopping experience without adding cost, and the underlying efficiency ensures that every dollar of sales translates into significant profit. For investors, the challenge is to look past the stock's recent underperformance and see the durable, scalable model at work.

Catalysts, Risks, and What to Watch

Costco's growth thesis hinges on a virtuous cycle: deepening member loyalty fuels fee income, which funds lower prices and more perks, attracting more members. The near-term catalysts to validate this cycle are clear. First, the continued acceleration of Executive Membership upgrades is critical. As of the last quarter, nearly half of all members had already upgraded, and the company is actively incentivizing this shift with exclusive benefits like early shopping hours and grocery credits. This strategy is working, with Executive membership growing 9.1% year-over-year. Second, the successful execution of its 2026 expansion plan is a tangible driver. The company is adding 35 new warehouses, a slow and steady approach that will directly boost its membership base and sales. Third, the exceptionally high renewal rate of 92.2% in the U.S. and Canada demonstrates the strength of its core moat. This near-perfect retention provides a stable, predictable revenue stream that underpins the entire model.

Yet significant risks threaten to disrupt this cycle. The most immediate is potential backlash from the base of Gold Star members. By granting exclusive early shopping hours and other perks to Executive members, Costco risks alienating its broader membership, creating a perception of a two-tier system. While the company argues this benefits everyone by thinning crowds later, any erosion of goodwill could dampen the upgrade momentum. Operational strain is another risk. Early hours place a burden on staff and inventory preparation, and if not managed smoothly, could lead to a poor customer experience that undermines the premium value proposition. The broader market risk is the stock's high valuation. With a price-to-earnings multiple hovering around 42, the market leaves little room for error. Any sign of deceleration in comparable sales growth or membership fee income is likely to be punished sharply, as seen in 2025 when a slight moderation in sales growth triggered a sell-off.

Investors should watch three key metrics for early signals. First, quarterly membership fee growth is the direct health check for the upgrade strategy. The 14% growth last quarter was strong, but sustaining that pace is essential. Second, comparable sales trends will reveal if the economic tailwind is fading. The recent drop to 6.4% from 6.8% is a red flag to monitor. Third, any changes in the competitive pricing landscape from rivals like Sam's Club or Amazon could pressure Costco's core value proposition. For now, the membership model holds firm, but the path forward requires flawless execution on both the expansion and the delicate balance of member incentives.