Costco saves its members money in all sorts of ways. Its business model involves offering a limited selection of products in a no-frills warehouse.
The company's product people work with vendors to lower prices in every way possible. At the core level, the company lowers its cost per unit by placing huge orders for each product it sells.
Costco (COST) won't carry the same item in a variety of sizes. Instead, it offers a very limited selection that magnifies its buying power.
Related: Costco shares news on its next membership fee increase
That allows the warehouse club to work with its vendors so they can lower their costs. Producing a huge order allows Costco's partners to negotiate with its partners to lower prices on everything from raw materials to packaging.
It's a virtuous circle built around limited selection and very careful sourcing. That's not the only way Costco saves its members money.
The retailer also offers significant value through its Kirkland Signature brand. Costco works with top-tier vendors to produce items under its private-label brand that it can sell at lower prices than name brands.
In addition, Costco has become famous for its travel deals. The chain offers everything from bundled theme park trips that include airfare, hotel, tickets, and even rental cars, to discount cruises, and a wide range of lower-cost travel deals.
The chain's latest offering, however, literally gives Costco members free money.
Image source: Kevin Dietsch/Getty Images
Costco offers a Southwest deal
Costco often offers gift cards for less than their face value. The warehouse club will have a varying selection of cards from restaurants, retailers, and other places hoping to bring in customers.
It's not uncommon for members to pay $20 for a $25 gift card to chain restaurants or be able to purchase a membership to a gym for a year at a price that's lower than face value.
The warehouse club's latest deal, however, offers a huge value to Southwest Airlines (LUV) customers.
"Costco frequently sells travel-related gift cards at a discount. They have $500 Southwest Airlines gift cards for $450 online. But through Sunday, March 10th they’re taking an additional $20 off ‘while supplies last.’ That gets you $500 worth of Southwest Airlines travel for $430. Funds on the card do not expire," View From the Wing reported.
After March 10, the offer will still be valid, but it will cost $450.
"A Southwest Gift Card may only be redeemed at southwest.com, on the Southwest Airlines mobile apps and mobile website (only for initial flight booking), by calling Southwest Airlines at 1- 800-435-9792 (1-800 I FLY SWA®), or at Southwest Airlines ticket counter locations for Passenger air travel and other qualifying products and services," Costco shared on its website.
Southwest has recovered
It's surprising that Southwest has partnered with Costco to offer such a large discount because the airline has been performing well.
"We saw close-in performance strengthened in November and December for both leisure and corporate travel. This led fourth quarter 2023 to be yet another record at just over $6.8 billion in operating revenue, and we are seeing that strength continue into 2024," CEO Bob Jordan shared during the airline's fourth-quarter earnings call.
The airline, he noted, has recovered from its 2022 holiday meltdown to deliver record profits.
"This demand strength, combined with about $1.5 billion in incremental year-over-year pre-tax profit from our network optimization efforts and the contributions from our portfolio of strategic initiatives is driving us to expect additional revenue records and year-over-year operating margin expansion despite cost pressures from new labor agreements and increased aircraft maintenance expense," he added.
The Costco deal should drive new customers to the airline and encourage existing passengers to fly more. In theory, the airline may also lose some money if existing passengers opt to buy the gift cards to pay for travel they otherwise would have paid full price for.
Costco does limit each member to five $500 Southwest gift cards.
Related: Veteran fund manager picks favorite stocks for 2024
