In 1983, James Sinegal opened his first Costco warehouse club in Seattle. Taking cues from California warehouse retailer Price Club, Sinegal's nascent operation charged a membership fee and catered primarily to small-business owners. Almost 25 years later, Sinegal's adaptation of Price Club's low-price, limited-selection merchandising is a retail success story: Costco employs over 100,000 people and earns a $1.1 billion annual profit on $59 billion in sales; it is the fourth-largest retailer in the country and the seventh-largest in the world, and it ranks 28th among Fortune 500 companies.

Behind Costco's rise to the top is an intelligent retail strategy. Costco stores are expansive. A walk around the "racetrack"--retail lingo for the U-shaped path along the perimeter that most shoppers follow upon entrance--is a tour through 150,000 square feet of merchandise. More impressive than the size of Costco stores is the productivity the company squeezes out of every square inch of its 488 locations. Costco produces $918 in annual sales per foot of space. By comparison, Sam's Club yields only $552 in sales per foot of retail space; Target stores report less than that.

Costco's ability to sell more efficiently than its low-margin peers is due in part to membership fees and cost reductions. Costco makes $50 per year of profit from club members--about 48 million of them. And while the company keeps membership up, it holds costs down. For example, Costco doesn't use pricey ad agencies, and in-store signage looks like something from a cheap laser printer. Additionally, there are no commissioned salespeople, and products move right from the delivery truck to the concrete sales floor.

Also central to Costco's profitability are its mass quantities of low-price, limited-selection merchandise. Club stores house about 4,000 items, compared with 40,000 in a typical supermarket and 150,000 in a Wal-Mart supercenter. And though products are relatively few, the selection is diverse: in a single shopping cart one may find Italian-made Hathaway dress shirts, Waterford crystal, diamond rings, vats of mayonnaise, and 2,250-count Q-Tip packs. Ensuring the fast movement of these products off store palates is Costo's lower than 14% markup. Supermarkets and department stores often carry markups of 25% and 50%, respectively.

The result of Costco's retail model is a fanatic, devoted, affluent customer base. The club's card-carrying legions come in droves, waiting anxiously in fancy foreign cars on Saturday mornings for the store to open. Carts in hand, they display a fervor not usually seen outside of houses of worship. Why? Because people love a bargain. And where else can a shopper to go to find ridiculously low prices on high-end brands like Waterford crystal and Calvin Klein jeans?