When we moved to the suburbs, we joined Costco

It seemed like a suburban rite of passage, but I admit: I've become a fan. Only I didn't know until recently how Costco is blowing away the competition in one surprising industry. 

Frankly, it's something most Americans would never think of looking for or buying there--a category where it's in eighth place and rising, behind giant superstores like Walmart, Amazon, Target, and Kohl's.

The category: clothing.

Displayed among the widescreen TVs, giant packages of French fries, and enormous jugs of store-branded Tennessee whiskey, it turns out Costco has been bringing in literally billions of dollars a year in designer clothing.

And the people who've already figured it out apparently swear by it.

"More than Old Navy, Neiman Marcus, or Ralph Lauren"

At The Washington Post, Abha Bhattarai reported on this recently. Costco has suddenly become a giant in the clothing and footwear category--while almost nobody was paying attention:

Clothes and footwear now generate more than $7 billion a year in sales for Costco; that's more than Old Navy, Neiman Marcus, or Ralph Lauren.

Revenue in that category has climbed about 9 percent a year since 2015, outpacing sales growth for food and electronics, according to recent earnings calls.

Those are stunning numbers for a retailer better known for its no-frills stores and bulk everything.

In fact, it's enough to make Costco the No. 8 clothing retailer in the United States, behind Walmart, Amazon, Target, Kohl's, TJ Maxx, Macy's, and The Gap.

Seven key reasons

"Costco has quietly become an apparel destination," Simeon Siegel, a retail analyst for Instinet, told the Post. "It is clearly resonating with shoppers and winning over brands at the expense of department stores."

So, how did Costco take a category in which most Americans still don't even realize it competes and become one of its leaders and one of the fastest growing brands all at the same time?

I count seven key reasons. When you add them up, it's a brilliant strategy:

1. It offers top brands

Costco seems to understand better than many other retailers that brand matters more than almost anything else in clothing sales.

So, it's pulled out all the stops apparently in order to make sure it features top brands--not no-names and knockoffs that your 13-year-old child would never be caught dead in. Among the brands cited in the Post article: North Face, Lucky Brand jeans, and Adidas.

2. It charges very low prices

This is the other key: There's no point to buying clothing at Costco unless it's cheaper than other places where you'd more naturally buy clothes.

But Costco caps profit margins at 15 percent, and makes money via scale and subscription fees (more on that in a second). Costco also has enormous bargaining power with the brands it features.

3. It offers only limited choices

OK, this is a paradox. You won't find anywhere near the selection at Costco that you will at other retailers when it comes to clothing. But many customers apparently see this as a feature, not a bug--because it means they're not paralyzed by choice.

  • As Bhattarai writes: "Today's shoppers don't want to rummage through racks of clothing or decide between dozens of styles of jeans. They want retailers to do the searching for them, and give them a handful of foolproof options."

4. It organizes around time-based incentives

The inventory changes constantly. So clothes shoppers who want to do a lot at Costco have to come back continuously. 

  • "If you see something you like, you have to grab it right away," shopper Michele Kulwin told the Post, adding that she now shops at Costco twice a week.
  • "Building a wardrobe at Costco is a marathon, not a track meet...but you have to curate it over time," added Stephanie Kretschmer, 39, who runs the @costcocasual Instagram account.

5. It has a smart pricing and business model

As I alluded to above, if you want to shop at Costco you have to join first and pay an annual membership fee of at least $60. With 85 million members (!) that's $5.1 billion annually before they sell a single product.

It's also sort of like a less expensive Amazon Prime, except Costco doesn't have to pay to ship anything to your house. 

As a result, it doesn't have to make the same margins on the individual items it sells--and customers are incentivized to return and buy at Costco because they've already paid the flat membership fee.

6. It offers fashion brands a "safe" way to liquidate inventory

For whatever reason--and this is pure subjectivity--a big fashion brand that offloads excess product via Costco doesn't seem to face the same stigma as it would for doing so at other cut-rate vendors.

"If you've got a lot of inventory," added Instinet's Siegel, "dropping off a pallet at Costco and having it disappear by the end of the weekend isn't the worst thing."

7. It bucks a trend

It's no secret that brick and mortar stores are under pressure. Maybe you've noticed if you shop at places like Sears, David's Bridal, or Gymboree, which have all filed for bankruptcy. Other big chains are closing stores.

But, despite the fact that Costco doesn't even have fitting rooms (so if you're curious about sizes you have to resort to the old "hold it up against you" method), it's killing it in the clothing category.

Add it all up, and it's a big win for the big box membership store. It's something most people never expected to find there--and the strategy seems to be paying off big time.