Morningstar's equity analyst, Ken Perkins, says if you look at Costco's return on capital, it's much higher than its peers. However, its gross margins are about half of what the likes of Wal-Mart, Target or Whole Foods enjoy. Ken's analysed Costco's cost structure and finds it competitive relative to its peer base. Its profitability is lower because the firm only marks up its products by about 12 percent, which is about half what traditional grocers might mark up their products. Costco can do this because of it keeps its costs down so well.