April 26, 2016
Analyst predicts Costco will raise membership fees
If history repeats itself, Costco will bump up its club membership fees early next year. That’s the conclusion of UBS analyst Michael Lasser, who noted in a letter to investors that the warehouse chain typically increases its annual membership once every five or six years. The last increase came in 2011.
Mr. Lasser and UBS are predicting that a basic Gold Star Membership at Costco will increase from $55 to $60, while its Executive Membership will increase by $10 a year to $120.
Costco’s comparable store sales in the U.S. were up three percent for the first half of the company’s fiscal year, which ended Feb. 14. Same-club sales in March were up one percent. The chain operates 702 warehouse stores around the globe, with 492 in the U.S. and the territory of Puerto Rico.
Membership renewals have been strong for Costco. The company reported that 91 percent of its members re-upped in the U.S. and Canada in its second quarter. New memberships improved four percent during the same period.
The company’s decision to up its membership fees will have to wait until it completes its transition to the new Citi Visa program. The club’s deal with American Express ends in June.
“Logic would dictate we certainly wouldn’t do anything during the transition,” Costco CFO Richard Galanti told analysts (via Seeking Alpha) on an earnings call last month. “We’ve got enough going on this year, mid-year when we’re doing this credit card transition. … At the end of the day, I don’t know when we’ll do it. I can tell you that we feel as comfortable today as ever about the loyalty of our members and we feel as comfortable as ever today that we feel that we’ve improved the value on that membership way more than the likely increases that you’ve seen in the past.”
- Analyst: Costco likely to increase membership fees – USA Today
- Costco shoppers could be in for higher membership fees – Chicago Tribune (tiered sub.)
- Costco Wholesale Corporation Reports Second Quarter and Year-to-Date Operating Results For Fiscal 2016 and February Sales Results – Costco Wholesale Corporation
- Costco Wholesale Corporation Reports March Sales Results – Costco Wholesale Corporation
- Costco Wholesale Q2 2016 Results (Earnings Transcript) – Seeking Alpha
Discussion Questions
DISCUSSION QUESTIONS:
Do you expect Costco to raise its annual membership fees over the next year? How likely is Costco to suffer pushback from members over an increase in its annual membership fees?
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Costco would be wise to wait for consumers to become comfortable with the transition from American Express to Citibank before upping membership fees. The best rationale for raising the fees is that the new Citi Visa card offers higher rebates than the old Amex card, which will, in consumers’ minds offset a membership fee increase.
As a Costco member, I hope that the fees do not rise, as I don’t agree with Mr. Galanti that Costco is offering significantly more value to members today than it was in 2011, the last time it raised fees. That said, if the fees rise, I will still renew my membership, and that’s exactly what Costco is counting on.
I can keep this simple: I have never had the opportunity to be a Costco shopper. Costco seems very well run and successful, even the comments about introducing the new membership card transition were thoughtful and well-measured. People who shop at Costco seem very satisfied with their memberships. If Amazon can raise its Prime rates with barely a sound from its members and increase memberships, so can/will Costco.
The comments from Costco’s CFO don’t do anything to dispel the rumor that a membership fee increase is in the works. Costco still provides very good value for many products, so as long as the fee increases are no larger than those predicted by UBS, Costco should see minimal pushback from its members.
I don’t know if Costco will raise its fees. It is not unrealistic to think after five years they would.
With regard to suffering pushback … a $5 or $10 increase versus the savings the regular Costco shopper experiences is not even a hiccup in the scheme of annual spending at Costco.
It depends on how much an Amazon Prime membership costs at the time.
Seriously, if Costco isn’t looking at this as their key benchmark rate they should be. One of their primary benefits for households is repeat orders of consumables refills — things like paper goods, diapers, vitamins and food staples. All a consumer has to do is set a Dash button for those things and it is game over for Costco. (Reference the statistics from the recent RetailWire/Slice webinar on percent of requirements filled once a consumer sets up a Dash button or even an Amazon subscription order.)
Costco is wise to avoid the summer period for any further confusion beyond what the card switch is going to cause. And I’m glad they “feel as comfortable as ever about the loyalty of their members.” At least from the perspective of this satisfied Executive Member, they should. But there is a serious competitor in our house now — her name is Alexa.
I was more upset with Costco dropping American Express. I locked up my credit years ago so getting a new credit card is not an option. If Costco or Disney World doubled their fees, I’d be ok with it as long as it meant not dealing with so many annoying people. In places like Hawaii, Costco is really the only competitive store on price. They could triple their membership fees and customers would care less. I really don’t see any pushback from members.
Costco has the data and analytics to determine the answer to this question.
If they look at my profile, they know they’re not convenient and I am barely seeing sufficient value from the savings I receive from them and will be very likely to end my 10-plus year relationship even though I think it’s a very well-run company and have never had an issue with them.
They need to be customer-centric and not try to upsell customers on memberships that are not in the best interest of the customer. This will ensure a loyal customer base of people that are receiving sufficient value for the fee and the fee increase.
I doubt they are going to get pushback. They have high customer satisfaction and those who are heavy Costco shoppers have Executive Membership and the cash back offsets the membership costs anyway. They would be wise to get their Visa transition done first to get people over that and start earning points on Visa cards at Costco before doing the communications on the rate hike. The segment of people buying bulk food products and perishables at Costco is different than Amazon Prime so for them the comparison of membership dues doesn’t apply.
As long as Costco continues to deliver the consistent material value of that membership — and their history says that they will — they will not miss a beat increasing membership fees (for the first time in five years).
Many Costco members have an emotional attachment to that card, that membership. Over the years Costco has always been able to “deliver on the value” of their membership, etc. No reason to believe any of that will change in the days ahead.
I’m not sure if they will raise their fees or not, but even if they do, I suspect the pushback will be minimal or even nonexistent as long as the increases are small. The cost savings from shopping there are significant enough that $5 or even $10 is not going to be a dealbreaker for most people.
It’s very hard to be critical of Costco, even though they have a couple major deficiencies, that they actually leverage as advantages. First, they have chopped off the long tail, that DRIVES TRAFFIC to most stores, even though it sells very little. Costco has 4,000 SKUs in stores twice as large as stores that have ten or more times that range of inventory. They sell ONLY what most shoppers want.
Secondly, they discourage “quick trips,” that constitute HALF of all supermarket trips, and a third of supermarket sales. As Jim Sinegal explained about the absence of express checkout, “Why would we want to encourage anyone to buy only one or a few items?”
And as to their membership program, even though I don’t frequent their stores often, every year I get a membership rewards check for several times more than the cost of an executive membership! So when a purchase is going to involve a fair amount of money, I always think of Costco.
No wonder they are now #2 in some global retail rankings. And notice how their ever expanding focus on FOOD is driving TRAFFIC. It’s simple science. People need food and beverage more often than any other thing, so selling it properly drives traffic, and LOTS of it.
This is the same strategy that Walmart used 30 years ago to drive their move to global retail dominance. Amazon is already all over it. Too bad Sears never got a clue. Every serious retailer needs FOOD. I see Nordstrom putting cafes in the BACK of their stores. Hmmm! How misguided is that? But at least they put coffee out front of the store.
Costco continues to be a reliable store that offers great deals. I don’t think they’ll see much pushback if they raise their membership fees by a few dollars. Their customers have come to rely on them. They may receive pushback from people who don’t shop their regularly or aren’t in need of buying bulk items, but there’s a chance they wouldn’t have renewed their membership anyway. I do agree with Max that they shouldn’t raise their membership fees until their customers are completely comfortable with the transition from Amex to Citibank.
Costco would be smart to raise its membership fees, especially modestly. The value proposition inherent in Costco, while not Amazon Prime, supports this. More importantly, the company needs to make up its recent earnings shortfalls to shareholders. Mr. Galanti is a smart CFO and it’s likely he’ll do just that.
Costco delivers beyond what their fees are. Good deals, great assortments, and an expanding wine section — and my fav pizza.
No flack in my area with rates up $10. They are worth the extra $10.
The typical Costco customer knows the value of that membership and will likely not balk at a $5 increase. It is well worth that price.
Just sayin’ for my 2 cents.
I wouldn’t be surprised if they increased pricing soon. It’s quite a modest price hike and the first one in a long time. I don’t foresee much pushback from members. No one likes a price increase and people will complain at first, but most will stay and forget about it soon enough, much like when Amazon raised their prime membership pricing.