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New members re-up at Costco in record numbers
First-time Costco members renewed their memberships in record numbers for the third quarter ending May 8.
Bob Nelson, senior VP of finance and investor relations at Costco, speaking last week on the company’s earnings call said that memberships were up 10.4 percent during the three-month period.
“In terms of renewal rates, we hit all-time highs,” said Mr. Nelson. “At Q3 end, our U.S. and Canada renewal rate was 92.3 percent, up 0.3 percent from the 12 weeks earlier at Q2 end. And the worldwide rate came in at 90 percent for the first time in company history, and that’s up 0.4 percent from what we reported at Q2 end.”
The retailer reported a six percent year-over-year increase in member households and cardholders, with both auto renewals and executive memberships up during the quarter.
Executive members represent over 43 percent of Costco’s total membership and over 71 percent of its sales worldwide. Costco reported that it had 27.9 million paid executive memberships, an increase of about 800,000, since the end of the second quarter.
Mr. Nelson also addressed public speculation that the company was ready to announce an increase in its membership fees. He acknowledged that Costco has typically raised its fees every five to six years and that the last increase happened in June 2017. That said, the retailer was not ready to raise its rates.
“Given the current macro environment, the historically high inflation, and the burden it’s having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time,” he said.
Mr. Nelson said that Costco has seen inflation rise over the first nine months of its fiscal year with the first quarter in the 4.5 percent to five percent range, the second quarter at “six-ish” and the third at “seven-ish.”
“We did see inflation in fresh foods come in slightly lower in Q3 versus Q2 a year ago as we began cycling high meat prices,” he said.
Costco’s dollar inventory was up 26 percent during the quarter. Mr. Nelson attributed the gain to several factors, including inflation, the opening of 20 new club openings over the past year and added stock in several categories that were light on inventory. The chain also added bulky items to its inventory for its growing e-commerce operations.
Discussion Questions
DISCUSSION QUESTIONS: What is behind Costco’s record membership renewal rates? Do you think the chain’s decision to hold off increasing membership fees is the right move at this time?
Poll
Loading …BrainTrust
Ken Morris
Managing Partner Cambridge Retail Advisors
Nicola Kinsella
SVP Global Marketing, Fluent Commerce
There’s no magic to Costco’s success – they deliver value consistently. Costco defined the warehouse category and executed in a way that few others have been able to. Their ongoing success is a testament to their commitment to their customers and employees. The decision to hold off on membership price increases is exactly the right message for the times and just another part of their value.
When you mix quality and service with competitive prices you have a “triple threat.” This is a combination for success.
Costco has bucked “conventional wisdom” for a very long time, and continue to reap benefits from it. The stock market may not love it, but shoppers and employees sure do. This is consistent and true to form.
And much appreciated.
As for the new memberships — Millennials have grown up. They’re buying homes, having children and shopping. Costco is a deal!
Sky-high gas prices have fueled Costco’s membership loyalty. If they can get the “no membership fee” increase message out, that will seal the deal with even more newbies and regulars.
Costco is a great company. They pay their people a living wage, their buyers always nail the product selection, and prices are low. What better recipe for success could there be in these tumultuous times? I’m a new member, and even their meats (USDA Prime) are great. Maybe we need a bigger freezer?
I agree with everything you’ve said here, Ken, and would add that while the “no membership fee increase” message is helpful, as an Executive Member I have never once received less than my full membership fee in rebates. In fact, I always end up making far more in rebates than the membership fee, and I wonder if there isn’t an even more compelling message there?
Mark’s observation is spot on. Costco delivers on its promise and with the economy facing headwinds, people realize its value in their wallets.
Based on lines for gas at Costco, I suspect that savings on fuel had a lot to do with people wanting that access via their memberships.
It’s definitely the right thing to hold off on increasing membership fees, it’s a no-brainer.
Costco’s record-setting membership renewal can be chalked up to one thing: inflation. The fuel price differential alone makes the annual fee a good investment for most people, and that’s before taking into consideration the quality and low prices offered in-store.
Since its inception, Costco has been an extremely well-run, well-managed company and they always walk the talk, especially with their decision to NOT increase rates during this high inflationary time. Clearly, consumers understand this and are not only rewarding Costco with renewals, but also evangelizing the brand to friends and family, which is, in part, contributing to this successful growth.
Costco continues to prove that offering quality products at a fair price with excellent service is a value proposition that consumers still, well, value. I love the Costco model: no gimmicks, no streaming or cloud services, just “classic” retailing at its best. And they pay their employees a living wage, too. I have been a long-time Executive Member and am extremely loyal, even more so lately thanks to their ability to execute throughout the past two years with only minor disruptions. And they have even worked out the (admittedly many) early issues they had with Instacart managing their same-day grocery delivery service.
Value value value. Consumers are looking for ways to save and Costco offers it. Pretty simple. What would be interesting to know is the make-up of the baskets of its members – are sales of large items lagging sales of grocery items? Are consumers just sticking to the basics with inflation as it is?
They make it a favorite place to shop – what more should you do as a retailer? Customers recognize this, that’s why they renew.
Costco has a strong proposition: great value for money combined with fantastic quality. However it is the value for money part of the equation that is really important to consumers, and especially families, right now – in food and in the lower gas prices offered at Costco pumps. That alone has helped drive retention and renewal in memberships.
The general public is pretty smart – especially when it comes to thrift and money out of their wallets. Cost per unit at warehouse stores is typically lower due to bulk purchasing and Costco maintains the best example of efficient sourcing in the market for bulk goods. Combined with taking care of their customer and employees, their model will continue to attract customers. Costco holding off on increasing fees is a good move and makes it even more attractive, especially as costs will filter through the product prices first.
Quality, integrity and amazing value. Unmatched value in the market place. Getting the most bang for the buck is an absolute known at Costco. If you can gird yourself for the bone crushing crowds at almost any time of the day, a visit to Costco is always time and money well spent.
We’re looking at brilliance in retail here!
Costco members renew because they get consistently good value for their money. No secret there. Costco delivers consistent quality all of the time. That said, we may be seeing a bit of pandemic hangover among new members renewing for the first or second time. Costco was sometimes the only source of key products during the early days of COVID-19, especially since people were trying to limit the number of trips they made outside their homes which made buying in bulk more attractive. As to the price hike, what would be more brand compliant than not taking an increase just because it was “time” and/or you thought you could get away with it? Speaks directly to the authenticity of the brand.
I have tremendous respect for Cost Co. They deliver an excellent value to customers so people stick with them. All the factors noted here might affect re-up rates. But, fundamentally, customers like a good value and will keep coming back for it. That means their net value is more critical than any near term decisions.
Costco understands its customers better than most retailers. Holding off on membership adds to the attractiveness of their value offer. Families can rely on the company’s quality, selection, and service. Costco is taking market share now, which it will not relinquish when the economy and spending rebound. Well done!
Costco fully understands that it is not about the customers being loyal to the company, but the company being loyal to its customers. How? Simply by delivering on its promises. Costco does this well by constantly and consistently providing value to its customers. The value equation can be observed in the traditional definition of value; quality divided by price. However it does even better when you define value as benefits received divided by burdens endured. As noted by other BrainTrust contributors, Costco provides a myriad of benefits and the process of taking advantage of these benefits is seamless and without significant burdens. As for holding off on membership price increases, this is icing on the cake!
Inflation. The cost of everything is has risen, and Costco helps households get more value for their money. Holding off on an increase is absolutely the right move during this time. Especially given the renewal rate. It’s a way of rewarding their customers and differentiating themselves during the time when everything else seems to be going up. Definitely a winning move for building (even more) brand loyalty.
Costco is making all the right moves at this challenging time. Consumer behavior is reflecting uncertainty about supply chain and inflation, leading consumers to take advantage of Costco to stock up on a broad range of categories in one single place. The increase of inventories at Costco further reinforces the position that Costco can be the one-stop shop to address a broad range of consumer purchasing needs in packaged goods, hard goods and beyond. The decision not to raise membership fees is inspired – how better to reinforce that Costco is one of the best defenses against inflation out there?
This is a great company with a great business model that puts their employees and their customers first. Better products, minimal out of stocks, superior pricing, happy employees, and excellent customer service make for happy customers. That is the secret to a great business and Costco keeps checking all of the boxes every year!
Yeah, they should have raised fees … NOT! I don’t expect to see anyone making the “pro-raise” argument, and while it’s easy to dismiss this as mostly PR driven, it’s still smart PR. (Might it cause a problem down the road when the fees finally have to go up? Perhaps, but that’s a bridge to be crossed later.)
Costco has a clear vision, being a highly customer-centric company they never fail to deliver value. Costco knows its ideal customer profile and they always aim at exceeding the customer expectations by offering high quality at a low price, with fast and immediate access and a simple return policy. I think the decision to hold off on increasing the membership fees is apt, prevailing inflation has already burdened the customers, this particular initiative will help Costco to retain its customers and will also help to attract new customers.