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July 11, 2024
Should Costco Be Raising Membership Fees?
Costco announced plans to raise annual membership fees in the U.S. and Canada by about 8% in its first increase since 2017.
Effective Sept. 1, annual fees climb to $65 from $60 for “Gold Star” and business members and to $130 from $120 for Executive members. “The fee increases will impact around 52 million memberships, a little over half of which are Executive,” Costco’s press release stated.
Membership perks include discounts on food, gas, home insurance, travel, and grocery items. Executive members earn an annual 2% reward on qualified purchases, and the max reward is increasing from $1,000 to $1,250 for these individuals.
On average, rates have been raised about every five and a half years, which would have put Costco on track to raise the fee in late 2022 or early 2023. However, Costco held off on raising fees prior to now. In an interview with CNBC, CEO Craig Jelinek said in July 2022 that it was not the right time as consumers dealt with high inflation.
Company officials on analyst calls over the last two years have hinted that fees would increase eventually while making similar comments about the need to showcase value for consumers amid inflationary pressures. On an earnings call in late May, Gary Millerchip, Costco’s new CFO, earned widespread acclaim across social media for committing to Costco’s hot dog-soda combo remaining at $1.50 — a price that hasn’t changed since the 1980s.
The fee hike comes as Costco’s business remains healthy, with the company also reporting on Wednesday that U.S. comparable sales, excluding gasoline, grew 6.3% in June.
Costco relies on membership fees to drive most of its profits and help keep merchandise prices low. In 2023, Costco collected $4.7 billion in membership fees, up 8% from the previous year. Net profits were $7.1 billion in the last fiscal year, much of that due to membership fees.
Jennifer Bartashus, a Bloomberg Intelligence analyst, wrote in a note that the fee increase was overdue. She said, “The company delayed an increase amid consumer concerns about inflation and the economic outlook, which have eased some.”
Costco’s annual membership was already a step higher than warehouse rivals. Sam’s Club, which increased its membership fees in 2022, charges $50 for standard members and $110 for “Plus” members. BJ’s Wholesale Club charges $55 for basic and $110 for its higher tier.
Amazon faced backlash in 2014 when it raised the cost of Amazon Prime for the first time, but U.S. Prime members have since more than tripled. A Prime fee increase in February 2022 met minor pushback.
Speaking to the Washington Post, Dinesh Gauri, a professor of marketing at the University of Arkansas, said the higher fees could impact Costco’s ability to attract new customers and retain newer members with the less-expensive options at wholesale club rivals and improved offerings at Target and Kroger that don’t require membership for entry. He said, “I do not think they have provided any other offering or new services…to shoppers to justify the fees increase.”
Discussion Questions
Will Costco see a spike in membership cancellations in reaction to the increase in its annual membership fee?
Is now the right time to be raising fees?
Poll
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Brad Halverson
Principal, Clearbrand CX
Cathy Hotka
Principal, Cathy Hotka & Associates
Carol Spieckerman
President, Spieckerman Retail
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Costco membership fees have been frozen since 2017. If they had risen with inflation, the basic membership would now be just over $77. So, in this context, a rise to $65 isn’t too bad. That said, no one will leap for joy at the increase – but the real question is will members tolerate it? The answer, for the large majority, is yes. Why? Because Costco’s all round value proposition is very strong and loyalty is high. Another question is: why is Costco doing this now? The answer to that is that growth is slowing down a little as inflation dips and volumes remain under pressure. A fee hike is a way of engineering growth.
Also, I have to comment on this which is noted in the article above:
“…higher fees could impact Costco’s ability to attract new customers and retain newer members with the less-expensive options at wholesale club rivals and improved offerings at Target and Kroger”
Target and Kroger. Seriously? Costco is very distinct from these mainstream players. From all of our data, people use Costco for very, very different reasons to Target and Kroger. There will be very few people who say “oh $5 more, I’m cancelling my membership and going to Target instead”. Sheesh!
Yeah that claim was a stretch. At Costco you expect consistency in surprise deals, for it to taste good or be good quality for the price, in mostly bulk packaging/sizes, and you love the hassle-free experience. Different retail expectations and motivations.
Agreed. I have been a member for years and I think $65 is still a good deal. It is still a good value proposition no matter what other retailers opinions happen to be..
As usual, Neil’s views above are RIGHT! Costco’s value proposition is such a huge driver for it that I beleive members will tolerate the slight increase. Also, with EVERYTHING under the sun Increasing in price, I think the members will not be surprised and I think this is a good time for Costco to make the move.
If this topic seemd overly familiar, and you used the search function, you likely came upon this tidbit from ~2 years back Costco typically increases the rates it charges for its membership about once every five-and-a-half years. Given the accelerated inflation of the past few years, it sounds like they’re right on schedule (If only Amtrak could be as timely!) Yes, some will complain overly stresed consumers want/need Costco – of all places – to be a break from such, but I’ll defer to Costco’s expert judgement
… It’s still allowed outside DC.I just read a news story (maybe in the Wall Street Journal) about the growing Costco membership ranks among shoppers in their 20’s and 30’s — even if they are splitting bulk purchases with their friends, it still means that another retailer is losing market share. Given the inflationary pressures over the past 7 years, the increase in membership fees is quite reasonable and it’s unlikely to slow down the company’s momentum.
Costco increasing the membership fee to $65 is pretty much a non-story for the vast majority of member customers. It’s still a great deal. Costco consistently delivers a good price-quality value of favorites, with new products, generous sampling, and other services. Hey, a huge pizza is still $10 and even the hot dog/soda combo with free toppings remains $1.50
And I don’t see Kroger or Target scraping their customers. Same industry, but different go-to-market strategies, offerings and value propositions.
Wait, after not increasing its fees in seven years Costco has the nerve to increase its membership by $.42 per month and by $.83 per month for Gold and Executive respectively? WHAT!?!?!?!? That’s preposterous! I’m cutting up my card and walking away from bulk buying FOREVER!
The Amazon lesson isn’t new. If you wait too long to raise prices the amount by which prices must be raised increases and therefore, so does the shock and pushback. It’s probably why there hasn’t been much pushback to the tripling of Prime Fees since the initial “hit.” Some inflation is expected and maybe even perceived as fair. I don’t hear anyone refusing pay raises, do you?
I can’t disagree that price increases can negatively affect new and existing customers but I think in Costco’s case the effect will be negligible because of Costco’s firm “value” positioning in the minds of consumers. Plus the calculations to the alternatives aren’t straight forward (and the time to make the calculation will cost more than $10). So, just eat an extra hot dog and soda combo every month and you’ll more than pay for the insane, unjustifiable, ridiculous increase!
We’ll all complain about the $5 increase and still fill our carts tomorrow at Costco.
People seem to love paying in advance for discounts down the line…it looks like Costco won’t experience any blowback.
Costco hasn’t raised the membership fee for a very long time, and consumers will adjust to it, and Costco will lose very few members, and any that they do lose, will be replaced or recovered. -Db
The fee increase is overdue, and will not be viewed as an issue for 99.99% of Costco customers. $5 over course of a year is $0.42 a month; $10 over course of a year is $0.83 a month.
The hot dog/drink combo is still $1.50 – is it lunch time yet?!
Costco can’t control basket size or items purchased, but it can control its membership fee. Recurring revenue is the bedrock on which yearly plans are made aka membership fees. And only a $5 bump? Still a good value at $65 annually, if only for the gas savings alone.
There will be little to no negative impact on membership with the new increase. Given Costco’s model, an additional $5-10 is not going to keep shoppers away, especially, since they’ve decided to keep the hot dog-soda combo at $1.50. Let’s do some easy math. If a family of 4 went to Costco to shop and they all purchased the lunch combo, that would be $6. Let’s say they decided to skip the combo and go to any other fast-food chain to eat lunch. Their tab would be roughly $40, a difference of $34. If they ate at Costco, that one lunch would have paid for the membership increase and saved them an additional $24-29, depending on member level. Uh, no, there won’t be any pushback.
Costco’s membership price hike is moderate – less than 10%, which is less than the cumlative inflation during the past 7 years. I doubt Costco will see a significant drop-off in members due to the price increase, as they continue to provide a postive ROI for most members. Great products and great value equals happy customers.
In absolute terms, the $5 increase will be more than paid for in one shopping trip, maybe even with the purchase of one item. This is a non-event.
If Costco didn’t raise its membership fee, would it remain a wildly successful business? Probably so. After all, its product prices have risen with inflation and Costco won’t lose money. It may just miss the opportunity to make more.. Costco may be testing the waters to see where the resistance point is. If there is not significant pushback from its customer base, the increase will remain. If Costco’s customer pushes back, Costco can reduce the increase or send it the way of the hot dog increase (rescinded).
Membership fees are Costco’s profitability lifeline. The five-dollar increase may seem negligible yet, with 52 million customers paying up, that’s a nice buffer. The holiday runway timing for the increase serves as a powerful hedge against any resistance. How can members resist Costco’s holiday charms? Well played.
The simple answer is yes. They are being very strategic in putting in a modest increase that most members will either say they can live with that…or won’t even notice. Costco continues to be one of the smartest retailers out there.
About $5.50 a month. Less than the cost of that streaming service I don’t remember subscribing to, that gets charged to one of the too many payment channels I don’t recall setting up, that I have to also watch advertisements for the privilege of paying that monthly fee ….somewhere. I’ll take a few hours of entertainment shopping at Costco over that every day
It is $5. For the value provided this still provides good value. What does Amazon Prime cost? I know–you get video and music too, so not a fair comparison, but still. $65 is not bad at all, and the downside risk of people cancelling pale in comparison to the upside revenue jolt.
$5.00 just does not buy what it used to…
Perfectly said.
I don’t know what Prime costs; I know the value I get far exceeds whatever it is. The same should go for COSCO
A bit of a dog bites man story. Costco has a terrific business. They seldom take and increase and when they do it’s modest. Costco continues to be an enviable retailer.
Costco might see some initial membership cancellations due to the fee increase, but it won’t be significant enough to impact their overall business. The value Costco provides through discounts and rewards generally outweighs the fee hike for most members. However, the timing is risky. With inflation still affecting many consumers, raising fees could push some to explore cheaper alternatives like Sam’s Club or BJ’s. Ultimately, Costco’s strong brand loyalty and unique offerings should help mitigate any negative fallout from the fee increase.
Nobody wants a price increase, but Costco’s membership is still low, and it’s been seven years since the last increase. Also, Costco seems to be transparent about its membership fees, which should create confidence about the increase. Furthermore, the Costco model is more about membership fees than higher margins on merchandise.