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Should Costco raise its membership fees?
Costco has hinted that it may raise its annual membership fee in the U.S. in 2017.
The company earlier this year noted that it typically increases its membership fees every five or six years. In November 2011, Basic Gold Star Membership was increased $5.00 to $55 and Executive Membership by $10 to $110.
On its first-quarter conference call in early December, Richard Galanti, Costco’s CFO, said the chain also gauges whether they have “improved the value proposition significantly greater” than the fee increase. Fees may also go up if comps “were a little weaker” and renewal rates were strong. Renewal rates were 90.3 percent in the first quarter in the U.S. while comps in the country were up only one percent in a deflationary cycle.
The expected fee hike reportedly supported gains in Costco’s stock last year. According to Street.com, JP Morgan analysts have estimated that fee hikes drive 300 to 500 basis points to EPS growth.
If the price of membership is raised, as expected, to $60 for Basic and $120 for Executive, Costco will have a bigger fee than Sam’s ($45 and $100, respectively) and BJ’s Wholesale ($50 and $100).
Warehouse clubs in general are also facing heightened competition in fresh foods from a wide variety of grocery competitors. Some investors have also been fixated about whether consumers will eventually choose Amazon as their primary membership program and drop Costco. Amazon Prime costs $99 a year, with Amazon Fresh costing an additional $14.99 a month.
Mr. Galanti said Costco continues to invest in mobile and online but has no plans to sell the “smaller pack size” that works best online. Its overall goal remains getting “people into the warehouses” to take advantage of impulse purchases.
Any higher membership fees would primarily be reinvested into price and the CFO noted that Costco tends to adjust prices lower in deflationary cycles quicker than its competition. Mr. Galanti elaborated, “We’re going to invest in loyalty and growth while it’s raining on everybody as it relates to higher levels of deflation.”
Discussion Questions
DISCUSSION QUESTIONS: Is Costco in a solid position competitively to increase membership fees? Do you see its membership model being challenged by Amazon and other online services that have made inroads into fresh foods?
Poll
BrainTrust
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Kai Clarke
CEO, President- American Retail Consultants
Costco remains the leader in warehouse-style retailing and a modest membership fee increase won’t hurt them at all. As noted in the article, Costco’s leadership is not optimizing for online, so moves by Amazon, while interesting, will not likely cause Costco to change course any time soon.
At the moment Costco is in a good position to increase fees, but I also think it needs to get its omnichannel act together with the proceeds. That’s where the threat from Amazon comes in. A treasure hunt model is fine, as long as the hunt is consistent between online and stores.
Costco has a lot of customer and employee good will. That’s very important. And its return policies are easy enough regardless of where the product was bought. But the buying process has to get easier.
Then, sure! Raise the price. It’s still half the cost of Prime, and Costco can be fun.
Costco could pick a region and run a test, thereby gauging the impact it would have — my guess is that the impact would be small, particularly on the renewal side. I don’t think its model is being challenged — you go to Costco for different reasons than Amazon for most things.
Emphatically yes. The Costco brand is so valuable to customers that they would pay significantly more for the privilege of brand ownership.
When I look around the very sorry retail brand category Costco stands out (like IKEA) in actually owning an important brand. Discovery, fun and feeling smart ARE the Costco brand. How valuable is that? To quote MasterCard from years ago: Priceless.
Yes, I think Costco can effectively increase their membership to $60. They will likely lose a few members to competitors, but not enough to diminish the revenue from the new rate. As long as Costco keeps providing excellent value to their shoppers, I think this is a safe move for them.
A Costco membership isn’t so much about fresh foods as it is about other grocery and household staples. Most households don’t buy fresh foods in bulk. They buy paper towels, dry and canned goods, snacks and frozen foods in bulk. Costco also offers discounted wine, liquor and gas.
Yes, I believe they are and yes, I see them being challenged as well by Amazon and others. Costco has better quality fresh foods as compared to what Sam’s offers, and I don’t want to order meats and fish from Amazon. Costco also has a great selection of berries, both fresh and frozen, which are great in smoothies, and they have a nice selection of other categories that are “good for you.” The rotisserie chicken is probably the best you can buy and the salmon is also very good.
Do I want my membership fee to go up? Of course not, but the price/value at Costco is excellent and for my money, I think they are doing a good job. Having said that, we order quite a few items from Amazon but fresh food is usually not part of the order.
As Richard Galanti aptly put it: as long as Costco can gauge that there there is still a value proposition, then the company can afford to increase its membership fees. Amazon thought so when it increased its Prime membership rates. The consuming public makes purchase decisions based on perceived value. Costco may try to raise its membership fees and will monitor the consumer response and adjust if necessary.
With a 90 percent renewal rate, Costco has the loyalty necessary to increase its membership fees. That doesn’t mean it should do it. Many consumers and small businesses are still feeling the effects of the Great Recession. And while a $5 increase is not much, it sends the wrong signal to members.
Being a long time member and fan of Costco, I have not really thought much about the fee and what I get for it. On the other hand, I do know that I would pay more for Costco than for Sam’s or BJs. Why? The quality is there and the staff are friendly, helpful and an added value.
A lot of folks do not know how well Costco vets their products but that is what ensures the great quality. Or how well they treat their staff which is why they always seem to deliver. Can they raise their fees and get away with it? Yes! But it sure would be great if they started doing more to promote all the value you get from shopping at Costco.
But that’s just my 2 cents.
Like so much, it comes down to perceived value. Yep, warehouse relies on impulse and treasure hunts — and Costco leads the pack when it comes down to the value of those found treasures. The food options are also superior and they are careful to provide plenty of on-trend selections (organic, gluten free, etc.) Based on this, a small fee hike won’t make much difference to their core shopper.
Amazon’s competitive advantage is its ability to more cost-efficiently deliver smaller unit/order transactions (compared to others), an advantage that still has a lot of value left in it as they nibble away at the replenishment purchases occurring in grocery, HBC, apparel, DIY and more. Costco’s competitive advantage is the uniqueness of their merchandise — specifically quality and assortment — unique enough to justify 90 percent membership renewal rates in any case. The value propositions are not mutually exclusive and won’t be for some time and, as such, Costco faces very little risk with a membership fee increase.
Costco is well-positioned to increase its membership fees without risking a backlash from its shoppers. Their long-time customers are accustomed to small increases every five years, and their plan to reinvest the additional fees into price reductions will reinforce their low-price value proposition.
It’s very interesting to see that Costco continues to emphasize their physical stores over online sales. Unlike Walmart, Costco is refusing to chase Amazon and drive its customers to an e-commerce model. Costco will succeed by enhancing and extending their physical warehouse operating model that continues to be popular with shoppers.
Costco is in a solid position competitively to raise its membership fees, especially for the value one gets by being a member. The company’s excellent return policy and the warranties on all electronics are values that can support the increase.
Competition from Amazon and others will always be there and the management at Costco will continue to be more innovative and not only meet but beat them most of the time. The crowds and parking hassles will continue to be a Costco tradition we love to hate, yet checkout seems to be quick and efficient every time!
We have been members of Costco for several years. Raising their membership rates will not deter us from renewing at all. No, I don’t really want to pay more, but a modest increase will be acceptable. We have memberships at two other warehouse clubs: one we use primarily because they are close and buy gas there. The other may be eliminated simply because we rarely use it.
Absolutely. Costco should raise its membership fee. Membership cost at Costco is price inelastic, so this should have little to no effect on Costco’s members. Also, in Costco’s model, profits are primarily driven through membership fees. These annual fees are low and really shouldn’t be compared to Amazon, which is in an entirely different league.
I don’t believe that a modest fee increase will harm Costco in 2017, however, traditionally it has been believed that Costco breaks even on their sales and that their fees are their profit. The latest statement says Costco will be reinvesting the increase in price. Does this mean that the model is different? If so, raising the fees is not the way to go. As a loyal Costco consumer I would rather pay the current fee and let Costco figure out how to manage the deflationary situation through efficiency and their typically tough negotiating skills.
Sure — cut out the hordes of people that visit Costco just to get dinner at all the tasting booths! When the time is right Costco will raise rates and apply the membership to a much better website — it will shock Amazon. The Costco team always has a long-term strategy, set to surprise the members. GO COSTCO!
Costco’s membership fees are the single best expenditure I make every year. They are an investment paid back in multiples. I have to believe most Costco members know this. And because the fees are a huge portion of their net profits, they are the main lever to pull in protecting profits. They could start to charge higher prices, but that would undermine their fundamental brand promise. That’s the very last thing they should do.
So sure, a modest hike in the name of protecting the overall health of the model — absolutely. I trust Costco to behave in manner that keeps my faith in their business model. They deliver the best value/quality metric in the market and make a fair profit in return.
I don’t see much discussion about Costco’s global success. Some rankings have shown them to be #2, next in line behind Walmart. Sometimes it is easy to forget that single moment of truth when a shopper says, subconsciously, yes, I am putting THIS in my basket. ALL of retail pivots on that single point, and of ALL the retailers in the world that I know about, ONLY Amazon and Costco manage that crucial point in time well.
Maybe you haven’t noticed that those are also the only two in the world, of massive size, who are also growing at steady, admirable rates, while notably, Walmart is stumbling about, spending billions trying to figure out, WHAT IS GOING WRONG!
Chapter 3 of my new book does a head to head comparison of the final selling PROCESS that brings a shopper to YES! It is just as Neal Martin said, “Habit: The 95% of Behavior Marketers Ignore.“Just like when Harry told his friend, George, about the twin problems we have, “ignorance and apathy.” George said, “No, I didn’t know that, and I really don’t care!”
It’s amazing how these two companies, Costco and Amazon, manage the mind of the shopper in such a similar way, and BOTH have moved to largely membership FEES to stabilize and drive profits. In the relentless process of driving as close to ZERO margin on sales as possible, a dominant meme of price focused retail, return on capital dominates board-room policy, not sales. That focus drove the first retailer in the world to hit a billion dollars in sales nearly 100 years ago. And is driving the two “retailers” to watch in the race for the #1 slot in global retailing.
Walmart has such massive “parked capital,” (see chapter 2 of “Inside the Mind of the Shopper“) that it is hard to see how they will possibly adjust to the Amazon/Costco juggernaut they are facing in the years ahead. One can note that it took more than 50 years for the first “billion dollar” retailer (A&P) to go bankrupt. So deployed capital (bricks stores) can be a massive stabilizing asset, as well as a strangling force when processes need to change. I don’t rejoice over the slow death of Sears, due to similar forces, either.
We belong to Sam’s and Costco because each offers different items that we purchase. That and the fact that Sam’s does not offer fuel at our local location.
I cannot speak for the value proposition for others but like most of the earlier comments, I don’t think a $5 increase in fees will deter any significant portion of joining or rejoining. That increase can be recouped in one to two fuel fill ups.
Costco is in the driver’s seat with a cult-like following of loyal customers. While nobody likes price increases, I don’t think the 9% increase in membership fees will cause many people to cancel their membership.
Amazon’s inroads into fresh foods aren’t a serious threat to Costco. While some consumers pick-up fresh foods on their Costco runs, it is usually not on the top of their shopping list. Most consumers create a shopping list from the Costco flyer and add the staples that they routinely buy at Costco. Then, when they visit the store, their cart soon fills up with impulse purchases which include some fresh foods.
Costco’s unique model, strong brand reputation and loyal fans provide a rare retail opportunity, as their customers are probably not very price sensitive with respect to their membership fees. Way to go Costco!
Costco has room to increase its fees and still come in under Amazon Prime. Our household happily belongs to both. We use Costco for bulk staples and Prime for harder to find items that we need in a hurry.
I do think that Costco has regrettably adopted a fixed mindset with regards to their online business. They have such a great brand and an enormous customer base, they should be experimenting with new and different online offerings.
Costco is on solid ground with this membership fee increase. I’d wager another $5 will have a negligible impact on renewal rates but a measurable impact on profitability. For Executive Members, the added $10 is already more than offset by the end-of-year rebate, and those folks won’t be price sensitive anyway.
Our smart colleagues have already raised a couple of interesting strategic points worthy of further comment:
First, while I agree that Costco’s online experience could be much much better, it may be a fallacy to compare its mission versus Amazon. The core difference comes down to limited assortment versus limitless assortment. Costco curates what it offers and offers many exclusives, while Amazon has made itself into a first-stop search engine for merchandise.
Second, Costco’s approach to selling food (fresh, packaged and frozen) is oriented toward stock-up shopping versus replenishment shopping. Amazon’s subscription model is not a major threat in that regard.
In short, these two powerhouses serve different need states, but they both earn a share of my wallet and those of many others, I suspect.
Costco’s clientele of warehouse style, large quantity buying wouldn’t be effected by the modest increase in membership fee. While Costco is less e-commerce centric than Amazon, its core group of buyers (including myself with Executive membership) derives enough value of its assortment in store and products online to make the membership worthwhile. Not everyone can or should mimic Amazon. Many companies that tried to “outdo Amazon at its own game” ended up in the wastelands.
Sam’s Club has been discounting its memberships with dollar value purchase coupons etc. for some time now — I even got a discount for renewing early, so the 45/60 price comparison is not really accurate. Also, Discover Card has been running a 5% rebate promotion the past 2 quarters for Club purchases which is essentially Sam’s Club as Costco does not take Discover Card.
Nevertheless, Costco has an almost cult following among consumers though from my anecdotal observations I think Sam’s still has the edge on businesses, especially the resale businesses. Sam’s basic business memberships are less than half that half that of Costco’s. But the bottom line is that even if Costco loses some members, the total membership revenues from a $5/$10 increase will be a significant positive.
I believe that Costco does hold a solid position to warrant an increase in membership fees. When comparing a brick and mortar based warehouse like Costco against an online warehouse like Amazon, one must realize the difference in focus between the two. Amazon offers convenience while Costco offers bulk. Both have amazing customer service and benefits, but what they offer is unique from one another. Amazon has its variety of online services while Costco has its wide range of in-house services such as auto repair and optometry. The value gained from a Costco membership is far greater than the membership fee and a small increase would not deter most from renewing at all.