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Is raising membership fees getting riskier for Costco?
Facing a host of competitive pressures, Costco last week announced a raise in its membership fees for first time since 2011.
Beginning June 1, standard Gold Star membership will cost $60 a year, a $5 increase. Executive membership, which offers an annual reward on purchases, moves up $10 to $120 annually. The retailer will lift the cap on Executive members’ two percent annual reward to $1,000 from $750.
Membership fees account for about 70 percent of the wholesale club’s operating income and helps support the low prices it is able to deliver.
The fee announcement wasn’t a surprise. Costco typically raises them every three or four years. This one comes as Costco’s second-quarter report revealed strong renewal and traffic rates. Membership renewals came in a little over 90 percent in the U.S. and Canada. Traffic grew three percent in the U.S., slowing slightly as Costco has begun to offer fewer coupons in its mailers while shifting to lower prices on fewer items and more everyday-low pricing.
Yet third quarter sales and profits were lower than expected largely due to higher gas prices, investments in digital efforts and price cuts.
Taking advantage of lower food commodity prices, Walmart, Target, Kroger and others have promised to invest in steeper price cuts this year. On a conference call with analysts, CFO Richard Galanti called the competitors’ moves “formidable,” but said they had no impact on the decision to raise membership fees or tweak coupon book mailings.
“I don’t know where else you can get in the country a 40-pack of half-liter water bottles for $2.99 down from $3.49. And we’re driving units, and we’re driving a little traffic. And that’s what we do, and it’s not because somebody else went down to that price,” Mr. Galanti said.
Some analysts have also been concerned about competition from Amazon as it increases its presence in the fresh foods category.
- Costco Wholesale Corporation Reports Second Quarter And Year-To-Date Operating Results For Fiscal Year 2017, February Sales Results, And Plans For Membership Fee Increase – Costco
- Costco Second-Quarter 2017 Conference Call – Seeking Alpha
- Costco is raising membership fees for first time since 2011 – CNN
- Costco shares fall after fee hike, Wall Street miss – USA Today
- Costco to Raise Membership Fees, Higher Costs Take Toll on Profit – The Wall Street Journal
- Should Costco raise its membership fees? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Is now the right time for Costco to raise its membership fees? What’s the biggest threat to disrupting its traffic and renewal rates?
Poll
BrainTrust
Zel Bianco
President, founder and CEO Interactive Edge
Frank Riso
Principal, Frank Riso Associates, LLC
Given that Costco hasn’t raised membership prices since 2011, now seems like a reasonable time. The increases are modest and given Costco’s unique store experience and value proposition, its legions of fans won’t be significantly offended. While online players will continue to lure shoppers away with promises of even lower prices and delivery to their door, the Costco experience is truly unique and I believe their brand loyalty is formidable.
Get over it folks. As stated by the CFO, the prices certainly make up for the membership fee. I was there yesterday and a 24=pack of Gillette Mach 3 razors was $24.00. You would pay $24.00 for an 8-pack at any drug store, including CVS. Yes, the membership is well worth it. Yes, the timing is never perfect to raise the fee but given that it has not been raised since 2011, they need to do it.
There really is no great time to raise fees, however there is no better time than now. Costco has completed its transition from Amex to Visa and its members are starting to see the returns in rebate checks from their use of the Visa card. Raising the fee now would be offset by some of their rebates so the timing is OK. Costco’s biggest threat continues to be Sam’s Club, which will use the increase in rates to attempt to lure away Costco members. They will be unsuccessful but will give it the “Walmart try” for sure.
No big deal. Look at the renewal rates and the traffic at your local Costco on a Saturday. The increase is less than 10 percent and provides a huge lift to lower prices and/or an enhanced bottom line.
Yes, now is the time to revamp its membership rates. My guess is that typical Costco customers have seen their 401ks explode a few hundred thousand dollars with the Trump rally. Plus many get their memberships through their employer. These stores draw for miles and $5 or $10 is nothing. In my opinion, Costco has created a separate segment in the market and they are the only one in it. I think they could raise membership rates $25 and few would care.
Even with a membership increase (nominal at that) Costco is the best thing going for so many shoppers. When we were feeding three hungry swimmers and their dozens of hungry pals, we could not get enough of Costco’s benefits. We don’t belong any more but I crave tagging along on others’ trips just for a dose of the treasure hunt and the pleasure of the great time/value relationship!
Excellent points, Anne. This modest Costco increase is nothing against the opportunity for discovery and value offered in store. The real question of consumers is the merit of the fee against savings. I was recently part of a conversation where the membership fee was factored into a chest freezer purchase so that adequate volumes of those Costco bargains could be on hand to feed the BBQ and those hungry words. Value in retail has to shift to a more holistic view than the transaction price.
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 percent increase in membership fees will cause many people to cancel their membership. Like Amazon, Costco has added many benefits to its membership program that make its shoppers very loyal. For example, beyond all the great prices on traditional goods, Costco’s other services like optical, pharmacy, home services, auto and travel provide its members additional cost savings.
Amazon, Target and Walmart are all serious competitors to Costco. However, if Costco continues to provide great value, they are in a similar position as Amazon where they are the dominate player in their category and this gives them more liberties to occasionally raise their membership prices. 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!
The material value of that Costco membership continues to be there. This is the first fee increase in six years. Like Costco’s past membership fee increases, the impact on both member acquisition and renewals will be minimal.
That said, as Craig Jelinek and his LT look to the future, a real investment in improving Costco’s digital game has to be top-of-mind. There is not only the direct, looming competition of Amazon Fresh’s grocery delivery, but also Chieh Huang’s fast-growing bulk urban delivery start-up, Boxed. The model (no membership, mobile-first, Millennial-targeted) is now nibbling at the edges of Costco’s markets (with $100 million in revenue and recently named as Forbes’ next billion-dollar start-up).
Costco members will tolerate the fee increase so long as the consumer experience improves or doesn’t change.
It’s a brand that reminds me of Disneyland. Regardless of the park entry increases, consumers keep attending in record numbers due to the consistency and innovation of products.
The only threats Costco has are consumer confidence (economy) and competitive pressure from other box stores.
Costco is in a unique position. No one likes to see membership rates increase, but I am sure it will not cost them any customers. Costco shoppers clearly see a great deal of value for their dollar at the store and are more than happy to pay a fee for access to that value. If they didn’t they’d already be leaving regardless of any increase in fees.