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.”
- Costco Wholesale (COST) Q1 2017 Results – Earnings Call Transcript – Seeking Alpha
- Costco could hike its membership fee – CNN
- Costco May Make It More Expensive to Shop Its Humongous Stores in 2017 – Street.com
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?