Warehouse clubs continue to be a tremendous value to customers, even if they charge a membership fee to shop there. Costco (COST), Walmart’s (WMT), Sam’s Club, and BJ’s Wholesale (BJ) all offer members a similar proposition: pay a membership fee and get access to a selection of items at discount prices.
There are some tradeoffs. The selection is small and items are usually sold in bulk packs rather than smaller sizes. You can often get the brand you want, but not in the size that will fit easily in your closet.
But even with those small sacrifices, all three of these brands have been successful and Costco has grown steadily and the company has done an amazing job of retaining existing members. CFO Richard Galanti commented on that during the chain’s second-quarter earnings call.
At the end of the fourth quarter, our renewal rate in the US and Canada was 92.6%, up 0.3 percentage points from 16 weeks earlier at the end of the third quarter, when we were at 92.3%. And our global renewal rate came in at 90.4% at the end of the fiscal year, up 0.4 percentage points from the end of the third quarter when it was 90%. In terms of the number of connected households and cardholders, we ended the fourth quarter at the end of the fourth quarter with 65.8 million paying family members and 118.9 million cardholders, both 6.5% more than a year earlier.
That is a very strong growth, especially after the growth that the chain has pushed forward during the pandemic. As the numbers continue to rise, Costco has been hesitant to increase its membership fees (Sam’s Club did so recently), but Galanti made it clear that an increase would be coming (even if it’s not quite there yet.
Costco Membership Fees Are Going Up (Exactly When Is the Only Question)
At the beginning of the conversation, Galanti more or less denied that there would be an increase in membership fees.
“In terms of membership fees and a potential increase, there are no specific plans at this time regarding an increase in membership fees. We are pleased with our growth in both revenue and membership households over the past quarters and in member loyalty as reflected in increasing of member renewals. We’ll let you know when something is going to happen,” he said.
No specific plan is not the same as no plans and the director gave a more complete explanation later in the conversation.
Look, at the end of the day we’ve always been told and I’ve told you that we’re a top company. We always want to boost sales.
Sure, since we’ve historically increased member contributions every five, five and a half years, we’ve turned it around and used it to generate more value. And when we do it, we do it. I think at the end of the day, it is — and I also want to point out, of course, that if you look at the last three increases, they were on average five years and seven months apart. If you look at June ’17, plus five years and seven months, you have about January ’23.
Now I am not suggesting that it is January 23. I’m just saying it’s not there yet. And our view is that we are confident in our ability to do this. And at some point we will, but the question is when, not if.
Galanti has previously referred to the timetable for previous increases, but he has not used words as specific as “and at some point we will, but it’s a matter of when, not if.”
Costco can afford to raise prices
The reality is that Costco has never experienced a large churn (or even a significant drop in renewals) when it increased membership prices in the past. That’s because the walks are generally $5 for a basic Gold Star membership and $10 for an Executive membership. That would raise prices from $60 to $65 or from $120 to $130 depending on your level.
That’s a small increase that it’s hard to imagine people getting angry after more than five years at the previous price. Many customers use auto-renew, of course, and while they should be notified, it’s hard to imagine anyone on the fence about renewing dropping their membership above $5 or $10 anyway.
Costco is careful here. It clearly plans to increase membership fees, but it is looking for the right time to do it.