Warehouse clubs are still a huge value for customers even though 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 low prices.
There are some trade-offs. The selection is small and items tend to be sold in bulk packs rather than smaller sizes. You can often get the brand you want, but not in the size that can easily fit into your closet.
Still, even with the small sacrifices, all three of these brands have been successful and Costco has grown steadily, and the company has done an astounding job of retaining existing members. CFO Richard Galanti commented on this during the chain̵[ads1]7;s earnings call for the second quarter.
At the end of the fourth quarter, our renewal rate in the US and Canada came in at 92.6%, which is 0.3 percentage points higher than 16 weeks earlier at the end of the third quarter, when we were at 92.3%. And our worldwide renewal rate came in at 90.4% at the end of the fiscal year, up 0.4 percentage points from the end of Q3 when it was 90%. In terms of the number of member households and cardholders, at the end of the 4th quarter, we ended the fourth quarter with 65.8 million paid household members and 118.9 million cardholders, both up 6.5% from the prior year.
This is very strong growth, especially after the growth that the chain showed during the pandemic. As the numbers continue to rise, Costco has been reluctant to raise its membership fees (Sam’s Club recently did so), but Galanti made it clear that an increase would be coming (although it’s not quite here yet.
Costco membership fees will increase (exactly when is the only question)
Early in the conversation, Galanti kind of denied that an increase in the membership fee was on the way.
“Regarding membership fees and a possible increase, there are no specific plans for a fee increase at this time. We are pleased with our growth in both top line sales and member households in recent quarters and in member loyalty as reflected in increasing membership renewal rates. We will let you know when any is about to happen,” he said.
No specific plan is not the same as no plans, and the manager provided a more complete explanation later in the call.
Look, at the end of the day, we’ve always been told, and I’ve told you, that we’re a top-line company. We always want to increase sales.
Of course, since we’ve increased membership fees historically about every five, five and a half years, we’ve turned around and used that to create more value. And when we do, we will. I think at the end of the day, it’s — and I also want to point out, of course, 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’re talking about January ’23.
Now, I’m not suggesting it’s January 23rd. I’m just saying it’s not there yet anyway. And our view is that we are confident in our ability to do that. And at some point we will, but it’s a matter of 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 major attrition (or even a meaningful drop in renewals) when raising membership prices in the past. That’s because the hikes are usually $5 for a basic Gold Star membership and $10 for an Executive membership. That will increase prices from $60 to $65 or from $120 to $130, depending on your tier.
It’s a small increase that it’s hard to imagine people getting mad about after over five years at the previous price. Of course, many customers use auto-renew, and even if they were to be notified, it’s hard to imagine anyone on the fence about renewing regardless of dropping their membership over $5 or $10.
Costco is being careful here. It clearly plans to raise membership fees, but it is looking for the right time to do so.