Is Costco the New Netflix?

The price of plastic is going up at Costco (Nasdaq: COST  ) .

The warehouse club chain revealed yesterday that it will be hiking its annual membership fees by 10% next month.

It will cost Costco's 22 million members either $55 or $110 to renew the memberships that allow access to 592 warehouses that provide bulk-sized savings. Jacking up prices by $5 to $10 a year may not seem like much, and analysts generally believe that the chain will be able to pull it off because it hasn't raised its cover charge in years.

Well, I seem to recall another company with 20-some million largely satisfied customers that also tried to push through its first rate hike in years. Analysts also applauded the move, sending the stock to new highs after Wall Street figured that members would gladly pay up. Things didn't work out so well for Netflix (Nasdaq: NFLX  ) . Will Costco fare better?

Uh-oh. I can't believe I just went there.

How dare I compare the beloved Costco to a company that was just lampooned this weekend on Saturday Night Live? Then again, Netflix was a darling brand just a few months ago, before consumers turned on the video giant for its insensitive pricing move.

The obvious counterargument here is that one can't compare a 10% pricing increase with the 60% monstrosity that Netflix fumbled.

Well, OK. Let's nip that right in the bud. Only a tiny segment of Netflix's 24 million domestic subscribers were hit with that widely publicized 60% move. The lofty increase only applies to those who were on the unlimited plan with a single disc out at a time. That plan's monthly rate went from $10 to $16 -- and only if those customers wanted to continue to stream video as well as receive discs. If they would stick with one plan or the other, their monthly bill would actually shrink by 20% to $8 a month. The more active customers -- those on unlimited plans with more discs out at a time -- saw the same $6 monthly rate increase, but it's less outlandish on a percentage basis. Someone with four discs out at a time, for example, is only getting a 17% increase.

Only half of the 24 million subscribers that Netflix was targeting as of the end of September were on the dual plans. In other words, half of its members weren't hit with an increase at all -- and those on the disc-based plans exclusively saw their rates decrease by $2 a month.

Reasoning with seasoning
Now let's get to the justification for the increase. Netflix is charging disc-based subscribers to stream so it can invest in more digital content. It will be losing Starz (Nasdaq: LSTZA  ) early next year, but it has recently announced a couple of new library-widening deals.

What is Costco going to do with the money? This isn't money that will go to drive food prices lower or -- closer to Netflix's example -- broaden its selection. Those prices will rise and fall with the market. It's not as if Costco is smarting, judging by the healthy earnings growth and double-digit comps in yesterday's quarterly report.

It's not even responding to the market. Wal-Mart's (NYSE: WMT  ) Sam's Club isn't inching prices higher. Smaller rival BJ's Wholesale did increase its annual memberships earlier this year, but did so simply to match Costco's old rate.

You thought I was joking
Maybe you thought I was getting all Jonathan Swift on you, pitting a ho-hum increase at Costco with the now widely trashed fiasco at Netflix.

Well, what if the same consumers that are flinching at paying $6 a month for unlimited video entertainment through Netflix balk at paying $5 or $10 more a year at Costco -- even if it's only on principle?

What if influential bloggers, Facebook buds, and Twitter tweeters begin painting Costco as an insensitive company hitting 22 million shoppers with a needless increase? Longtime CEO Jim Sinegal is retiring in a few months, so how hard would it be to suggest that the new regime is out to milk bulk shoppers dry?

Rate increases aren't the golden tickets that they used to be in terms of moving stocks higher. Sirius XM Radio (Nasdaq: SIRI  ) is trading lower than it was when it revealed that it would be boosting its monthly rates by a mere 12% come January.

Consumer-facing companies need to realize that anything short of passing actual costs to consumers is going to be perceived as gouging at a time when consumer confidence is dragging its knuckles on the floor.

Costco isn't going to repeat every single mistake that Netflix made. It's not going to split its warehouse club in two, forcing members to maintain two different shopping lists as they pick up their dry goods from nearby Qwostco stores. However, if these past few months have taught us anything, it's that there is no such thing as an arbitrary price increase that goes unnoticed.

I hope it's worth it, Costco.

If you want to follow this saga, track the latest news by adding Netflix and Costco Wholesale to My Watchlist.

The Motley Fool owns shares of Costco Wholesale and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, Netflix, and Wal-Mart Stores, as well as creating a diagonal call position in Wal-Mart Stores and a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (17) | Recommend This Article (14)

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  • Report this Comment On October 06, 2011, at 10:41 AM, brokeassbroad wrote:

    The nearest Costco to me is 350+ miles and I'll be happy to pay the increase. The savings in prescription meds alone pays the membership fee. Also, ordering online is easy and items arrive more quickly than I would have believed.

    Sam's Club is nearby but a perusal of the items I would buy in bulk didn't justify even their somewhat lower membership fee.

  • Report this Comment On October 06, 2011, at 10:58 AM, TMFSymington wrote:

    I, for one, won't bat an eye at another 5 bucks per year tacked onto my Costco membership (42 cents extra per month? I can find that on the floor of my car.).

    Also, I happened to be one of the people in that "tiny segment" (which I think is bigger than you think) affected by Netflix's 60% hike. With easily accessible alternatives like Redbox or my local Hastings for DVD rentals, the perceived value of paying another $6 per month to include the DVD portion of my NFLX subscription was not good enough for me to want to keep it. I did, however, keep the "Watch Instantly" portion of my subscription.

    And Costco? I save a heck of a lot more than $55 per year by shopping there. Additionally, I think (as a general group), Costco's middle-class demographic can and will easily absorb a this small price hike that's been a long time in coming. IMHO, this is a non-issue.

  • Report this Comment On October 06, 2011, at 11:01 AM, xxxJDxxx wrote:

    This article is an extremely poor comparison. Comparing Netflix's subscription increase to Costco's is apples and oranges.

    Costco members, for the most part, are not going to flinch at an extra $5/year. Netflix subcribers are paying at least $72/year more using the example given in the article.

    Also, Costco's increase will hit member's once/year. Netflix's change will hit members every month. This "feels" very different to a consumer.

    The only way Costco could be compared to Netflix's fiasco, is if Costco had raised the prices on it's products by 60%. That would be an apple to apple comparison as it would hit the member on a regular and recent basis like Netflix's subscription increases.

  • Report this Comment On October 06, 2011, at 11:06 AM, nhalden wrote:

    First...Costco is nothing like Netflix. $5 or $10 for a year is nothing for the savings people derive from Costco.

    NOW...your whole "only a small part" of NF subscribers were impacted by the price increase is 100% wrong and ignorant to say the least.

    THE COST WENT UP FOR ALL SUBSCRIBERS.

    Increase in dollars for one out at a time...

    As well as a reduction in service levels for multiple disks...ie 3 down to 2.

    SO to say only the one subset was affected is so bogus and pathological that you must work for Netflix or something,

  • Report this Comment On October 06, 2011, at 11:20 AM, Veritas01 wrote:

    I am an executive member at Costco paying 100 dollars a year. Regular membership is 50 dollars annually. Part of the pitch for executive membership is that your 2% cash back at the end of the year is guaranteed to be at least 50 dollars..or the cost of a regular membership. So you have nothing to lose. If you spend $2550.00 dollar a year at Costco you get a check for $51 dollars. I generally spend close to $5000 a year or more at Costco so my membership is free...I get $100 bucks back. I also get a fee free Amex card as part of the deal.

    My question....will Costco now guarantee you will get at least 55 dollars back in your executive membership year end check? I am not happy about the price increase but consider milk. I have a 4 year old who drinks a lot of milk. In local supermarkets milk can rug from 3 to 4 dollars or more a gallon. At Costco...$2.20...so on just milk alone I save from $40 - 90 dollars or more on that one purchase on an annual basis. So I won't be leaving but I won't be happy....just please keep the 1.50 hot dogs and soda...

    Now Netflix....speaking of dogs....I had the one DVD and streaming plan. It was better than me taking out a Redbox movie and forgetting to return it for days..even at a buck a day that adds up. We would get our DVD one or so a week...and I would stream a few things. Their streaming selection is truly awful. Then comes the price increase. I dropped streaming but now I have a new hobby to fill that time slot. I, and thousands of other irate subscribers, go to Facebook every day and post on the Netflix page how much we hate Netflix, the price increase and the company's management...now that's entertainment.

  • Report this Comment On October 06, 2011, at 11:31 AM, Veritas01 wrote:

    I forgot to add...Mozy...the backup giant changed their price structure that essentially raised prices for many hundreds of percent. For me my monthly rate went from 4.99 month to 17.99 a month. Yikes. I like thousands of others jumped ship. I wound up with CrashPlan who had a "Goodbye Mozy Special" and I locked in 4 years of unlimited backup service for a hundred bucks. I am not a power user...I had a couple of hundred gigabytes of pictures and movies. With today's digital technology that is peanuts.

    The point I am coming to. Mozy had a Facebook page that allowed comments. Thousands of negative comments were posted daily. They started to edit them (delete the negative comments) and that just enraged their current and former customers. Then they tried to ignore the comments and kept posting little news items and help tips...open to comment. Needless to say the comments soon filled up with profane and angry diatribes.

    It all reminds me of what Netflix is going through on Facebook. What happened to Mozy? Then gave up on Facebook. They have a page but just with info ...no comments allowed. Netflix should take notice. You have angered so many customers and anger their will never go away. For years people will post negative comments on anything Netflix posts. The sad part is ...Netflix doesn't care care.

  • Report this Comment On October 06, 2011, at 11:52 AM, idahogeo wrote:

    All of this complaining about price hikes is getting old. You get what you pay for (most of the time). If you want a pleasant shopping experience and quality merchandise at good prices, then pay Costco the extra $5 (per year!). If you just want a basket of cheap stuff, then go to the Dollar Store. Similarly, if you want access to the Netflix streaming catalog, pay the $8. Personally, I don't know anyone with young children who doesn't find value in Netflix's selection of streaming kids' movies...which, by the way, a 2 and 3 year olds will watch over and over and over. However, if you think the streaming library sucks, then Netflix just saved you money by separating the services.

    In any event, quit complaining.

    idahogeo

    long COST & NFLX, short complainers

  • Report this Comment On October 06, 2011, at 12:18 PM, BMFPitt wrote:

    If Costco raised prices by $5 and tried to charge another $55 on top of that for access to certain parts of the store, I'd care more. As it is, the only thing that will prevent me from re-upping my membership is the 45min drive to the closest Costco in comparison to the BJs that is 15min away.

  • Report this Comment On October 06, 2011, at 12:31 PM, smartin619 wrote:

    Costco provides needs. Netflix provides wants. Much easier to find alternative wants than needs.

  • Report this Comment On October 06, 2011, at 2:11 PM, stan8331 wrote:

    The Netflix griping has really gotten absurd. They started with a DVD-based plan, and then threw in streaming of a limited number of titles for free. If they stayed with that model, they would NEVER be able to offer a streaming catalog that could rival the DVD catalog.

    So, Netflix customers would remain happy right up to the time Amazon or someone else offered a large streaming catalog for a competitive price. At that point, swarms of supposedly happy Netflix customers would realize that waiting around for discs isn't as much fun as having almost everything available instantly, and the Netflix streaming catalog was far too small. Those customers would defect to Amazon without a second thought. Netflix would become the new Blockbuster.

    Netflix made some stupid mistakes in how they handled and explained the transition, but the bottom line is the change had to be made or a large percentage of its customers would have eventually left for a better streaming deal.

  • Report this Comment On October 06, 2011, at 2:46 PM, biolasteve wrote:

    Generally I agree with the comments above, it's apples and oranges to compare $5 for the year, vs $6 per month, whether on a dollar to dollar or percentage basis (though i'm not crying about the Netflix increase either...did we really think $10 for their whole library was going to last forever? come one people...)

    BUT my main point here, is that the "Qwostco" line above is brilliant. laughed out loud.

    that's it, thanks all.

  • Report this Comment On October 06, 2011, at 2:46 PM, Rogo wrote:

    Again, more pointless "analysis".

    $5 per year vs. $6 per MONTH. Who cares what the percentage increase is?

    Oh, right, you claim for >some< Netflix customers it was "only" 17% not 60%. Well, it's 10% at Costco. First increase in years. Netflix? They had raised prices a year ago as well.

    So, $5 per year for the first time in years vs. $72 per year on top of the earlier increase -- combined with making the service demonstrably worse (less content streamed as Starz goes, having to manage 2 queues, 2 sites, etc.). What a bogus straw man of a piece.

    Are people thrilled to hand Costco more money? Of course not. But this has nearly nothing in common with Netflix. $5 per year vs. $72 per year. Seriously.

  • Report this Comment On October 06, 2011, at 2:52 PM, Rdsunder wrote:

    Rick,

    Netflix expects (per their Sept 15, 2011 8-K filing) to end the quarter with 12M DVD + Streaming subscribers, out of a total of 24M. Those 12M are getting hit with a 60% hike. Since when did 50% of a company's customer base become a "tiny" fraction? If it was a tiny fraction, the outrage wouldn't be so widespread.

    As a very satisfied Costco customer, I'll happily pay the extra $5; it's a 10% hike on the fee, not on the total bill. I will barely notice it, given how much we save, compared to regular grocery stores. Besides, I'm sure I munch on more than $5 bucks worth of freebies each time I visit my local Costco (perhaps the highlight of my visits!).

  • Report this Comment On October 06, 2011, at 3:27 PM, mikecart1 wrote:

    Was a member of Costco for 2 years. Wound up getting tired of paying small discounts on food I couldn't finish in time before it spoiled. 3lbs of tilapia is hard to eat in 2-3 days. Same with the 5lbs of steak or the 10 rolls of bread. Wound up paying more for toilet paper LOL. I canceled my membership after I got my eyeglass prescription there for $55 and now have since bought 6 pairs of glasses online for 1/10th the price you pay at a place like Lens Crafters.

    Thanks Costco for all your memorable bathroom experiences and for an eyeglass prescription that has saved me hundreds the past few years alone. No thanks on your low quality food selection. I'm still trying to finish your industrial size Oatmeal that has taken me over 2 years to reach the half way point.

    About to cancer Netflix later this month as their streaming selection reminds me of Costco - poor quality and not good.

    Cheers!

  • Report this Comment On October 06, 2011, at 6:12 PM, lasano wrote:

    Honestly, I am totally fine with the increase in both Netflix and Costco membership. I still feel that Netflix is affordable. As some of the other members have mentioned here, Netflix is a WANT, not a need. I like Netflix, we don't subscribe to cable and all we watch is Netflix. The way I figure it, Netflix is still cheaper than cable, when the day comes that this isn't the case, then I will complain. As for Costco...I save so much money per month, that an extra $5.00 is nothing. :-) Just my two cents.

  • Report this Comment On October 07, 2011, at 12:22 AM, wannalivelife wrote:

    totally agree with the folks that $5 increase is not much, ESP. Per year. But gotta say that the argument was creative.

    I too think that I save a lot more by being a member. Even if you do not go buy premium foods and stay with basic stuff, you save tons of money.

  • Report this Comment On October 07, 2011, at 9:21 AM, TMFTomGardner wrote:

    I think 10% is the upward boundary line for reasonable price increasing in consumer markets. Given that they will be raising prices over the long haul, Costco may just be preferring to go 10% at a time infrequently, rather than half that more frequently.

    Buffett said that the sign of a great company is that it can raise prices over the long haul. Netflix is a younger company, with a shorter-term base of members, and a rising group of worthy competitors.

    Costco has built its brand and relations over decades and, among its members, there are no real competitive offerings.

    I think this'll prove a good move by Costco. Whereas Netflix, in its situation, raising prices 6 times highert han Costco...was very problematic.

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