How Costco Wholesale Keeps Members Coming Back

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There is little better in the business world than a captive audience. Not literally (brands would likely take a heavy hit if they forcibly locked people in the store); we're talking metaphorically here. As we speak, Costco Wholesale (NASDAQ: COST  ) is sitting on close to 75 million members in its club -- that's a captive audience.

For the uninitiated, Costco's membership program gives cardholders access to the company's warehouse retail locations and cheap prices. Memberships range from the personal level up to business class, and the recurring income drives a large portion of Costco's operation. To keep customers happy, Costco must consistently offer low prices, which means low margins, which would mean weak income if it weren't for the happy consumers paying for memberships. It's a beautiful circle, and here's how Costco keeps it rolling.

Keep the punters happy
Everyone has a favorite little thing that they pick up from the store more often than not. Maybe you grab a cookie at the grocery store, or buy batteries whenever they're on sale, or just pick up a pack of gum when you buy gas. Costco has built an empire founded on the idea that those things keep us happy and coming back for more.

As an example, take Costco's famous rotisserie chicken. Right now, the Boston Market near me sells half a chicken for $8.59. That doesn't seem too bad. You can feed a few people on half a chicken and some sides. Now look at Costco -- a whole chicken is $4.99. Costco could be losing money on those chickens, and with poultry costs rising, it probably is, but that's not the point. The point is that the little things like cheap chicken make for return customers. Costco's current membership renewal rate is more than 90% in the U.S. and 87% globally.

Costco also makes coming into the store a different experience every time. The company drops special sales in unexpected places, so shoppers have a reason to browse every aisle looking for hidden values. That has helped the business fight off online competitors that can't offer the same experience.

Wall Street's Costco anxiety
Not everyone loves Costco's strategy. By selling low, Costco takes short-term hits on revenue and comparable-store sales, and that makes some analysts unhappy. Last quarter was especially unsettling, as Costco cut deeper, missing forecasts for revenue and income. Of course, today the company bounced back with a strong showing over January. 

For serious investors, Costco continues to be a long-term investment. The company is built around an extended vision, which involves growing its membership base by keeping shoppers happy. That means taking little hits in the short term to make the long term work. This year looks set to be another good one for Costco, especially if January is a glimpse of things to come.

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Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2014, at 2:06 PM, Viking99969 wrote:

    AS far as you write but another WS anxiety is how growth will continue? January is not a "Foolish" MY POV. Growth Internationally; cultural challenges are more real than one ever expects. Growth On-line sales; little to differentiate one retailer from another on how they conduct business - cost, time to receive, nor losing a shipped order is any different using Amazon/Overstock/Costco nor are their efforts to mollify an abused member buyer.

    Result: earnings not as robust as before (therefore slumping stock price). What will current winter weather across Northern US have on numbers to come? As a Foolish fan, one can't help but think what long term impact will be.....

  • Report this Comment On February 06, 2014, at 4:33 PM, Renekton wrote:

    It's the free samples. That and the Costco dogs.

  • Report this Comment On February 06, 2014, at 10:17 PM, 72freddyf wrote:

    I can get a whole chicken at Walmart for $4.98 and not have to pay a membership fee. I don't live close to a Costco, but wouldn't become a member anyway. Dropped my membership at Sam's years ago. It wasn't worth the fee.

  • Report this Comment On February 06, 2014, at 11:33 PM, cakebatter wrote:

    Love Costco! Every time I mention Costco someone mentions how much they love it. It is always fun to see what is new there.will always be a member.

  • Report this Comment On February 08, 2014, at 2:22 PM, somethingnew wrote:

    It's the cheap gasoline, cheap deli pizza slices and free samples. I don't know about anything else because those are the only things I buy or obtain there. Only the best low margin items for me ;)

  • Report this Comment On February 08, 2014, at 2:58 PM, taloft wrote:

    Packed parking lots and packed shopping aisles in every Costco I go into tell me that the company is conducting a large amount of business. The staff is happy and helpful because they are making more than starvation wages. The corporate culture is not toxic like at some retailers.

    Unless there is serious mismanagement at the top levels, this company is going to keep right on growing. With a market cap just over one fifth that of Wal-Mart, I feel there is plenty of room to grow.

    Consider the business model. Most of their overhead is paid for my membership fees, and the renewal rate is better than 90% domestically. That is an astonishing showing of customer loyalty. Must be doing something right if they can get that many people to renew. This doesn't even take into consideration new members signing up for the first time.

    The situation looks just fine to me. Day traders may not like the recent drop but, I liked the opportunity to grab a few more shares. Of course, I'm in this for the long term.

    Long on Cost.

  • Report this Comment On February 08, 2014, at 2:59 PM, taloft wrote:

    *By not my.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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9/1/2015 3:59 PM
COST $138.30 Down -1.75 -1.25%
Costco Wholesale CAPS Rating: *****