Costco (COST 0.17%) has built a nearly invulnerable business that's more or less immune to the changing retail environment. The warehouse club uses a fairly simple model: People pay an annual fee to join, and in exchange, they get to shop at the company's "clubs," where products are very inexpensive.
It's a model that has proven extremely resistant to competition and online shopping. Members pay to join, and because they have paid, they feel connected to the stores -- and those membership fees make up most of the chain's profit.
That bond drives traffic, and even when it doesn't, the model still works. Even when someone pays to join but does not visit Costco, they may still renew because of the prospect of saving money the next time around.
Costco has built a strong membership-based business. Image source: Costco.
Costco has a loyal customer base
Costco has steadily maintained customer renewal rates around 90%. That's a testament to the connection the brand has with consumers. It costs $60 for a normal membership and $120 for an executive membership, which comes with 2% cashback on most purchases up to $1,000 a year.
People would only pay that fee on a repeated basis if they felt it was worth it. They clearly feel that Costco offers a good value on the merchandise it sells. Many consumers also enjoy the treasure hunt nature of shopping at the store, where you never know what you might find.
Costco does not really need to sell anything beyond memberships to be successful. However, if the chain can get customers to buy things, it increases the likelihood they will renew. That's why something CFO Richard Galanti said during the recent fourth-quarter earnings call spoke to the ongoing success of the brand.
"In terms of the Q4 comp sales metrics, fourth-quarter traffic or shopping frequency increased 3.7% worldwide, and 3.6% in the U.S.," Galanti said. "Our average transaction or ticket during the fiscal quarter was up 1.4%."
Basically, more members are visiting, and they're spending more. That bodes very well for the long-term success of the warehouse club chain, which has clearly been strengthening its bond with its customers. That was reflected in renewal numbers that have inched higher.
"In terms of renewal rates, at Q4 end, our U.S. and Canada membership renewal rate came in at 90.9%, up 0.2% from 90.7% as of the end of the last quarter," Galanti said. "And worldwide, the renewal rate was 88.4%, up from 88.3% a quarter ago. Both of these figures [are] all-time highs."
And a dividend, too
Costco has a successful membership and retail business that has been steadily growing for decades. The chain has proven that it's immune to the "retail apocalypse" and that it can slowly adjust its business as new models (like same-day delivery) become popular.
That underlying business strength supports the other part of the chain's business that's appealing to retirees: its dividend. The company has steadily raised its dividend for roughly a decade. It has also paid a hefty special dividend on two occasions (and it may do so again soon).
Costco has a strong business with a loyal customer base, and it pays you to own it. That's a perfect mix for any retirement portfolio. No company is fully protected from changing consumer tastes, but this one has a built-in warning system. If renewals dip, the warehouse club can make changes. That should be (and has been) enough to keep Costco on strong footing for a very long time.
