Costco Wholesale (COST 1.01%) is on track to post net sales of over $220 billion in its 2022 fiscal year. But the company sells its merchandise barely above cost. Instead, membership fees generate the bulk of Costco's net income.
Typically, Costco has raised its annual membership fees in the U.S. and Canada, by far its biggest markets, every five to six years. The last increase came in June 2017, driving speculation that the next fee increase could come very soon.
However, in a recent interview, CEO Craig Jelinek said that Costco isn't about to raise membership fees. Here's are two reasons that's a smart idea.
Image source: Costco Wholesale.
Reinforcing member loyalty
High inflation represents the biggest reason Costco plans to hold its membership fees steady for now. With many lower- and middle-income consumers' finances under pressure, Costco doesn't want to add to the problem with a membership fee increase.
This isn't just altruism on the company's part. Consumers are flocking to Costco in increasing numbers as they look to save money on everything from gas to food, clothing, and appliances.
As a result, Costco's membership base has grown more than 6% over the past year. Renewal rates have reached an all-time high. And as members increase their spending at Costco, more and more are upgrading to the executive membership, which costs twice as much but offers 2% cash back on most purchases. Executive members tend to spend more and renew at higher rates.
Increasing membership fees by $5 for regular members and $10 for executive members would juice the growth of Costco's membership fee income in the short run. But that increase could cause some members to cancel. If holding membership fees flat for a little longer will help Costco grow its overall member base at a faster pace, that's a great investment in the company's future.
Costco is doing just fine
Second, Costco isn't in a rush to raise membership fees because it doesn't need to do so. The company has increased prices on many items in its stores to offset rising costs, but members still see Costco as offering better value than other retailers.
That's supporting rapid sales growth. Net sales jumped 16.9% year over year in the first 10 months of fiscal 2022. Meanwhile, strong growth in the membership base and upgrades to the executive tier allowed Costco to post a 10.6% increase in membership fee revenue last quarter, excluding foreign exchange effects -- without raising membership fees a dime.
And while many of its peers have posted disappointing results lately, Costco is on track for another year of double-digit earnings growth in fiscal 2022. In short, the business is firing on all cylinders. As the saying goes, "If it ain't broke, don't fix it."
Maybe in 2023
Costco won't hold its membership fees at current levels forever. I would expect the warehouse club giant to implement a fee increase sometime next year, assuming that inflation has started to moderate by then.
Customers are getting more and more value out of their Costco memberships -- as evidenced by the company's surging sales -- so it would be reasonable to ask them to pay a little more. But waiting an extra year or so to raise membership fees could generate plenty of goodwill and help Costco sustain its recent momentum in the years ahead.
