The price of plastic is going up at Costco
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
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
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
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
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.
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.