Costco (COST +1.82%), Sam's Club of Wal-Mart (WMT +0.84%), and privately owned BJ's Wholesale offer over 1,475 membership-only warehouse club locations throughout the world. In contrast to much of the rest of the retail industry, Costco has continued to outperform while increasing its membership and net sales annually. This is despite the pressure from online retailers like Amazon.com (AMZN 0.41%) on the retail industry. Going forward, though, what is a Costco membership really worth?
What is a Costco membership really worth?
Costco's fiscal year 2014 first-quarter earnings report showed that net sales rose 5% to $24.47 billion as comp sales increased 3% overall. On a year-over-year basis, membership fees for the first quarter jumped to $549 million, up from $511 million in FY 2013's first quarter.
Despite the 7.3% increase in membership fees, these fees account for just 2.24% of sales for Costco. To better understand the real value of a Costco member and how the typical member measures up to a member of its biggest competitor, Sam's Club, look at the table below:
|
Costco |
Sam's Club | |
|---|---|---|
|
Total Membership |
72,500,000 |
47,000,000 |
|
2013 FY Net Sales |
$102,870,000,000 |
$56,400,000,000 |
|
Net Sales Per Membership |
$1,418.90 |
$1,200.00 |
Source: Costco and Wal-Mart's latest earnings reports and presentations.
The table shows that each Costco cardholder generates over $200 more in net sales annually, on average, than the typical Sam's Club member. However, the following table may be the most revealing as it shows that the average Costco member has become more valuable to the company.
|
Costco FY 2010 |
Costco FY 2013 | |
|---|---|---|
|
Total Membership |
58,000,000 |
72,500,000 |
|
Net Sales |
$76,255,000,000 |
$102,870,000,000 |
|
Net Sales Per Membership |
$1,314.74 |
$1,418.90 |
Source: Costco's earnings reports.
Not only is Costco leading Sam's Club in net sales per membership, it is beating its own result from FY 2010 by over $100 in net sales per member on an annual basis.
Two other factors to consider regarding Costco membership are renewal rates and membership levels. Overall renewal rates are at an all-time high of nearly 90% while Executive members (the most expensive membership level at $110 annually) represent 38% of all cardholders. More importantly, Executive membership has represented 38% of all cardholders since 2011.
Costco's membership magnet is named 'Gasoline'
On the surface, recent earnings showed that Costco's gasoline profit was slightly lower. However, gas stations have been key in driving customer frequency. Traffic last quarter was up 4.5%. By comparison, Sam's Club traffic was up just 2.4%.
During the recent conference call, CFO Richard Galanti stated that while gasoline profits fluctuate throughout the year, on a YOY basis gasoline is always profitable for the company. The average Costco gas station generates far more annual revenue than the typical gas station:
|
Costco Gasoline Stations |
Rest of Gas Station Industry | |
|---|---|---|
|
Total Stations |
414 |
121,446 |
|
Total Revenues |
$11,200,000,000 |
$249,000,000,000 |
|
Revenue Per Gas Station |
$27,053,140.10 |
$2,050,293.96 |
Source: Costco's earnings and gas station industry statistics .
Competition from Sam's Club, BJ's, and Amazon
Wal-Mart's recent earnings showed that the company continues to struggle with its profit margin. The outlook for Sam's Club is expected to range between flat and 2%. One of the problems Sam's Club has is its relationship with Wal-Mart. The Wal-Mart brand is known for its low prices, and to some extent, its quality. Customers that aren't fans of Wal-Mart may choose Costco instead of trying Sam's Club.
While BJ's Wholesale is ranked third behind Costco and Sam's Club, the chain only occupies 15 states. This puts the company at a huge disadvantage in this sector as it will likely lose ground to both Costco and Sam's Club in the future.
During the conference call, Costco acknowledged Amazon.com as a real competitor. Amazon.com continues to increase the number of products that are available in bulk on its website at competitive prices. Some products are even available for lower prices than what Costco charges. Amazon.com is also expanding its Amazon Fresh business that offers fresh foods.
However, Costco has a better competitive position versus Amazon.com than the majority of retailers. Until Amazon.com is able to offer one-hour photos, pharmacies, fresh foods in bulk, or gasoline, Costco's business model is safe.
Costco stores can get a lot bigger
Costco's ancillary businesses have been a staple of success for the company. Even though its food courts and photo centers are in nearly every Costco location, it only has 414 gas stations among the 649 warehouse locations it expects to have by the end of 2013.
Credit: Costco presentation.
Additionally, other ancillary businesses are expanding such as car washes and travel. Costco can choose to break even on its car-wash business in order to attract customers to the main warehouse. Furthermore, Costco's travel services can disrupt the nearly $600 billion leisure-travel industry within the US.
Bottom line
Glassdoor.com recently placed Costco 16th in its 2014 Best Places to Work rankings putting itself ahead of popular companies like Intel, Apple, and Starbucks. This may be the most telling part of the Costco story. If its own employees love working there, that could be the biggest reason why customers continue to join. In the end, the value of a Costco membership continues to increase because satisfied employees go a long way toward creating satisfied customers and driving net sales higher. This pattern is priceless.
