Why Costco Members Are Remaining Loyal Despite Inflation
Costco has more than a few good reasons to celebrate its results this past quarter. Even though it faced the same headwinds that its competitors Walmart and Target did in the form of supply chain challenges, rising fuel costs, and high inflation, it also managed to keep its investors happy, by meeting analyst expectations and reporting a 16.3% increase in net sales to $51.61 billion, as well as an increase in same-store sales of nearly 15%, per Investor's Business Daily.
During its earnings call (per The Motley Fool), Costco's Senior Vice President for Finance and Investor Relations Bob Nelson reported several bits of positive news for the chain. According to Nelson, Costco saw a 9.2% increase in membership fees collected, which amounted to an $83 million increase year-over-year. Membership is also up 10.4% from last.
Nelson also said renewal rates are at an all-time high. He said that at the end of Q3, U.S. and Canadian renewal rates hit 92.3%. Nelson further revealed that Costco's worldwide membership renewal rate hit 90% for the first time ever.
According to these numbers, the company is retaining an impressive number of members during a time of inflation; so why are customers staying by Costco through thick and thin?
Costco manages its members expectations
The Motley Fool gives Costco credit for being able to keep its members happy. It uses its buying power to secure bulk discounts and then makes sure its members benefit from that too. It also gives Costco points for keeping a tight grip on the number of items in its inventory, which The Motley Fool says, "turns shopping at Costco into a serendipitous scavenger hunt."
It explains, that in addition to a smaller selection of low-cost options, the limited number of luxury offerings at Costco creates a mentality, in which customers don't want to pass on a good deal that will likely be gone by their next visit. This draws high-income customers into the store and entices them to spend a lot.
Costco's management can pat themselves on the back for being able to read its customers. When asked about how the company is able to raise prices on certain goods without getting any pushback, Bob Nelson said, "We always want to be the best value in the marketplace. And to the extent that we continue to show that, I think it's easier for us to pass on higher pricing or higher freight costs, or raw material cost, assuming that we show that value in the marketplace," per Fox Business.
Costco isn't making any decision on its membership fees -- for now
Loyalty has its rewards, and that's looking like it will be the case for Costco's members too. In Costco's earnings call, as reported by The Motley Fool, Bob Nelson outlined the company's standard practice of raising its membership fees every five to six years with its last membership fee increase occurring in June 2017. However, inflationary pressures may see the big box store put off making that decision.
Addressing rumors that Costco would adjust its membership fees, Nelson said, "...given the current macro environment, the historically high inflation, and the burden it's having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time. We will let you know, however, when that changes."
Analysts following Costco stocks say that decision isn't a matter of 'if' but 'when,' particularly since each time membership fees have gone up, Costco's stocks have chalked up gains. Yahoo Finance says during the three months prior to the last three fee increases (when astute investors jumped aboard ahead of anticipated increases), stock prices gained 11%.
The last time Costco adjusted membership fees in June 2017, it added $5 to Gold Star fees and $10 to Executive membership fees, for a total of $60 and $120 respectively. But for now, Costco members can sigh in a bit of relief while their fees hold steady for the time being.