Costco's business isn't selling things. It's keeping its members happy.
The warehouse club makes the majority of its profits selling memberships so the company relentlessly looks for ways to give members more value.
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That's partially pricing, but it's actually so much more than that. Yes, Costco (COST) works relentlessly with its suppliers to find ways to offer customers the lowest possible prices. That means placing huge orders and working with suppliers to bring their costs down.
During the covid pandemic, in fact, until fairly recently, Costco actually handled some of its own shipping from overseas so it could control (and predict costs). The warehouse club also looks not just for deals, but also for very compelling merchandise.
Basically, Costco wants to make its customer happy so they renew their memberships and that includes a famously lax returns policy. The chain has what it calls a 100% satisfaction guarantee on both its memberships and its merchandise.
"We will cancel and refund your membership fee at any time if you are dissatisfied," the chain posted on its website. "We guarantee your satisfaction on every product we sell, and will refund your purchase price."
There are some exceptions (like alcohol and cigarettes based on local laws) but Costco has famously taken back soiled clothes, half-eaten food, and other things most retailers would reject.
Now, with Amazon tightening its return policy, Costco stands to gain and the reality is that with its lack of physical locations, matching what the warehouse club offers would be very expensive for the online retailer.
Image source: Tim Boyle/Getty Images
Costco Makes Returns Easy
Basically, with very few exceptions, Costco takes any item back as long as you return it to the same store you bought it at. The warehouse club has a similarly robust online return policy but because so little of its business is online, it’s not hurt much by the expense of returns.
E-commerce sales actually dropped by 8.7% in the most recent quarter. That means that Costco, which already does most of its business in its warehouses, saw even fewer possible online returns as overall sales increased by 5.7% in the United States (where the bulk of its business is).
Costco's return policy has remained generous at a time when Amazon AMZN has tightened its policies. Now, the Amazon change is admittedly small -- the company will be charging a small fee for returns when customers opt to use a UPS store when an Amazon Fresh, Whole Foods, or Kohl's location is closer.
That seems like a really tiny change, but it's already a hassle to make an Amazon return. You need to repackage the item and physically bring it somewhere while the vast majority of Costco returns are simply made the next time the member visits the warehouse club.
Amazon has made making returns harder -- albeit just by a little -- while Costco's policy remains as generous as it ever was.
Costco Has Held Onto Its Members
Costco's formula works. The chain has generally held onto over 90% of its members and that number keeps inching up higher. CFO Richard Galanti talked about the chain's retention numbers during its second-quarter earnings call.
"In terms of renewal rates, at second-quarter end, our U.S. and Canada renewal rate was 92.6%, up 0.01% from Q1 end and worldwide rate came in at 90.5%, also up 0.01% from the prior quarter, both represent all-time highs," he shared.
That comes at a time when membership numbers have hit records as well.
"Membership growth has remained strong. We ended the second quarter with 68.1 million paid household members and 123 million cardholders, both up more than 7% versus a year earlier," he added.
A liberal return policy is, of course, just a small part of the company's recipe for success but it may grow into a major advantage over Amazon as the online retailer looks to cut costs. Returning online orders is expensive and Amazon will likely have to keep making tweaks to its policies.
