Costco's members drive its business. The company actually makes the majority of its profit from selling memberships, so its core business model revolves around signing up members and doing whatever it can to retain them.
That's actually something Costco (COST) does spectacularly well. The company not only steadily adds members, it retains them at remarkable rates. CFO Richard Galanti spoke about membership and retention during the warehouse club's first-quarter earnings call.
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"In terms of renewal rates, at first quarter-end, our U.S. and Canada renewal rates were 92.5% compared to 92.4% a quarter ago. And worldwide rate came in both at this quarter-end and the previous quarter-end, the same level at 90.4%. We ended first quarter with 66.9 million paying household members and 120.9 million cardholders, both up 7% versus last year," he shared.
Galanti did note that Costco added 22 new warehouses globally over the past 12 months, which accounted for 3% of the increase. The big story, however, continues to be the growth in Executive membership sale.
"At Q1 end, paid executive memberships were right at 30 million, an increase of 904,000 during the 12 weeks or 75,000 a week during the first quarter," he said. "Executive members now represent 45% of our paid membership and just under 73% of worldwide sales."
Image source: Tim Boyle/Getty Images
Executive Members Drive Costco's Business
Executive members pay $120, twice the basic membership Gold Star fee to get 2% cash back on most spending at Costco up to $1,000. The chain wants people to join as Executive member or upgrade to being one and Galanti explained why.
"We know that an executive member buys more and shops more frequently in a year than a Gold Star member. We know that one of those members with a credit card, co-brand credit card shops even more frequently and spends more. And they do all three, they're an executive member with a card versus being a regular member, that's the big kahuna here," he shared.
Basically, Executive members have the deepest commitment to the warehouse club and that pays off in both sales and ongoing loyalty.
"And so, I think that we've seen those trends go on over the last few years, frankly. And what's helped in the last year is the fact that, again, just our new member sign-ups has been higher than they had been historically over the last few years versus the last year -- last year or two. And I think we believe that's more because of COVID, and we were in a good place to shop," the CFO added.
Costco Sees Good News For Members
Galanti shared that Costco shops its biggest rivals on at least a weekly basis to make sure its prices remain competitive. That sometimes means the chain has been eating some of the price increases caused by inflation in order to match or beat prices at Walmart (WMT), Amazon (AMZN), and Target (TGT).
The CFO, however, did share some positive pricing news.
"In the first quarter, we estimate the equivalent year-over-year inflation number in the range of 6% to 7%. Food and sundries is still up more than nonfoods, but overall, a little better level than a quarter ago for the company," he said.
Galanti also noted that prices were dropping in another key category.
"Commodity costs are mostly coming down, whether it's corn flour, sugar, and butter or even some things like steel. A few things are up, but overall, we're seeing a little bit of a trend, but we'll keep you posted," he added.
