Costco (COST) built its business on low prices and loyalty. Members have to pay to even access the chain's clubs, but once they do, they get access to very low prices.
It's a business model that is very different than what Amazon (AMZN) and Walmart (WMT) use. Both of those companies sell memberships to get free, quick delivery, but they don't require people have a membership to shop (aside from at Walmart's own warehouse club, Sam's Club).
That means that Walmart and Amazon sell to everyone, with memberships enhancing loyalty. Costco needs to get customers to join -- something that has historically been a challenge -- and then must keep them for years to come for its business model to make sense.
Costco essentially sells something -- low prices -- that its key rivals give away. And, it does it through no-frills warehouse stores that have somehow become destinations and draws in their own right.
The pandemic sent a lot of customers -- both regulars and new members -- to Costco. Being able to buy in bulk and at a low price had a lot of appeal when people were limited in their ability to leave the house and uncertain about their financial future. It would have made sense for the warehouse club to see a spike in membership that failed to renew once more normal conditions returned.
That's not what happened.
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Costco Has Increased Customer Loyalty
Costco spends very little money on advertising its brand. Instead, it creates interest through word of mouth, customer satisfaction, and curiosity when it enters a new market. It signs up people for a membership that costs $60 for basic entrance to its warehouse or $120 for an enhanced "Executive" membership that comes with 2% cashback up to $1,000.
Getting members to renew year after year has been a key part of Costco's business. That's something the chain has done really well, and it has gotten even better at it, according to CFO Richard Galanti, who spoke during the chain's second-quarter earnings call.
"In terms of renewal rates, they continue to increase. At second quarter end, our U.S. and Canada renewal rate stood at 92%, up 0.4 percentage point from the 12-week earlier at Q1 end. And worldwide rate, it came in at 89.6%, up 0.6% from where it stood 12 weeks earlier at Q1 end," he said.
Those are stunning numbers, but there's a strong reason for the uptick.
"Our renewal rates are continuing to benefit from more members' auto-renewing, as well as increased penetration of Executive members who, on average, renew at a higher rate than nonexecutive Members and higher first-year renewal rates for our new members," he added.
Is a Costco Membership Price Increase Coming?
Costco has been careful about how and when it raises the cost of its membership but it has raised the price slowly, but consistently. Galanti would not commit to a price increase but shared how the company views doing one.
"Historically, we always look at things like do we feel we can -- we look at ourselves in the mirror, do we feel that we've continued to increase the value of the membership? Certainly, we look at renewal rates. We look less at what others do frankly but certainly is out there what others are doing. And what I do note is that I looked at the last three increases over the last 15 years," he said.
The CFO also noted that the warehouse club has reached the usual timeframe in which it traditionally raises prices.
"And on average, they were done about every five -- a little over every five and a half years, about five years and seven months," he said. "And five years from the anniversary of the June of '17 would be this June. So I think the question will continue to be asked until we do or don't do something. But at the end of the day, we certainly feel very good about our member loyalty, our success in getting members to move to Executive member, which are the most loyal."
