Good morning. The new CFO of retail giant Costco, Gary Millerchip, succeeds the company's longtime finance chief, Richard Galanti, who had been in the role for decades. One of Costco’s first moves with Millerchip at the helm of finance: the first membership fee increase in seven years.
The company announced on July 10 that membership prices are increasing by $5 to $65 for the basic Gold Star level in the U.S. and Canada, while the executive membership plan, which offers cash back, will go to $130 from $120 as of Sept. 1. Costco boasts 128 million members worldwide.
Millerchip began the job after Galanti ended his nearly 40-year tenure as CFO of Costco on March 15. Prior to leaving, Galanti had been teasing a membership price hike for months, hinting that he preferred to wait until inflation pressures afflicting customers eased, my Fortune colleague Phil Wahba reported. Last September, Galanti commented on a call with investors that it’s “a question of when, not if.”
Wahba points out that membership fees are no small matter to a company like Costco. And of the most important decisions made by a Costco CFO is the timing and size of a fee increase.
His recent deep dive into the culture of the retail giant explains the dynamics of membership. Wahba writes: “Its distinctive place in the public’s imagination has propelled Costco to tremendous growth. Net sales have risen around 10% annually for the past 35 years, almost three times as fast as overall retail spending over that span. Membership, meanwhile, has risen 50% since 2016—a vital detail, because membership fees drive most of Costco’s profits. Last year the fees amounted to roughly two-thirds of profits, and on several occasions in the past few years, Costco would have reported a net loss without them. Without membership growth, Costco’s bargain, sometimes loss-leading prices—and the clout with suppliers that makes them possible—would be hard to sustain.”
Costco's membership fees generated $4.6 billion in revenue, and the member renewal rate in the U.S. and Canada was 92.7% (globally it was 90%) in the fiscal year that ended last September. The average U.S. Costco member has a household income of $100,000, compared to shoppers at Target ($89,400), Sam’s Club ($86,900), and Walmart ($76,300), according to consultancy Kantar Retail, Wahba reported.
Millerchip joined Costco from The Kroger Co., where he served as SVP and CFO since April 2019. He spent 15 years at Kroger, preceded by more than 20 years in banking, most recently with the NatWest Group (formerly Royal Bank of Scotland) in the U.K.
When Costco announced in February that Galanti was stepping down, the move came as a surprise to Wall Street, and the company going with an external CFO hire was also unexpected. But Millerchip is on board with Costco's membership fee philosophy. “We've historically looked at increasing the membership fee every five years or so,” he said during his first Costco quarterly earnings call on May 30. “And obviously, we're beyond that time period now in terms of what would be the typical cycle.”
But there’s at least one price hike that’s not likely to happen: “I also want to confirm the $1.50 hotdog price is safe,” Millerchip said on the earnings call.
Sheryl Estrada
sheryl.estrada@fortune.com
