Costco leadership fully understands the business relationship the warehouse club has with its members.
People pay $60 a year for a regular membership or $120 for an Executive card, which comes with 2% cash back up to $1,000. And in exchange they get to pay low prices.
That’s how it works on the surface, but it’s actually much deeper than that. Costco (COST) – Get Free Report doesn’t simply just keep its margins thin; it actively works to ensure it’s giving members better prices than its rivals do.
Chief Financial Officer Richard Galanti talked about it during his company’s third-quarter-earnings call.
“I remember when inflation was peaking at 8% and 9% and some out there would say — and we’re known for trying to hold the line and work with our suppliers — how much will they eat of that, how much will we eat of that.
“At the end of the day, if margins year over year were down 50 or 100 basis points back then, that implies that some portion of it, maybe instead of an 8% or 9% increase, our members were seeing a 6% or 7% or 8% increase,” he said.
“When we do comp shops against our direct warehouse club competitors, as well as different components, whether it’s retail food or general merchandise on the buildings, home improvement side, we feel very good about our competitive position and what we’re doing to do that,” he said.
Now, in addition to holding the line on prices, and even dropping them in some cases, Galanti shared news of another gift for members.
Costco Discusses a Membership-Fee Increase
Costco raises its membership fee roughly every six years, and for more than a year Galanti has been fielding questions about when it might take that step.
During Costco’s second-quarter-earnings call the CFO made clear that the company was within the window in which it typically raises the cost to join its clubs.
“June would be our sixth anniversary. But — and as I mentioned in the previous calls — looking at the last, I think they averaged around five years and seven months, which is about now or last month,” Galanti said.
“And what we said over the last few semesters — over the last few quarters, it was — I’m a college kid. For the last few quarters is that it’s a question — in our view, it’s a question of when, not if.”
Now, Galanti has somewhat changed his tune. He hasn’t taken a price increase off the table, but he made clear that it’s not imminent.
“At the end of the day, with the headline being inflation, we feel very good about if we want to do it, can we do it without impacting, in any meaningful way, renewal rates or sign-ups or anything,” he said.
Costco doesn’t raise prices on anything just because it can. The company weighs the impact on its customers, and in this case Galanti thinks raising membership fees right now would send a bad message.
“And at some point, we will. But our view right now is that we’ve got enough leverage out there to drive business, and we feel that it’s incumbent upon us to be that beacon of light to our members in terms of holding them for right now,” he added.
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