Costco (COST) – Get a free report has a hugely loyal customer base with a membership renewal rate of over 90% worldwide and an even higher rate in the United States (92.5%) in the most recent quarter. The warehouse club, as you might imagine, goes to great lengths to protect that retention rate, as members are the lifeblood of its business.
Currently, Costco charges $60 for a Gold Star membership and $120 for an Executive membership. Those rates haven’t increased in more than five years, as a growing number of the chain’s members have moved to the more expensive offering, which comes with 2% cash back up to $1,000 on qualified orders.
Executive members are becoming increasingly important to the company. Only 43% of members have the more expensive membership class, but that accounts for 76% of the chain’s turnover.
CFO Richard Galanti, who leads the company’s earnings calls, has answered questions during each of the last few earnings calls about whether the company would raise its prices. He has generally said very little on the subject, implying that the company had not made a decision.
On Costco’s first quarter earnings call, he was a little more specific, finally giving members some, but not complete, clarity on the matter.
Costco is approaching the time to raise membership prices
Galanti noted that Costco has an average of 5 years and 7 months between membership price increases, which puts the next one in January 2023. He did make it clear that that timetable was not rigid, but he was clear that an increase was imminent.
“It’s a matter of when not if,” he said.
The CFO shared that while the company was aware of the economic concerns facing many Americans, he made it clear that a struggling economy would not be a reason to hold prices indefinitely.
He noted that if the company were to raise membership prices, it could use the added revenue to hold price on some items where the company’s costs have increased.
Galanti repeated the “when not if” line twice during the call, adding, “If we have to wait a few months, that’s fine. I’ll be coy about when,” he said.
Costco sees inflation slow, costs fall
Galanti noted that in some cases, Costco has begun to see some prices drop when it comes to fresh food. He specifically noted that prices for protein (chicken, beef and fish) have fallen somewhat, leading to a decrease in the number of customers trading down.
Last quarter, he noted an increase in the number of people buying canned chicken and fish as fresh prices had risen. The company has also taken margin cuts on some food items in some cases to keep prices in line with historical norms,
“We intend to remain competitive,” Galanti said of the company’s pricing. “We are our own biggest competitor,” he said, noting that the goal was to hold or lower prices.
The CFO noted that big tickets and discretionary items had experienced a slowdown. He did share that TV sales were generally up, but sales of larger screens were down.
He was cautiously optimistic that overall sales would remain strong no matter what happens to the economy.
“People need to eat,” he said.