Analyzing Costco’s cardholder strategies
In contrast to other conventional retailers (RTH), Costco Wholesale (COST) operates as a membership warehouse club. Customers need to sign up as members by paying an annual membership fee to be able to shop at Costco. In return, members can shop for a wide array of quality merchandise at highly competitive prices. Due to the implied savings on merchandise, members expect to be able to more than recoup their membership fees, cementing Costco’s value-for-money proposition. Besides, ancillary services like gasoline, as discussed in part five, ensure foot traffic and loyalty of existing members and an incentive for new members to join.
More conventional retailers, who are also Costco’s competitors, like the Home Depot (HD) and Lowe’s (LOW) do have a store card for pros, but customers don’t have to sign up for memberships to be able to shop at these stores.
There are two types of Costco memberships. Gold Star membership is available to individuals and Business memberships are exclusive to businesses. Memberships cost $55 annually in the US and Canada [1. Canadian dollars]. Each member is also eligible to receive a free household card.
Executive memberships are driving higher sales at Costco
Costco also offers an executive membership to existing Gold Star and Business members at an additional $55 a year plus an upgrade fee. Executive members get 2% cash back on select purchases, subject to a maximum of $750. Executive members tend to shop a lot more at Costco. They’re vital to the company’s sales growth. Although they make up ~39% of Costco’s membership base, they account for nearly two-thirds of the company’s sales.
Paid memberships at Costco have grown at a CAGR (compounded annual growth rate) of 7.1% over the past five years to 44.6 million last fiscal year. Costco also has a high membership renewal rate. More importantly, the company has been able to steadily increase the renewal rate in the US and Canada from 88% in fiscal 2010 to 91% in fiscal 2015. Globally, the renewal rate has risen from 86% in fiscal 2011 to 88% in fiscal 2015.
An increasing rate of Costco’s membership loyalty is a positive indicator for the company’s growth, particularly in an environment of cutthroat competition among retailers, and the increasing influence of online retailers. That said, Costco is also enhancing its online capabilities. We’ll discuss the company’s performance in the online channel in part 12 of this series.
Walmart’s (WMT) Sam’s Club also operates on a membership basis. Business and savings memberships cost $45 per year. Walmart also offers Plus memberships for $100 annually. Plus members are eligible for $10 of cash rewards for every $500 spent, up to a maximum of $500 annually.
BJ’s Wholesale Club offers personal and business memberships at $50 a year and Perks Rewards memberships (which offer 2% cash back on most purchases) at $100 a year.