Costco’s new membership rule could have a major domino effect
According to The Street, If you’ve been planning to shop at Costco using your partner’s membership card, you might want to think twice. The retail giant is tightening its entry rules to prevent non-members from accessing the warehouse. Costco (COST) is introducing a new system aimed at curbing the use of membership cards by unauthorized individuals.
In a statement released in August, Costco announced that membership scanning devices will soon be installed at the entrances of its warehouses. “Once deployed, all members must scan their physical or digital membership card by placing the barcode or QR Code against the scanner before entering,” the company said. With these stricter measures, shoppers will either need their own membership or must be accompanied by a paying member to gain entry.
The Iconic Hotdog and Value Proposition
While many might think of Costco primarily for its membership benefits, it’s not just about the iconic $1.50 hotdog and soda combo. This meal deal has become synonymous with Costco’s commitment to value, particularly as prices rise amid inflation. The company has successfully reduced prices on several private-label products in recent months, reinforcing its image as a low-cost retailer.
Retaining members is crucial for Costco, and maintaining competitive pricing plays a significant role in this strategy. The company understands that loyalty hinges on keeping prices low, which is vital for sustaining membership.
Financial Performance and Membership Fee Adjustments
Last month, Costco reported strong earnings for its fiscal fourth quarter, posting earnings of $5.29 per share, surpassing analysts’ expectations of $5.08. However, while revenue reached $79.7 billion, it fell short of the anticipated $79.9 billion. Same-store sales—a critical metric—rose by 5.4% year-over-year but missed the expected 5.7% growth.
Membership fees are a significant contributor to Costco’s profits, with revenue from these fees reaching $4.8 billion in fiscal 2024, accounting for approximately 65% of the company’s net income. As of September 1, Costco implemented its first membership fee increase since 2017, although the new fee structure only slightly impacted overall revenue.
Attracting Younger Customers for Sustainable Growth
Costco is also seeing an influx of younger customers, signaling potential for sustainable growth from membership fees. As of the end of Q4, the company had 76.2 million paid household members, up 7.3% from the previous year, and a total of 136.8 million cardholders, reflecting a 7% year-over-year increase. Notably, about half of the new member sign-ups in fiscal year 2024 were under 40, a trend that has emerged since the COVID-19 pandemic and has contributed to a decrease in the average age of its membership base.
Positive Membership Growth Post-Scanner Rollout
Morgan Stanley’s channel checks indicate that Costco’s membership counts are rising by low double digits at select locations following the introduction of the scanning devices. This growth is largely attributed to strong conversion rates among previously non-paying customers. While the firm has not yet adjusted its estimates, it anticipates that faster membership growth could be a potential upside for Costco’s future.
Morgan Stanley compares Costco’s membership crackdown to Netflix’s approach to password sharing, which significantly increased subscriptions. After experiencing slow membership growth in 2022, Netflix saw its paying members soar from 231 million in December 2022 to 283 million following its crackdown.
Whether Costco will experience a similar surge in memberships remains to be seen. However, Morgan Stanley maintains an overweight rating on Costco shares with a price target of $950, noting that the stock closed at $899.17 on October 23, reflecting a 36% increase year-to-date.
