Consumers, Retailers crowed Costco’s Low-price niche

Since opening its first warehouse store in Seattle 40 years ago, Costco has never wavered from its mission “to continually provide our members with quality goods and services at the lowest possible prices.”

But while that mantra and ethos has served the warehouse giant well for decades, its low-priced corner of the market has gotten increasingly competitive this past year, as rampant inflation and economic uncertainty have sent both cash-strapped consumers and overstocked retail rivals rushing into its space.

Whether it is increasingly diverse and nimble grocery stores trying to outhustle them, big-box stores and eCommerce players promising faster and more perks, traditional mass market brands getting more aggressive with promotions or a well-armed attack from dollar stores and discounters, Costco’s model, mission and value proposition are under fire.

“The last couple of years, given shortages in electronics, … the industry saw a lot less promotional activity being offered by retailers,” Costco Chief Financial Officer Richard Galanti told investors on the company’s fiscal fourth-quarter and full year earnings call Thursday evening (Sept 22). “There was no need to do that, but we’re starting to see some of those promotional activities come back.”

While light on digital details for the quarter and full year, Galanti said eCommerce sales rose 8.4% for the quarter, excluding foreign exchange, noting particular strength in tires, lawn, patio and garden, prescription pharmacy and health and beauty aids.

Ultimately, one of the best measures of Costco’s ability to communicate its value proposition to new and existing customers can be seen in its membership metrics, and the number of customers willing to pay $60 to $120 per year for the right to shop in its over 800 warehouse stores.

According to Galanti, membership fee income was $1.3 billion dollars, up $93 million or 7.5% in Q4, with a renewal rate hitting an all-time high of 92.6% in the United States and Canada, and 90.4% worldwide.

More lucrative executive memberships totaled 29.1 million at the end of Q4, “an increase of 1.2 million or 74,000 per week” since the end of Q3 Galanti said, noting that these members have higher spending and clout, and they now represent over 44% of Costco’s members and nearly 72% of worldwide sales.

As far as long-simmering speculation on when Costco’s annual member ship fees might make their own inflationary adjustment, Galanti offered little fresh insight.

“There are no specific plans regarding a fee increase at this time,” he said, but he noted that Costco has historically raised membership fees every 5.5 years, and that 2023 will mark five years since the last fee increase.

In July, Costco CEO Craig Jelinek said it was “not the right time” for the retailer to consider price increases in membership fees.

He said the strength of U.S. consumers was “not so bad,” when facing inflation, a tightening labor market, ongoing supply chain issues and the potential of a looming economic recession, which could lead to “huge amounts of inventory” across Costco stores.

To keep pace with the faster delivery race between major retailers, Galanti said Thursday that Costco is continuing to transition from a vendor drop ship to direct ship from our own inventory, particularly when it involves big and bulky items.

“Overall, this lowers the cost of the merchandise, improves delivery times and service levels to our members,” he said.

And finally, one other growth barometer that investors and analysts track is Costco’s ongoing store count expansion, which saw the retailer open 23 new locations in the past year, and nine in the past three months, including five stores in the U.S., two in Canada and one each in Korea in Japan.

Next year, Galanti said, Costco expects to bump that pace a bit, planning 25 new store openings, of which 15 will be in the U.S. and 10 others will be spread out internationally, including first-time locations in New Zealand and Sweden, and its third and fourth locations in China.

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