Should A Membership Fee Hike By Costco Concern Its Shareholders?

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In a report issued after a meeting with Costco‘s (NYSE:COST)   executives, UBS analysts stated that ‘conditions are in place’ for the company to increase its annual membership fee early next year. The previous hike in Costco’s membership fee was in November 2011 and the company typically increases the fees every five to six years. UBS analysts expect that the increase will be in the range of $5-$10. With a high membership renewal rate ranging between 85-90% annually and a steadily increasing member base, Costco’s membership fee hike should not have any negative impact on the company’s revenues. For its target audience of affluent consumers who can pay a high membership fees and buy in bulk, a 10% fee hike after six years should not impact membership renewals. Also, the company should see an uptick in new members after its switch to Visa from American Express cards. (Read Can Costco Attract Customers With Its New Partnership With Visa?) As the company works on several initiatives to provide value to its members, the hike in fees should not negatively impact its membership growth.

Costco Continues To Provide Value To Its Members

Costco’s member-based business model thrives on loyalty and growth of its memberships. The company is continuing to work on initiatives to provide the best quality of products at the lowest possible prices to its members, thus justifying the high membership fee. Recently the company started working with farmers to help them buy land and equipment to grow organic products, as the demand for organic foods has increased substantially in the U.S. (Read How Costco Is Focusing On Its Organic Food Supply?)  Costco is also steadily working on its e-commerce initiatives to increase the convenience of buying online for its consumers. The company’s attractive pricing of products and a limited product offering to suit its member’s requirements have worked well in the past and it continues to witness a steady growth its membership base. We expect Costco’s members to increase steadily in number from nearly 86 million in 2016 to around 105 million by the end of our forecast period.

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According to our estimates membership fees accounts for nearly 18% of Costco’s valuation and we expect its average membership fee per cardholder (globally) to increase steadily from $33 in 2016 to around $37 by the end of our forecast period.  An accelerated pace of increase can lead to an upside in our price estimate.

A membership fee hike in 2011 by Costco was not followed by any substantial decline in membership growth or loyalty and the renewal rate remained high. For the fiscal year 2012 (ended September 2012) the company’s membership renewal rates reached an all-time high of 90% in the U.S. and Canada and 86% on a worldwide basis. Membership fees in this fiscal year increased by 11% due to the fee hike and good sign ups at new warehouses.  For the fiscal year 2013, membership renewal rates remained the same as 2012 and membership fees increased by 10%, as the benefits of fee hike continued.

We believe if the company hikes its membership fees next year, it should not negatively impact Costco’s revenues or growth in members. The company enjoys customer confidence and consumers see value in Costco’s membership as the company’s initiatives to cut costs and pass the savings to consumers bear fruit.

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