Guest Post: Costco Announces Membership Fee Hike

October 6th, 2011 · 16 Comments

[As you may have heard already, Costco announced yesterday that they will be raising individual and business memberships by 10%.  They’ve had good earnings, surprisingly good in comparison to other retailers, but despite that memberships are on the way up.  So, today’s guest post is one members take on what the reasons are for the hike, or aren’t, and his thoughts on the change.  I’d love to hear everyone else’s thoughts as well.]

Costco membership fees to go up by 10%

According to the Associated Press, despite Costco announcing a 12% increase in profits for the year, members may be shocked to hear that all U.S. (and Canadian Business) membership fees are going up by 10%, effective November 1 (Source 1). In the article, Costco blames the increase on the price of goods as the impetus for higher membership fees.  But that doesn’t make sense because the same article points out that Costco recently re-valued their entire inventory. On a personal level, I’ve seen price increases all over the store, especially in the meat department and at the gas pump. So what’s the true reason for the increased membership fees? Greedy investors and a greedy successor.

Jim Sinegal, co-founder and CEO of Costco, had a reputation of putting his employees and customers ahead of profits. Unlike his counterparts in retail, who greedily counted every penny, Sinegal managed to grow Costco tremendously, while keeping prices reasonable (instituting a maximum profit margin of 14-15%, and maintaining the ever-persistent $1.50 hot dog combo), and treating his employees fairly. On September 1, 2011, though, Jim Sinegal announced his retirement, and succession by Craig Jelinek (Source 2).

Only one month after this announcement, 10% membership price hikes are now formally announced. Raising membership fees increases profit with no inventory or up front cost, and will surely help the stock prices. But profits are already up 12% this year, and there is no evidence that the increased membership fees are being used to offset inventory prices (which are adjusted with the market; see above) or to grow the company. This leads to the conclusion that the incoming CEO,  Jelinek, is capitulating to the board of directors, who all stand to personally profit through their shares of stock by this increase in revenue. This is something Sinegal managed to avoid for years.

I warn fellow Costco members that this is just the beginning; I would not be surprised if Jelinek makes other mistakes, such as allowing for higher margins on items. I also urge you to voice your opinion with your wallet; skip the Executive membership next year, or consider Sam’s Club. I also warn any Costco executives who may see this that it may backfire, by pointing to Netflix. Since their recently announced membership increase took effect on September 1, their stock has dropped 50% in value.

Thanks for your time,
Mike Pirone
Arizona

For more information, and the full articles sited in this post:

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16 Responses so far ↓

  1. 1 David // 2011.11.14 at 11:22 pm

    There’s absolutely no way I’ll cancel my executive membership over a $10 increase. The increase of the rebate to $750 is great news. If the possibility of poorer quality and/or customer service is a concern, then I’ll cross that bridge when it happens.

    As it is, I purchase as much as possible at Costco because it’s great value, and risk free (given the return policy). If the quality doesn’t live up to my standards, I’ll either shop less or leave, but not until then.

    I assume you’ve canceled your membership?

  2. 2 What do I Think About the Increase in Membership Fees | Addicted To Costco! // 2011.10.25 at 6:00 am

    […] a couple of weeks ago, I published a Guest Post that discussed the rising membership rates for Costco.  I enjoyed reading everyone’s opinions and thoughts on the situation.  But I never shared […]

  3. 3 Brian.A // 2011.10.16 at 11:00 pm

    I am a different Brian who posted 2 days ago.
    I have been a Costco member for over 15 years. I have often marveled at how the Costco creators have been able to prod so many of us to PAY to shop in their warehouses. But for me, it is perfectly logical to be a member of Costco. I have an executive business membership, thus receiving the maximum allowed return of $500 due to the purchases I make. Deducting the $100 for my membership, Costco actually PAYS ME $400 per year to shop in their warehouses. Added to that the hundreds of thousands of American Express points I receive each year by using my American Express Platinum card for my business and personal purchases and the cash back on my Costco True Earnings American Express Card, Costco is an absolutely wonderful personal and business opportunity for me, my family and my business partners. Out of all the depatments within Costco, their membership program is the most profitable, as the only real expense to it is the minimal labor that has to be thrown at it to manage it. Being a Costco member only works, economically for individuals, if what they buy from Costco saves them at least the membership fees. If it doesn’t, then it is simply an individual choice whether to be a member or not. At the very least, think of the cost to eat in the food court. I can feed my family of 5 quite nicely for $12. Sometimes a bit more, sometimes a bit less, depending on what we get at any individual visit. Since we, as a family, enjoy the personal experience of shopping at Costco and then hitting the food court, if we “eat out” once a week at Costco instead of going to McDonalds, or Wendy’s or any other “fast food” joint, conservatively I save ANOTHER $500 bucks or more over other fast food. Costco simply makes sense for us. I may or may not be the exception, but I won’t balk at a membership increase as Costco is far to personally profitable for me.

  4. 4 Hyun // 2011.10.15 at 11:07 pm

    Hi!
    I’m using an international membership. My membership started in Korea, and I still use it in the usa. When I first came to the usa, I was glad to hear that we can use it worldwide. I was amazed by that and used it for 1 year and half. Today I went to Costco to shop, and asked for a coupon book. They said no more coupon book for an international membership. I guess new owner increases membership, and block international membership partly. Next I checked gas price. Normally it is 10 cents cheaper than other gas stations. Today’s price was same with the gas station in my neighborhood. I’m losing my interest in Costco.

  5. 5 Brian // 2011.10.14 at 5:30 pm

    I am wondering what “membership fees” are really for. Shannon, Matt, Mike, etc… what is the official reason? Are membership fees solely for the purpose to allow shopping (questionable) or for the company’s source of profit? Is the fee ‘necessary’ for the continued operation of the business? Is Costco’s reasoning for fees the same as Sam’s Club’s or other such, like BJ’s?

    I used to be a member of Costco myself, but since I buy little, I can’t justify paying someone (this case Costco) a fee to shop with them. If the fee is their sole or even primary source of operation expense and profit, then I can accept it. If it’s just additional revenue to those, like myself, who don’t buy much, then I am against it.

    The same goes with this increase… no? Is the increase just more money for profits – or – to justify expenses (such as operational cost)? Since I don’t know the answer, I won’t assume anything. Maybe someone can help me with the understand of the real reason, the “official” reason, for “membership fees.”

    Shannon, I have to say your reasoning falls apart upon a little reflections. I too am a part of a large operation that is EXTREMELY affected on fuel prices (imagine farming with several tractors and the trucking industry). While we may not be as big as Costco, ratio is ratio, and logic follows the same. I am glad you are sentimental about your co-workers… but retailers add a point basis to cost, and when your costs go up, so does your prices, thus profits. If your markup basis is 15% (???), I am sure you would rather have that on a $20 ham than a $10 ham… thus making $3 instead of $1.50. Inflation can be seen as a good thing, no? We were able to get the price of corn to inflate 87% because we too have increased expenses.. lol.. and it didn’t hurt us in the least bit.. in fact, we are doing better now than ever.

    Point basis are like taxes.. which are amusingly deceptive. Growing up, I paid 3% sales tax. If a chair cost $20 then, I gave the retailer 60 cents more, for a total of $20.60. Today, because of inflation, that same chair would cost $60, and at 3%, my taxes would have increased proportionally to $1.80, thus govt. having $1.20 more to spend. However, they raised the tax, or point basis, to 9%, so the chair’s tax is now ($60 x .09) $5.40. So, Mike’s question is really valid… will an increase in price/point basis be coming next, to Sinegel’s blessing or not?

    The increase profit thing falls on its own face. Saying our profits increase 12% means nothing on its own. I made a $1 profit last year, but this year I will make $5. wow, I make a 500% increase in profits. I.E… I made $4 more… big whip. Question is, did you make your basis points? did you clear the 10% you were shooting for? If you had $5 billion in sales/revenue, and you made .5 billion in profit, you made your 10%. Stockholders should be happy, no?

    This is important when considering the fee increase, as Mike points out. If the membership fee is what is needed to cover operational expenses, like employees’ salaries, then it’s understandable, acceptable, agreeable – or what ever term you want to use. If it’s just to increase profits above and beyond the made point basis, then Mike would be right, no? If the points weren’t made, and then fee increase to keep the company afloat, then that would be understandable also.

    So, I ask, why do Costco/Sam’s club/BJ and all these Membership Clubs charge a fee to shop with them? Sam’s Club admits that it’s “enables us to carry less operating overhead.” (http://samsclubanswercenter.custhelp.com/app/answers/detail/a_id/241/kw/membership%20reason) What is Costco’s reason?

    I am not trying to step on anyone’s toes, and I support having administrators you care about, rather they are “greedy” or not.. lol. Bottom line, everyone will have to decide when fees are appropriate or not, including Netflix, Costco, BOA, etc.

    (I found this site doing a google search, and thanks for making it possible to make comments. I need to know why membership fees are charged to compare with other similar fees that are taxed.)

  6. 6 TampaSlim // 2011.10.13 at 6:19 pm

    Lately I have:

    1 – Kicked Netflix to the curb because they increased fees 60% and CEO Reed Hastings was extremely arrogant towards membership. He later recanted but it was too late for me. Was it about the $6? No! It was about the way it was delivered to me that made me search (successfully I might add) for other services. It was disposable income for me, I’ll write more and read a book. I made the right decision for me. Netflix is tumbling and stumbling as a company and will never be the Wall Street darling they once were.

    2 – Bank of America came next. They irritated me by announcing that they are (in 2012) going to charge me to use my own money with my debit card anytime I use it. So I closed (am in the process of) my BOA account (which I have had since 1993 btw) to a local Credit Union who was more than happy to work with me and treated me very nicely. It was and is a hassle to move everything, but I’d had enough of BOA. Again was it the $5 or was it the way I as a customer was treated? The later obviously since I’d hung in there with BOA earlier through other issues. Again I made the right decision for me. It remains to be seen the damage this movement will cause with BOA but they are clearly suffering stock damage because of management snafus now.

    Now Costco:

    It should be noted that I’m a very conservative chap who doesn’t usually like change. I think politically and economically I’m not unlike many others who are this way. You might call me slightly Apathetic. But what has surprised me about myself lately the most, is the fact that I’m feeling very irritable and grouchy (with government, with businesses, with causes, with everything). I CHANGED in example #1&2 because I’d felt that enough was enough. I felt treated like crap!

    So Costco is increasing my executive membership fee $10 starting with my next renewal! I’m not happy to pay more in this bumbling economy. But in this example, I will probably stay with Costco and renew.

    But there is a warning for management however carefully couched inside my renewal. Don’t think that you can push or sacrifice membership for the sake of a bottom line, not in this economy we live in. People are razor-thin stressed out to the max and will cancel membership, no matter how good or wonderful your company is. If fees continue to rise, membership will fail to renew. Simple as that!

    So let’s just say -For now, I’m staying with Costco but hoping that they remember clearly the times we are living in, the stresses that their membership are under and to tread very gingerly with any fee increases passed on to membership.

    thanks for reading

    TS

  7. 7 Robin from Orlando // 2011.10.08 at 1:35 am

    I’ve listen to both sides, and have decided while the $5 does at first glance seem off-putting, in actuality, when dropping $50 – $100 a visit, it’s a drop in the bucket. It’s less than a tub of hummus.

    One other ‘expense’ that hasn’t been mentioned it employee salaries. They may not fluctuate with the market, but I’d like to believe that as other things become more expensive, salaries are keeping up with them.

    Now if membership rates keep going up every few years, than I might need to asses membership value, but for now I think it’s fair.

    As for Sams Club, there is no comparison between it as Costco.

  8. 8 Danita // 2011.10.07 at 1:27 pm

    I spend enough at Costco that my Executive membership rebate pays 80-85% of my membership cost. I appreciate all of the opinions and comments above, it gives a balance of opinions and advice. I don’t like the idea of the increase either, but I would never switch to Sam’s Club. I don’t shop at Walmart due to their business practices. I don’t like how they treat their employees or their vendors and the same is not true of Costco.

  9. 9 Mike Pirone // 2011.10.06 at 4:38 pm

    Hi Shannon, Thanks for taking the time to write a response. I do want to clarify an apparent misunderstanding. I was not complaining about the increased cost of goods inside the warehouse. I pointed to beef and fuel as examples of things that are adjusting with the market and I fully understand why the prices go up. This was meant as a contrast to the fact that the membership fee is not something that requires market adjustment.

    I point to this article about how Walmart is raising prices to appease shareholders, and it’s causing sales to drop (http://consumerist.com/2011/08/wal-mart-is-dying-because-its-a-self-strangling-weed.html). People flocked to Walmart for the lowest price, and there is no other reason to shop there, so now sales are declining. Costco is not in this position yet, because there are many reasons to shop there besides the low prices – Kirkland brand, the return policy, concierge service on electronics… But Costco has to be careful not to trust the investors and shareholders, instead of the employees and customers they have made their priority in the past.

    You say “Our profits are up because sales are up.” I’m saying that defends my position, because profits being up makes it hard to explain why the membership fee needs to go up. We are in an economic recession, so of course earnings aren’t what analysts expect. The fact that Costco managed 11% YTD profits in this market, with 10% unemployment, should be celebrated, not frowned upon and reacted to with a membership increase.

    On an aside, I think it’s great to see your enthusiasm as a Costco employee; knowing the employees are happy makes it so much easier to shop there — the same goes for Wegmans, a grocery store on the east coast I used to frequent.

  10. 10 Marie // 2011.10.06 at 3:52 pm

    Thank you Shannon. Was great to get your point of view as well. I’m not happy about the price increase either but it’s because I’m tightwad, not because I think Costco is taking advantage of me.

  11. 11 Shannon // 2011.10.06 at 2:16 pm

    After reading this rant, I am personally compelled to respond to some of the assumptions made above. For ethical reasons, I also feel it necessary to identify myself as a 12 year employee of Costco. This is my own personal opinion and I am in no way representing Costco Wholesale as a company.

    The first assumption made is that the fee increase was not blessed by Jim himself. Jim has announced his retirement as of January 2012 and will remain on the board until 2013. We see him regularly and remains just as involved now as he was six months or even two years ago. The fee increase is not an arbitrary decision made by Craig as a kowtow to “the greedy board of directors”. Craig is fully indoctrinated into Jim’s business philosophy and I personally am not remotely concerned that he will make sweeping changes in the way employees are treated or how Costco does business.

    You also point out that you have seen price increases at the gas pump and the meat department specifically, so I will address those concerns directly. Gasoline prices fluctuate based on oil prices which is a commodity. Period end. Costco does not have the ability to set pricing and keep it there. In fact, we turn over the gasoline in our tanks more often than most gas stations, so there are times that we actually lose money on gasoline because each delivery (many buildings receive two to three trucks a day) can fluctuate with the market while we hold pricing in line with the surrounding competition. In addition, price increases in the meat department can be driven by several factors. The most obvious is transportation. Diesel prices are up nearly $.80 a gallon across the country from this same time last year. (http://www.eia.gov/oog/info/wohdp/diesel.asp) One of the other major factors is another commodity, corn. Corn is used in the feeding of cattle and other livestock. Corn prices are up nearly 87% over last year (http://www.farmdoc.illinois.edu/manage/pricehistory/PriceHistory.asp). When it is more expensive to feed the livestock, the meat is more expensive to sell. I assure you that our margin structure has not changed and am confident that it will not change under our new leadership.

    I also want to point out the our 12% profit increase is bolstered by our International markets. We operate warehouses in Canada, Mexico, UK, Australia, Taiwan, Korea and Japan. Bringing our pricing philosophy to these markets has proven to be wildly successful. Comparable sales for the 16-week fiscal fourth quarter and the 52-week fiscal year 2011, including Mexico for
    last year and this year, were as follows: Total company 12% – 16 week and 10% – 52 week. The US Profits are 10% – 16 week and 7% – 52 week) Our profits are up because sales are up, but our margins have not changed. After all, we are here to make money and reward our shareholders after taking care of our members and our employees.

    The plan for the fee increase, ($.42 per month for Goldstar and $.83 per month for Executive) will help us cover the last 5 years of increases in our day to day operations such as the increased diesel charges for shipping product to our warehouses. It can also allow us to stave off any planned increases that our suppliers may be trying to pass along to Costco. In addition, we are also increasing the Executive membership rebate cap from $500 to $750 per year. Also, keep in mind that this fee increase goes into effect November 1st for new members and not until January 1st for membership renewals.

    As a long time employee, it is hard to see Jim go. He has been a fantastic leader and I have always held him in high regard. Craig Jelinek is also a great leader. He is in tune with his employees as Jim always has been. He believes in this company and holds the same values. I fully believe an am confident that he will continue to put the needs of our members and our employees before the desires of Wall Street.

  12. 12 Matt // 2011.10.06 at 1:43 pm

    Hi Mike – I get where you’re coming from. From the consumers perspective we walk in the front door and hand them $50/$100 (now $55/$110) for the “right” to shop in their store. We then buy things at a small percentage increase over their cost. So I can certainly see how someone would see the membership as an administrative cost, but that isn’t not how the business operates. For the 52 weeks ending Aug 28 Costco took in $1.8b in membership fees and had net profit of only $1.45b. Costco basically says, “Pay us $55/$110 for the right to buy items that we’re barely making money on, we’ll spend some money on building the business further, and give some to investors.” That is why I compared it to inflation, because it’s crucial to their profitability.

    I don’t think you’ll see the customer experience change much, it’s too central to the identity of the business. Costco has does an excellent job of sticking up for the average consumer while Jelinek was head of business operations. For instance, they’ve shunned Apple products from their warehouses because Apple wouldn’t allow them to lower margins on their goods. Simply put – Costco wanted to buy an iPod for $X and then sell it for $X+15%, that was too low for Apple so they backed out. I see that as Costco standing up for the consumer and putting their shareholders second. Same thing goes for their negotiations with Coke. I think it was a year or so ago that Coke products disappeared from the shelves for a few weeks. That was because Coke wanted their products to be sold at a higher price than Costco was comfortable with. They eventually worked out a deal and Coke is back, probably because Costco is the 3rd largest retailer in the US and Coke couldn’t easily give away that market share. The reason I point these out are because Jelinek played a key part in the decisions.

    I originally purchased Costco shares a few years ago because I liked shopping there. Since then I’ve listened to every earnings call and have researched Costco from an investor’s standpoint. Many Wall Street types aren’t a big fan of Costco because of their refusal to increase margins to drive profitability growth. Costco relies on keeping margins low and growing revenue through organic expansion (same store growth and new stores). I’m intrigued by how Jelinek will handle growing the business, keeping customers happy, and keeping investors happy. Will he increase margins? Will he continue Jim Senegal’s management style? Will the generous return policy change? All good questions that no one besides Costco’s BOD knows. I tend to agree that some things will change with Jim’s departure that are bad for the customer and good for investors. For example, he announced his retirement after the market closed on Aug 31 and the next day the stock jumped 1.8%, so investors are betting on some change that benefits them. I don’t think you’ll see a drastic change though. Jelinek has been the heir apparent for this job for years and has been with Sinegal for decades, so I would assume they’re like minded. Also – Sinegal will still be a member of the board of directors so his input will still be heard.

    Time shall tell!!

  13. 13 Mike Pirone // 2011.10.06 at 12:30 pm

    Matt, I am the author and I wanted to respond to your comment. First off, I love that your dog is named Kirkland; I’m a huge Costco fan myself and go multiple times in some weeks. But comparing the membership fee to inflation doesn’t really make me feel any better, because there is no need for the membership fee to go up with inflation. Membership costs are largely clerical, and whatever infrastructure is required to maintain that data would not go up in-line with inflation either. In addition, inflation affects the entire world, but only the U.S. (and Canadian Business) memberships are being adjusted.
    My point is that the timing is not a coincidence with the new leadership, and the fact that Costco missed analyst’s expectations. Under Sinegal’s leadership, customer service was the most important factor, not what the analysts expected of him. The leadership under Jelinek is already trending to to follow a more ‘typical’ publicly-traded company. And that is not good news for employees or members.

  14. 14 Emily @ Bentobloggy.com // 2011.10.06 at 11:08 am

    I’m not sure how I feel about the membership hikes (I have Executive…but they refund the difference if you don’t make that much back at the end of the membership period) but I don’t like how the prices across the board are increasing. That affects me more on a day-to-day basis.

  15. 15 joel // 2011.10.06 at 8:07 am

    Great post

  16. 16 Matt // 2011.10.06 at 7:47 am

    As a shareholder and Costco executive member/fan (I named my dog Kirkland!) I don’t see the issue. When you boil it down the majority of their profit comes from membership fees. The last time membership prices were increased was 2006, that’s 5 years of Costco trying to maintain profit expectications of Wall Street and keeping their Main Street customers happy, and I think they’ve done an incredible job of both.

    The 10% increase doesn’t bother me in the least, the rate is actually less than inflation. At 3% annually the membership fee should be $58. Good luck finding a business that can be profitable and at the same time refuse to increase retail profits margains.

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