[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.]
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,
For more information, and the full articles sited in this post:
- Source 1: http://beta.finance.yahoo.com/news/costco-4q-profit-climbs-hike-102338697.html
- Source 2: http://www.retailwire.com/discussion/15484/jim-sinegal-retiring-as-costco-ceo