The warehouse club usually raises this key fee every five-and-a-half years.
Warehouse clubs took on a position of importance during the pandemic. When some items were in short supply, Costco (COST) – Get Costco Wholesale Corporation Report and rival Walmart’s (WMT) – Get Walmart Inc. Report Sam’s Club became essential to people’s lives. Rather than simply being fun places to visits that offer really good deals, these chains became a lifeline selling items like toilet paper and paper towels that were in short supply.
The pandemic made warehouse clubs less fun. Sampling went away and people stopped shopping at Costco and Sam’s Club just to see what merchandise they might have. Covid, however, was very good for business. It helped Costco achieve both membership growth and a higher-than-normal level of retention, according to the warehouse club’s Senior Vice President of Finance speaking during Costco’s third-quarter earnings call.
In terms of renewal rates, we hit all-time highs. At Q3 end, our U.S. and Canada renewal rate was 92.3%, up 0.3% from the 12 weeks earlier at Q2 end. And the worldwide rate came in at 90% for the first time in company history, and that’s up 0.4% from what we reported at Q2 end. Renewal rates continue to benefit from the increased penetration of both auto renewals and more executive members and, in addition to that, higher first-year member renewal rates than what we have historically seen.
Renewals are incredibly important to the warehouse club which makes a significant portion of its profits from membership sales. Keeping and growing members is Costco’s core business and that happened during the third quarter.
In terms of member counts, number of member households, and cardholders at Q3 end, we ended Q3 with 64.4 million paid households and 116.6 million cardholders, both of those up over 6% compared to a year ago. At Q3 end, our paid executive memberships were 27.9 million, and that’s an increase of just about 800,000 during the 12 weeks since Q2 end. Executive members now represent over 43% of our member base and over 71% of our worldwide sales.
Scroll to Continue
Those numbers were very impressive and the chain has grown its customer base steadily during the pandemic.
Nelson also answered the question that has been hanging over Costco for a few quarters, or at least he addressed it. The executive, who was filling in for CFO Richard Galanti who was on vacation, talked about the chain’s plans to raise membership fees.
“Now before I move on, I want to take just a minute and address the question that we’ve been getting a lot recently regarding the timing of the potential membership fee increase. Historically, we’ve raised fees every five to six years, with the last three increases coming, on average, at about the five-and-a-half-year time frame and our last increase coming in June of 2017. As we approach this five-and-a-half-year mark, there will be more discussions with Craig, Ron, and the executive team,” he said.
That’s not a direct answer, but Nelson made it clear that while the timing was right for an increase, the market conditions are not.
“But for today, we have nothing more specific to report in terms of timing,” he said. “In addition, given the current macro environment, the historically high inflation, and the burden it’s having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time. We will let you know, however, when that changes.”
Essentially, Nelson said that the chain would normally raise its membership fees but the current economic climate makes doing so a bad idea. That’s a small respite for customers who are facing significant economic pressures in other areas of their lives.