The retail giant, Costco, is juggling to escape the impact of inflation that hits the United States (as well as the rest of the world) and that has exceeded 8% year-on-year in September 2022. In the fourth-quarter earnings call – the typical conference call between the top managers of a public company and members of the investment community, to discuss the performance of the business – the CFO, Richard Galanti, was asked about the rumors of a possible increase in the price in the annual membership.
Galanti replied that, with costs rising on all sides, it is possible that members should expect an increase in the coming year, but it will not necessarily happen in January. According to the financial head, the increase will be used to “add more value” for the customers, and that they will do everything in their hands to “to keep things simple”.
Will Costco memberships stay the same?
What Galanti said means that there are no plans to create additional types of memberships. The current ones are: Gold Star (basic, from $60) and the Executive ($120 with a 2% cash refund on most purchases, with a maximum of $1000 per year).
During the previous fiscal year, Costco generated $58 billions in sales from its stores, about a quarter of the total revenue of the conglomerate that has other business such as fuel vending and travels. According to Nasdaq, shareholders remain “alert” around the discussion due to the possible increase in the cost of memberships.
Now: Why does Costco charge you to be able to shop in its stores? According to the company, the membership fee allows “to offset many of our operating costs and reduce the price of merchandise,” And for this Issaquah (Washington) based retailer everything revolves around offering low prices.
To achieve this, there are two fundamental pillars in the business model: membership and selling items in bulk. Its focus is on driving high volume, which allows it to capture strong profits even with low margins. Their gross margins typically range from 11% to 12%, which are the lowest in the industry. Its gross margin was 10.2% in the last quarter.