Topping retail headlines last week was the rumor that Costco Wholesale Corporation (COST) would soon up its membership fees by $5 to $10 in late 2016 or early 2017. Shoppers looking to save money are soon going to have to pay more each year for the opportunity to enter Costco’s 703 warehouses worldwide.
Whenever subscription-based fees go up, the business media routinely questions what the overall effect will be for the members who pay those fees. It’s only human nature. And the same applies for investors.
So now that the cat’s out of the bag, investors will question how that projected 10% fee hike will affect business — will it barely register a blip on the radar, or will Costco shoppers switch to competitors in droves? The answer could mean the difference between selling COST, holding it or buying more shares.
If history is any indication, it won’t be bad for business as Costco tends to raise its fees every five or six years. Whether it will turn out fruitful is simply a matter of conviction based on past results.
What the Price Hike Means for Costco
Costco last announced a price hike on October 5, 2011, when it raised its annual membership fees from $50 to $55 and $100 to $110, respectively. At the same time, it delivered fourth-quarter earnings that, while solid, came in shy of analyst expectations.
COST stock buckled in the days after the dual announcements, losing a couple of bucks before bouncing back, finishing the month slightly ahead of where it started.
However, the price increase itself took effect November 1, 2011. It would take several quarters to understand what, if any, affect the price increase had on retaining and obtaining customers. According to Costco’s Q4 2011 press release, the 2011 price increase affected approximately 22 million members, more than half of which were Executive Members paying the higher $100 fee. That’s out of approximately 35 million primary cardholders worldwide.
Why the difference? The fee increase didn’t include its stores outside Canada and the U.S. At the time, there were 80 stores in six other countries, including Mexico and the UK.
In Costco’s 2012 10-K it reported an 89.7% renewal rate in the U.S. and Canada, which it described as “consistent” with recent years. In 2013 and 2011, its renewal rate was 90% and 89%, respectively. The 2013 number suggest the price increase had no effect on retaining memberships.
The big question, then, is the effect on new memberships. For that, you just need to do a little math.
Costco finished 2011 with 35.3 million primary cardholders. Approximately 89.7% of those renewed their memberships in 2012, suggesting it would have finished 2012 with 31.66 million members had it not added new ones. In 2012, it lost 3.64 million members and gained 5.24 million for a net increase of 1.6 million, or 4.5%.
It finished 2012 with 36.9 million primary cardholders. With a 90% retention rate in 2013, it would have finished 2013 with 33.21 million members had it not added new ones. So, in 2013, it lost 3.69 million members and gained 5.79 million for a net increase of 2.1 million, or 5.7%.
So should investors be worried about the upcoming fee increase?
History suggests not in the slightest: In the two years following the 2011 price increase Costco stock gained 28% in 2012 and 22% in 2013.
Should you be buying COST stock?
Down 6% year-to-date, I’d say now’s as good a time as any.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
