Costco Wholesale is a retail company. ( COST 1.70% ) This retail stock is quite simple and does not have the excitement and allure of technology stocks. However, it has consistently outperformed the market for many years. Recently, the warehouse giant has been experiencing a series of eventful and fast-paced developments.
The latest update is about implementing stricter measures against non-members entering the store. Let’s delve into the recent developments at Costco and determine if this is a cause for concern.
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Staying current with Costco
Costco has been quite busy lately. Here is a timeline of important occurrences at Costco in recent months, listed in order of when they happened.
- Craig Jelinek resigned from the position of CEO , and Ron Vachris assumed control.
- Costco distributed a special dividend of $15.
- The Chief Financial Officer Richard Galanti resigned, and Gary Millerchip assumed the position.
- Costco revealed the long-awaited increase in its membership fees.
The most recent addition to the list is Costco’s announcement on its website that they are implementing card scanners at all their stores to prevent the sharing of memberships.
The way Costco generates revenue
Costco’s membership is a crucial aspect of its business model. Customers pay $60 each year for the opportunity to shop at Costco’s stores, but starting in September, the fee will increase to $65 for a regular membership and $130 for an executive membership.
Costco offers products with minimal markups and maintains its warehouses at a low cost to ensure that prices cover expenses. The company primarily generates revenue from the sale of memberships, and it focuses on delivering value to members to drive high volume sales.
To illustrate, here is what occurred during the fiscal third quarter, which concluded on May 12th: Revenue amounted to $58.5 billion, with $1.1 billion attributed to membership fees. The gross margin stood at 10.8%. , with a net profit of $1.7 billion.
It is understandable why the company would find it necessary to enforce strict rules regarding sharing memberships. What is the reason behind the abrupt announcement?
One change leads to another change.
If you are a Costco shopper, you are aware that Costco has procedures to prevent non-members from entering. A membership card must be presented both when entering the store and at the checkout.
Despite being perceived as simple and perhaps unexciting, Costco is not outdated or uninteresting. The company has shown significant growth in e-commerce, with a nearly 21% increase in the third quarter. Additionally, Costco has introduced self-checkout counters in numerous stores, allowing non-members to shop and pay for their items without needing a membership at the entrance.
Management acknowledged that membership sharing had risen during the pandemic, but they were lenient in enforcing the regulations when customers were facing significant stress. Nevertheless, the occurrence of membership sharing has escalated further now that the store has introduced self-checkout stations, eliminating the need for shoppers to present their membership cards to a cashier.
The former CEO, Rochard Galanti, mentioned in March that management addressed member complaints by strengthening their procedures. He explained that in a trial initiative to prevent sharing of memberships, Costco was gaining more revenue from acquiring new members compared to the revenue lost from rejecting non-members. However, he emphasized that the main concern was maintaining proper management practices.
Does this raise a concern?
This is not a new development as it has been undergoing testing in specific areas for several months. The latest update is that it will now be implemented across all locations.
Costco does not seem to be engaging in this for financial reasons as their membership and renewal numbers remain robust. Both the U.S. and Canada saw a slight uptick in renewal rates to 93% in the third quarter, with a 7.8% increase in paid household members compared to the previous year.
According to Galanti, it is probable that Costco is implementing these changes in order to ensure efficient operations and deliver benefits to its members. The reorganization may also be linked to the recent shift in leadership, with Vachris, a long-time Costco employee, and Millerchip, who previously served as CFO. Kroger It wouldn’t be unexpected to observe them implementing a few modifications.
Costco has been keeping investors alert in recent months, so investors should remain vigilant. However, Costco is known for its stability and dependability, so this may turn out to be more sensational than significant.
