Costco shoppers are increasingly paying twice as much for membership, and the warehouse giant says it’s because the extra perks now offer enough value to justify the higher price.
The warehouse club‘s members are driven by value and data shows that the chain delivers, according to a study commissioned by Consumer Reports and conducted by Strategic Resource Group (SRG) in February.
“When SRG compared prices on baskets of commonly purchased items at mainstream grocery chains in six regionally representative cities across the U.S., the difference between the highest- and lowest-priced in each city was more than 33%. And when the comparison included the warehouse clubs like Costco and specialty grocers like Whole Foods, the price differences were even more significant,” the data showed.
The study used Walmart as the baseline, and Costco came in with the lowest prices, 2.14% below the retail giant and well below discount supermarkets Lidl (-8.5%) and Aldi (-8.3%).
Costco, however, shared in its third-quarter earnings call that both new members and existing members are opting to make a change that saves them even more money.
Costco’s Executive membership has a catch
Costco sells two kinds of membership. Gold members pay $65 and get access to the chain’s warehouse clubs, gas stations, and website.
Executive members pay twice the price, $130 per year, but get some additional perks, including:
- Added discounts on insurance and other services purchased through Costco
- 2% cash back on most Costco purchases up to $1,250 a year
- Early shopping hours
In theory, the Costco Executive membership pays for itself, but that’s not a level of spending I ever reached as a Costco member. So, while I paid for the higher membership class for years, I actually lost money on the deal, which adds to Costco’s bottom line.
For the Costco Executive membership to pay for itself, you need to spend $3,250 annually (about $271 a month) on eligible purchases to earn $65 in rewards and break even.
Related: History of Costco: Company timeline and facts
Membership drives Costco’s profits
“Costco’s membership fees contributed some 72% to its operating income last year,” according to Retail Dive.
That makes gaining and retaining members the company’s most important business metric.
Executive memberships matter because they generate higher annual fee revenue while encouraging members to consolidate more of their household spending at Costco to maximize the 2% annual reward.
In the third quarter, the warehouse club reported membership fee income of $1.373 billion, an increase of $133 million or 10.7% year over year. Adjusting for FX, the increase was 9.9%, according to CFO Gary Millerchip, speaking during the company’s Q3 earnings.
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The chain’s September 2024 U.S. and Canada membership-fee increase accounted for a little more than a quarter of membership income growth. Excluding the membership fee increase and FX, membership income grew 7% year over year.
“This was driven by continued growth in our membership base and upgrades to Executive Memberships. At Q3 end, we had 41.2 million paid Executive Memberships, up 9.6% versus last year,” Millerchip shared.
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Costco sees a membership change
The CFO fielded a question from BofA Securities Research Division’s Christopher Nardone during the Q3 earnings call.
“So, on the Executive Membership strength relative to recent trends, are you seeing more customers trade up from Gold into Executive? Or is the recent strength more driven by new customers choosing the higher-tier membership?” he asked.
Millerchip was direct in his answer.
“On the Executive membership, it’s a combination of both. So we’re definitely seeing an increase in membership upgrades from Gold membership, but we’re also seeing a higher penetration of new members signing up for Executive membership with the extra benefits that we offered, particularly the extended opening hours and the $10 per month on Instacart if you spend over a certain level,” he said.
Costco wants Executive members
In addition to opening its stores an hour early for Executive members every day except Saturday, when it’s only a half hour, the chain recently added the delivery benefit Millerchip mentioned.
The new benefit gives Executive members one $10 credit per month on orders of $150 or more on either Instacart or Costco Same-Day Delivery.
“To use your credit, just place an order through either platform, and it’ll get applied automatically. The $10 credit expires at the end of each month and won’t roll over to the following month. But fear not, because that credit renews automatically on the first of each month,” wrote TheStreet’s Maurie Backman.
The expanded hours aren’t just about adding a perk for members. They also help to spread out traffic at the chain’s busiest locations.
“Costco is currently facing a unique real estate crisis: their stores are simply making too much money. Once a specific warehouse hits $300 million to $400 million in annual volume, the parking lot completely maxes out, and shoppers actively stay away on weekends,” RTMNexus CEO Dominick Miserandino told TheStreet.
Miserandino also shared that Costco members see the long-term value of spending more upfront for the pricier Executive membership.
“Consumers today are incredibly smart and they are doing the upfront math. They know they are going to spend an absolute fortune on basic groceries, gas, and household essentials anyway. By buying the premium membership immediately, they are intentionally locking themselves into that 2% cash-back reward program just to claw back the exact pain they feel at the checkout counter,” he added.
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