Costco’s business model differs from other retailers in that the store gets a large percentage of its revenue from membership fees.
While rival Sam’s Club charges $50 a year for its standard membership and $110 a year for its Plus membership, Costco’s fees are higher.
Following a fee hike in September 2024, a basic Gold membership at Costco costs $65 a year, while an Executive membership costs $130. Costco’s September increase marked the first fee hike in more than seven years.
Unlike Sam’s Club, Costco also doesn’t discount membership fees on promotion. Instead, Costco collects fees in full but uses that money to improve the customer experience.
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Costco also invests strongly in its employees, and it recently made a big change to that effect. But that change could stall the warehouse club giant’s growth at a time when its costs are up broadly.
Costco is facing higher costs in one key area.
Costco responds to pressure, raises wages
Earlier this year, Costco made the decision to raise worker pay as Teamsters union members threatened a strike.
During the company’s recent earnings call with analysts, Chief Executive Ron Vachris said top wages for U.S. employees would rise by $1 to $31.90 an hour, with the average U.S. employee earning a little more than $31 an hour when factoring in bonuses.
But even before that increase Costco’s hourly pay was among the most generous in the retail space. And the reason is that investing in employees is part of Costco’s code of ethics.
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A higher hourly rate is what drives employees to stick with Costco rather than job hop. And less turnover means more efficient operations.
Costco is also known to promote workers from within, which serves as added incentives for employees to remain loyal.
The company’s benefits package includes health insurance with low out-of-pocket premiums and copays, vision benefits, paid time off, disability insurance, and access to a 401(k) plan.
Costco also regularly invests in employee development programs, so workers can climb the ranks.
Costco wage hike could hinder its growth
Costco’s investment in higher wages aligns with the company’s brand. But when costs are generally elevated due to sticky inflation, the company will need to find ways to compensate.
During the company’s March earnings call, Chief Financial Officer Gary Millerchip said Costco’s new pay structure could hurt its bottom line.
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“While there was no impact in Q2, we estimate that this will create a headwind,” he said.
Asked on the call about mitigating increased labor costs, Millerchip said the Issaquah, Wash., company would “continue to find ways to be more efficient because we are committed to continue to invest in our employees.”
Millerchip also said the company would seek to compensate for its investment in higher wages by “being more highly productive and finding ways to fund those through labor productivity and continuous improvement.”
Alternative membership approach at Costco?
But inflation is tightening retailers’ profit margins and consumers’ budgets, and Costco might need to consider shifting gears to make up for its higher wage expenses.
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Millerchip noted on the March call that customers might become even “more choiceful as the impact of some return of inflation and the potential impact of tariffs could flow through as well.”
Although Costco has never offered discounted or promotional memberships, now might be the time to step outside that box.
Offering promotional rates could generate more revenue from membership fees and bring more customers in the door.
As it is, Costco’s recent decision to enforce a members-only policy at its food courts limits the number of nonmembers who enter the stores.
Making memberships more accessible to budget-conscious consumers could help boost sales and enable it to continue investing in employees without disappointing investors or raising prices.
The author owns shares of Costco.
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