Costco announced on Wednesday that it would be raising its annual membership fees by $5, to $65, for basic memberships and by $10, to $130, for executive memberships. As a result, customers started planning how to avoid the fee increases, even though many shoppers know it’s pointless to try to beat the warehouse store.
To make up for the higher fees, many plans involve making better use of some of Costco’s COST, -0.11% most popular loss leaders. These are low-profit items that are meant to attract customers who will then buy other items that make the store money.
One Reddit user said, “I’ll eat 10 more hot dogs a year to make up for the extra $10 a year fee increase.”
Someone else wrote, “I will buy two more $5 chickens to make up for the price increase.”
“By buying two pizzas, I more than make up for this $10 price hike,” said someone else.
One person said that shoppers would “only” have to spend $6,500 a year, or $542 a month, to “fully recover the $130 exec membership costs.” This is because the annual 2% reward for executive members will go up from $1,000 to $1,250. Business Insider reported last year that the average Costco customer spends $3,000. That’s more than twice that amount.
A request for comment from Costco did not get a response right away.
A big part of Costco’s marketing plan is offering deals on rotisserie chicken and hot dogs from the food court. It kept the price of its hot dogs in the food court at $1.50 by making them itself. In 2019 it opened its own chicken farm and slaughterhouse to save money and keep the price of its rotisserie chickens at $4.99. The store keeps the prices of other items low by buying in bulk and selling its own brand, Kirkland Signature.
What some shoppers might not know, though, is that the membership fee is Costco’s most profitable item. In the last quarter, Costco made just under $1.7 billion in net income, up from $1.3 billion in the same quarter last year. “Without the $1.1 billion in membership fees,” Barron’s reported this week, the company’s profit would be less than $600 million.
People with higher incomes who shop at Costco often may still think the membership is a good deal even though the fees are going up. The last time the company raised the membership fee was in June 2017, when it went from $60 a year to $75. If you take inflation into account, $60 from seven years ago is worth $76.95 today.
A Costco member in Minneapolis named Megan Schwichtenberg told MarketWatch, “I am not the least bit upset about the fee increase because I am saving money on gas and groceries.” “It’s also fun to walk around the store because you never know what cool things you might find.”
On Thursday, gas at Costco stores in New York and New Jersey cost $3.21 to $3.33 per gallon, which is less than the national average of $3.54 per gallon.
Even so, some customers may still shop more to save more as an excuse for the rising costs of membership clubs like Costco, even though this usually means more sales for the company.
Michael Hershfield, CEO and founder of fintech platform Accrue, said, “Memberships are powerful tools for retailers to get upfront revenue from customers, which helps cover the costs of running the business, marketing, and more.” Some people who shop a lot might be willing to spend more to save more, but the big idea that you can save more by shopping there isn’t always true, he said.
Many people have written on social media that they left Costco in a daze after spending hundreds of dollars on things they didn’t need, like a sofa, a hot tub, a lit tent, and vitamin C retinol serum that “was on super sale.” This is despite going in with a strict grocery list of basic, low-cost necessities.
“Costco always costs more than planned.” “Broke it 100 feet into the door,” a shopper said on TikTok not long ago.
Schwichtenberg said she has never left Costco without buying something on the spot, and she has returned “frivolous items” right away after buying them. “Even if I only mean to get pizza and hot dogs at the food court, I always end up getting ice cream or churros instead,” she said. “And they melt on the 10 minute drive home.”
Tricia McKinnon, a retail consultant, says this is all on purpose.
Costco puts things like milk and salad at the back of the store on purpose so that you have to look at all the extra items first, she wrote on the blog for her company. “At the front of a Costco store, big-ticket items like electronics are often heavily discounted, which makes people buy them on the spot.” Do you really need that brand-new 70-inch TV?”
It will be interesting to see how people plan to spend the extra $5 or $10 they will soon be paying for memberships. Costco will make money from these higher annual fees. Wall Street experts think that the fee increases will help the business make more money and sell more over the next two years.
