August 04, 2004


A comment left by Ensie got me to thinking about Costco. Ensie, in commenting on my first post about Costco, said:

Actually, the Costco "Executive Membership" involves a cash back feature. I just signed up for my first Costco membership last week and had to tell three Costco employees, "NO, I DO NOT WANT TO UPGRADE. PLEASE STOP ASKING ME!" You're absolutely right that you won't save any money, unless you're spending millions at Costco each year. Which is pretty unlikely.

This got me to thinking about the actual impact of membership fees on Costco's revenue stream, so I followed the link I posted before back to their annual report for fiscal year 2002, and I poked around a bit. Annual reports can be fascinating reading and this one was no different.

First of all, membership has been growing for Costco at something like 2 million members a year at the most basic level. Sales increased 11%, to $38 billion, and earnings increased 16%, to $700 million, during FY2002. Those are some pretty big numbers and it is clear that membership statistics are an important component of earnings for Costco because they break out the membership fees as a separate item on their revenue breakdowns.

Executive members make up 1.75 million of their membership base. These people pay $100 for access to all sorts of useless stuff. Do the math, that's $175 million in fees alone each year for access to the right to spend more money on services. That is a hefty portion of the net earnings of 700 million right there (I have no way to subtract out the costs they attribute to executive level membership so I attribute none and that's probably artificial and wrong). There is a cash back feature of 2% of your purchases. But as Ensie points out, you have to spend a lot. How much? Well, you are limited, according to the report, to a maximum refund of $500. $500 is 2% of $25,000*. That's right, to get the max payback you'd have to shell out $25,000 yearly. And then they'd cut you off.

Costco had total revenue of $38,762,499 (that's billion) of which membership fees accounted for $769,406 (million). There was an increase from FY2001 of 17%, which is partially attributable to an increase in membership fees. The membership fees generally are 2.03% of sales. So, I was right to say that there must be some cost they assign to the membership fees, even if I can't find it. I mean, it stands to reason right? If membership fees accounted for $769,406 (million) and there were net earnings of $700 million, then clearly not all of the membership fees are straight profit. There must be some cost associated with the membership fees, like the salary for employees who do the sign ups, or the cost of printing up the cards, or other things I can't think of. They must lump it in under "selling, general, administrative" expenses which, for FY2002 was a hefty $3,575,536 (billion), but they don't seem to break it out enough for us to see what the membership program costs them, although they do note that this includes salary, health insurance and workers comp. Of course, they also don't break out how much more the executive level membership class pays for goods and services over the basic level, so we can't figure out if the class has a greater impact on the bottom line beyond simply the expanded fee.

So, what's the upshot? Well, seems to me that membership fee income is very important to Costco, which explains why that guy was soliciting people in line to upgrade, and that Ensie was right, you have to spend a lot of money to make any program like this worthwhile.

Oh, and Helen, the annual report claims to have had three openings in England. Looks like there could be a 20 gallon of jiffy in your future after all.

Let me add a small disclaimer, because while it seems obvious, you never know: nothing herein should be considered investment advice or a recommendation to purchase or sell securities. I am not qualified to make investment recommendations and I ain't doing so here. If you're taking investment advice from me, you're worse off than you might think!

*Math mistake caught by Mick. Thanks, Mick!

Posted by Random Penseur at August 4, 2004 09:36 AM

Dang. I was just about to call my broker until I read that last line. ;-)

Posted by: Jim at August 4, 2004 10:05 AM

Phew! That was a close one, Jim. I'm glad I put that disclaimer in! :)

Posted by: rp at August 4, 2004 10:09 AM

*ahem* I've been going to Costco for what must be ten years by now.

For the first 8 years, I paid $45 every year for the privilege of shopping in bulk and getting good deals on various items.

But for the last two years, we've been excecutive members. I now get a check once a year between $50-$100, depending on how much we spent that year.

Regular membership: $45.00
Executive membership: $100.00

As you can see, if I get a check for *anything* above the $45.00 I pay anyway, I've saved on my annual membership fee.

So I end up either getting my entire yearly membership paid for, if I get back $100, or at least I get my fee partially paid for.

Before, I was just out the $45.00 every year.

Plus, Executive membership hours are different. I can get in and shop before the vast unwashed hordes (read: you regular card holders *g*) are allowed to sully the premises. ;-P

So, it completely depends on how much you spend a year at Costco as to whether or not it would make sense for a family to get the Exec card or not. Obviously, if you don't spend several thousand a year there, it doesn't make sense.

We buy: all our paper products, including office products, all meat, bread, olive oil, soda, beer, fresh vegetables, DVDs, most Christmas gifts, wrapping paper, tuna, pasta, detergent, milk products, towels, socks, sheets, pharmaceuticals, outdoor furniture, appliances, books, etc., etc., at Costco whenever possible.

Oh, and gas for our two gas-guzzling cars, which is much cheaper than anywhere else.

FYI: did you know that the prices for meds at Costco are cheaper than most medical insurance companies have to offer?

So, before you write off the Exec card, make sure you don't buy enough anually to make it a pretty good idea. :-)

Posted by: Amber at August 4, 2004 01:54 PM

That's a great analysis, Amber, however, I don't agree with you that all you have to earn back is the $45. You're out the $45 regardless. Now, you're out an additional $55. To earn back that $100 fee you just spent to get that card, you'd have to spend $5,000 a year there, or $416 a month. That is probably a trip there almost every week. We don't have gas available at the ones near us in NY, which would help push that total up and are, perhaps, not as committed as you are in shopping there. For instance, I don't really care for the meat they sell and we find a much broader range of beverage options at our local supermarket. For someone like you, it probably makes a lot of sense. For someone who shops there the way I do, it probably doesn't.

Thanks for taking the time to leave such a detailed comment.

Posted by: RP at August 4, 2004 02:12 PM

$500 is 2% of $25,000. But it's still an outrageous amount of money to spend there, even if you're a business owner.

Posted by: Mick at August 4, 2004 03:21 PM

Thanks, Mick. I corrected it on the post itself, giving you credit!

Posted by: RP at August 4, 2004 03:49 PM

I hear you, Random. :-) Like I said, if you don't go a LOT, it doesn't make sense. Btw, we don't go every week; we go once a month, it's a pill of a trip *grins* and we don't like doing it, but the prices are so good, we just can't pass it up.

Btw, just to clarify for anyone reading and thinking of joining, the check can be used ONLY at Costco; it's not cash in your pocket. Also, Costco gasoline does NOT count towards the total; only merchandise from the store.

The 1st year we paid the $100 *total* annual fee, there are no more fees than that, that's it. We received a check at the end of that year for $57.17 towards our next Costco trip. So that year, we ended up paying $42.83 total for our dues. A savings of $2.17

But the 2nd year we made a bigger effort to go strictly to Costco. We received $93.47 towards our next Costco trip a the end of that year.

So we paid $6.53 in total dues for that year.

So, instead of spending $90 in membership dues over the past two years we've only spent $49.36 for two years.

That's why we do it. :-)

However, we're probably in the minority. A lot of people don't go enough to make a difference, so you're right; in that case, they'd be out the extra money for nothing.

And that's what they are hoping for, of course. Like gyms who hope you join and then "forget" to go. :-)

Posted by: Amber at August 4, 2004 07:48 PM

You're on the right track with that one, Amber. It's like mail-in rebates: the manufacturers count on most people not sending in the rebates. A very low percentage of customers actually do. That's depressing, because most of us only buy certain products because they come with a mail-in rebate.

Personally, I go to Sam's Club. I signed the company up for a business membership, they give me and the owner's wife free cards and the employees can purchase two cards each for $30. They don't have the same variety Costco does but they don't have the same lines either.

Regardless, I can still buy 3 months worth of toilet paper and enough paper towels to wallpaper my house.


Posted by: Mick at August 4, 2004 11:41 PM

Regular membership: $45.00
Executive membership: $100.00

20 gallon jar of Jiffy: Priceless.

Posted by: Helen at August 5, 2004 04:45 AM

Just for your information, I spoke with a Costco service representative and she noted that gasoline purchases and cigarette purchases do not count towards the Executive membership rebate calculation.

Posted by: Ernie at February 12, 2005 10:52 PM

Up here in Canada, Costco has not yet invented a way to ask you just once if you would like to be an executive member (I don't). The assistant manager told me that perhaps by next year they'll work out a way not to give you the high pressure treatment every time you set foot in the store.
Any innovative ideas out there on how to fight this garbage?

Posted by: zack at April 9, 2005 11:03 PM

Just got the Costco check in the mail. Only it's NO LONGER A CHECK! It's a coupon now! It can't even been used towards next year's membership payment! (sorry for the exclamation points, but this is just wrong) Actually, there are several things the "check" cannot be used for when shopping at Costco.

What a joke. I tbink the Consumer Rights Agencies need to be contacted. To enlist members under the guise of a 2% cashback rebate and then change the terms is bait and switch, it's also fraud.

The proper slogan for Costco to use, in my opinion, would be "2% coupon back on all purchases". Lol, somehow doesn't have the same ring.

By the way, one additional shoppig "privilege" of the executive membership card is you can shop earlier in the day and avoid the longer lines.
But without actually getting the cash back feature, this card is now a joke and I'll probably cancel my executive membership.

Posted by: A. A. at May 26, 2005 01:15 PM

Maybe I don't know what I'm talking about!

Just talked to someone from Costco who says the executive program hasn't changed at all. As long as the check can be used towards renewal, I'll be satisfied.

Posted by: A.A. at May 26, 2005 01:30 PM
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