Costco has justified its membership fee increase and says more stores are coming

Costco has justified its membership fee increase and says more stores are coming

On Wednesday (October 5) US warehouse retailer Costco announced a rise in sales and profits in its annual results for the year ended 28 August. However, they also released details of a 10% rise in membership fees which caused a bit of a stir among analysts. Sam Webb reports.

Costco, the US club retailer, has benefited from the downturn with consumers, concerned over the economy, look to save money.

On Wednesday, the company reported higher annual profits as sales climbed 14%. Costco's top-line was helped by fuel prices and currency fluctuation but, leaving those two factors to one side, comparable-store sales were still up 6%.

Nevertheless, Costco's results announcement contained a surprise. It said it would increase membership fees - a charge consumers pay to benefit from the retailer's prices. Given the economic enviroment, Costco would have been reluctant to put up the fee but a factor could have been an erosion in its margins in the fourth quarter of the year.

The rise in fees - a move that will affect 22m people in the US and Canada - was a key topic of discussion when Costco CFO Richard Galanti spoke to analysts after the results.

In the fourth quarter, membership fee income was $590m, up 11% from last year, while renewal rates were a healthy 89%. How will the 10% jump on executive and regular memberships affect Costco?

"Needless to say, we feel that the enhanced value of the Costco membership over the past five to ten years far exceeds the modest $5 and $10 increase in the annual membership fee levels, and it will continue to allow us to bring our members even greater value on everything we offer," Galanti said.

Robert Ohmes from Merrill Lynch asked if the rise will affect the company's competitiveness.

Galanti said no but admitted the decision was not taken lightly. "The fact of the matter is we're always going to be competitive with or without this. This is a 10% increase, a $5 increase on a $50 membership fee that has been $50 for the last five-and-a-half years and a $10 increase on $100 that has been that way for seven to 11 years, depending on which country. So this is not a $5 a month increase, it's a relatively small increase. We recognise with the economy, historically, we have very low fall-off from it."

He added: "Every time we've done it we look at ourselves in the mirror and feel that we have continued to enhance the value of that membership by a lot more than that. And we say that sincerely. Maybe we're fooling ourselves, but we don't think so."

Galanti said there were no plans to increase membership fees outside the US and Canada, but he added: "Things change. Ten years from now, who knows?"

Costco also faced questions about its plans for expansion. Mark Miller, an analyst from William Blair & Co., pointed to the slowdown in store expansion, with projections down from 25 stores in fiscal 2012 to 20, and asked why the retailer had lowered its projection for new stores.

Galanti said there are "a lot in the pipeline beyond this". He added: "All I can tell you is that [our] goal is to get that number up. I think you're going to see a lot of openings just past the end of this fiscal year into the next year.

"There are a lot of locations that we want to open. There's more unpredictability in terms of some of the timing and zoning, particularly in some of these foreign countries. But they're favourable to us opening, it's just it's a longer process." Costco has already signalled that it plans to open stores in France in 2013.

Last month, co-founder and current CEO Jim Sinegal, who set up the business in 1983, announced he was stepping down. President and COO Craig Jelinek, who joined Costco as a warehouse manager a year after the company was formed, will replace Sinegal next year.

Replacing a CEO of a successful company can be a tricky task. It can be even more challenging when succeeding the founder of a company. All eyes will be on how Jelinek looks to move Costco forward.