Get Ready, Shoppers: Your Costco Membership Is About to Get More Expensive

By Daniel B. Kline Markets Fool.com

Costco (NASDAQ: COST) plans to raise its membership prices in the United States for the first time in over five and a half years.

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The increases, which take effect in June, are modest. Goldstar and Business memberships will rise from $55 to $60. Executive Members will pay $120, a $10-per-year increase from the current price of $110. Those who pay for the pricier memberships, though, will see the cap on the 2% reward members earn on eligible purchases increase from $750 a year to $1,000.

Members whose renewal date occurs before June 1 will get another year at the old price, and any new signups before the deadline will also pay the current prices. The company said in its Q2 earnings release that the change will affect around 35 million members, about half of them Executive Members.

Costco has not raised membership prices in more than five years. Image source: Costco.

Will this cost Costco members?

For members, or even people considering signing up, the increases are modest enough that they likely will not matter. The company could lose a small amount of people to Wal-Mart's (NYSE: WMT) Sam's Club, where memberships start at $45 a year. The same could be said of BJ's, which charges basic members $50 a year.

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Costco traditionally has very strong membership renewal rates. In its most recent quarter, renewals were a little over 90% in the U.S. and Canada, and 87.7% worldwide, according to CFO Richard Galanti on the company's earnings call with investors. Total accounts globally were up 400,000 from the end of Q1, while the total number of cardholders rose 800,000 to 88.1 million quarter over quarter. Executive member also grew, now accounting for a little over one-third of the membership base, but two-thirds of total sales.

It's those executive members who mean the most to Costco, and while they may not love the price increase, it's very unlikely that they will leave over $10 a year. In addition, some of these members may even like the change since the new rewards ceiling lets them earn an extra $250 back each year if they spend enough.

What does this mean for the bottom line?

Eventually, it will be a positive for the company, which makes about 75% of its operating profit from membership fees, but the impact will take a long time to be fully felt.

"In terms of how it hits our P&L, our membership income line, approximately one-twelfth if you will, or one month worth of the increase in fees from the June renewers, that will be the first group that gets this fee increase," Galanti said. "Approximately 1/12 of the increase will be booked to the income statement in that first month of June, with an additional 1/12 being booked in each of the succeeding 11 months."

Because renewals take place every month (every day of every month, really) the actual full impact will take nearly two years. Galanti explained the math:

Next, the increased fees from our July renewals, those will be booked starting in July, one-twelfth and following through to the following June, and so on. So the full P&L impact of these increases will be over a 23 month time line, such that the last group of members to be billed at these new levels will be next May of 2018, with a booking if you will, of those $5 and $10 increases being recorded over that month, and its succeeding 11 months, i.e. 23 months out.

In a broader sense, the increase in fees may not have much impact at all on the bottom line. Traditionally, Galanti noted, the company has raised prices around every five years, and much of the extra money goes into lowering or keeping prices low.

What does this mean for Costco members?

For regular members, it's hard to compute how much extra they would have to buy in order to recoup the price increase because there's no standard discount for shopping at the warehouse club versus other retailers. When it comes to Executive Members, spending an extra $500 year earns you $10 in added cash back, covering the increase. Of course consumers probably won't buy that much more just to get a relatively small reward, but some were likely already making enough purchases to put them over the previous $750 cap (business members especially).

This fee increase is big news for Costco, only because it has been so long since the last one. In the long run, while there may be mild anger from a small amount of consumers, many may not even notice or care. This was a needed move, but one that's very measured. It will slightly pad the company's bottom line (albeit slowly), and it's really nothing consumers nor investors should be overly concerned about.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.