What Does It Mean That Costco Is Using Groupon to Discount Its Memberships?

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In this MarketFoolery segment, host Chris Hill, Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman dip into the Fool mailbag and find a question about a marketing promotion. Costco (NASDAQ: COST) may have a minor worry based on Amazon's purchase of Whole Foods. And it may be headed toward less aggressive growth. But using Groupon (NASDAQ: GRPN) to attract some new members isn't necessarily a bad idea.

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A full transcript follows the video.

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This video was recorded on July 31, 2017.

Chris Hill: From Matt Holzman, who forwarded an email and wrote, "I just saw this Groupon and couldn't help but wonder if discounting the Costco membership is a new signal of decline. Would love your thoughts." As I said, he forwarded a Groupon email that he got, and the main promotion that was featured there was a one-year Costco Gold Star membership that comes with a $20 Costco Cash Card and exclusive coupons, and you can get all of this for $60. A Gold Star membership at Costco for one year on its own costs $55. This can cut both ways. You can look at this and say, if Costco gets a whole bunch of new members and gets people who wouldn't otherwise consider a Costco membership, and it locks them in, because we know they're so good at retention, then this is totally worth it.

Taylor Muckerman: That's the way I'm looking at it.

Hill: Is that how you're looking at it?

Muckerman: That's how I'm looking at it, yeah.

Hill: Go on. [laughs] Please continue.

Muckerman: They're doing well. I think this is a better deal for Groupon, because it's actually a compelling offer. It's a gift that keeps on giving, a Costco membership. You get in there, if you've never been in, and all of a sudden for $20 you get the chance to stroll in there and see what it's all about. They have a very hard sell when you go in there. It's easy to be completely blown away by the difference of the availability in there from your traditional store. And it's doing well. I looked at the sell-off from the Amazon-Whole Foods deal as a potential entry point for myself. I don't own the stock, but when I saw that stock sell off the way it did ... I've been wanting some of it for myself for a little while now. I haven't pulled the trigger yet, but it's still selling at that reasonable price, compared to historical numbers. Yeah, this doesn't worry me from a Costco perspective at all.

Hill: Jason?

Jason Moser: Yeah. I think the knee-jerk reaction for the skeptic would be, "This is the beginning of the end. We told you so; Costco is on the way out." You can't look at it that way at all.

Hill: I'll just say, I didn't think it was the beginning of the end, but I did make that, [groans].

Muckerman: I do like the thought process.

Moser: Like, "I don't like that."

Muckerman: You're being associated with Groupon.

Hill: Groupon?

Moser: So this is marketing, plain and simple, for Costco. It's a way for them to reach out to an audience they have yet to capture. And you both made the point -- this really gives them a chance to bring new members in and then do what they do best in retaining them. Now, whether it works, that's the question. It's not going to cost them anything to try. But I do think this at least makes the question mark as to how attractive a model this is going forward for younger generations of shoppers. I think it makes that question mark the little bit more pronounced, because there are obviously plenty of different options out there today. You don't necessarily need to be a member to do warehouse-style shopping. There are more convenient ways to do it.

So Costco is a very good, very customer-centric business that has done something well for a really long time, and I don't expect that to change at all. But the growth prospects for the company going forward aren't the most attractive in the world. If I have $1,000 to plunk down on Amazon or Costco, I'm going to take Amazon 10 times out of 10. But I think Costco has a place in the portfolio, if you're looking for some sort of defensive play there, a little bit of a less volatile holding. They are a very customer-centric company. I really wish that ... man, they buy back shares, and with a company like this, that share count needs to come down and it goes up. That's just something I can't get past for whatever reason.

Hill: That seems like you're doing it wrong, if you're buying back shares and the share count goes up.

Moser: You know, you can't really tell that as shareholder-friendly.

Muckerman: No.

Moser: And the fact that they took out $3 billion in debt to pay that dividend. I think that's an acknowledgment from management that it's going to be tough times in the days ahead for capital appreciation on the stock, so they are rewarding those shareholders today. But yeah, this is a way to reach out to an audience that they haven't really been able to crack yet, and if it brings a few people in, that's great. They'll probably retain a lot of them.

Hill: And if you're on Groupon's mailing list, you're going to know pretty quickly whether or not this is working for Costco, because if it is, you can probably expect to see a lot more of them.

John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and Whole Foods Market. Jason Moser owns shares of Whole Foods Market. Taylor Muckerman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool owns shares of Whole Foods Market. The Motley Fool has a disclosure policy.