It’s no secret that people buy a staggering amount of stuff at Costco.
The wholesale club saw net sales of nearly $270 billion last fiscal year, and shoppers can’t get enough of the chain.
With this rising popularity has come a tighter enforcement of Costco’s membership policy, with new scanners at the front door and ID checks at self-checkout.
However, there’s a reason the company started cracking down on freeloaders, similar to Netflix.
Despite selling billions of dollars’ worth of merchandise, Costco generally doesn’t profit from those sales as much as typical retailers like Walmart or Target do.
Last year’s average merchandise markup, or gross margin percentage, was around 11% at Costco — far less than the 25% to 50% commonly estimated for businesses selling similar products.
Factoring in other costs, like payroll and utilities, meant the company retained about $5 billion from its top-line sales last year, before taxes.
Meanwhile, membership fees are about as close to pure profit as a company can get, and Costco raked in over $5.3 billion in fees from 68.3 million households and 12.7 million businesses. (Costco allows two authorized cardholders per household membership.)
Renewal rates are also remarkably high — 92.2% in the US and 89.7% worldwide as of last quarter — which gives the company a comfortable financial position to operate from each year.
In other words, membership fees account for more than half of Costco’s total profits, so it’s little wonder the company decided to crack down on unauthorized card sharing.
Warehouse club competitors BJ’s and Sam’s Club (owned by Walmart) operate with a similar model. Sam’s Club even says profits from other revenue lines, such as in-house ads, get reinvested into lowering prices on merchandise.
Viewed another way, Costco starts to look awfully similar to Netflix, in the sense that both companies are in the business of selling access to goods and services, versus profiting from the content or merchandise itself.
Rising costs have led both Costco and Netflix to crack down on sharing
For many years, both Costco and Netflix seemed content to look the other way as paying members shared passwords and ID cards in violation of their respective policies.
As long as renewals and new sign-ups held steady, neither company seemed too worried, but rising costs have pushed both companies to hunt for ways to shore up their profits.
Beyond simply raising prices, the lowest-hanging fruit for both companies is to nudge more of their non-paying consumers to become paying ones.
Indeed, the password crackdown has been a wildly successful move by Netflix, more than doubling the usual rate of new signups in the days following the announcement.
And Costco’s tighter controls have led to what analysts have literally called a “Netflix moment” to encourage more people to pay the annual fee.
The enforcement also set the stage for a fee hike last year and the introduction this year of new perks (including early shopping hours) to encourage shoppers to upgrade to executive memberships — moves that gave an additional lift to the company’s bottom line last year.
Going forward, the company says it’s focused on making sure it’s giving members the most bang for their membership buck, beyond all the $1.50 hot dogs they can eat.
