Younger consumers have more experience with the subscription economy than older ones. People in their 20s and 30s are, for example, used to signing up for a streaming service to binge-watch a popular show, then dropping it for something else once they have finished consuming the desired content.
Costco has protected itself from that type of quick churn by offering annual memberships. There’s no monthly option, so once it locks someone in for $65 as a Gold member or $130 for an Executive membership, which comes with 2% cash back up to $1,250, it has that customer for 12 months.
Its challenge during that membership period, however, is to make sure that the person renews. In the past year, the warehouse club has seen its renewal rate drop, which represents a material danger to its business.
“TD Cowen attributes the recent dip in renewal rates to a changing membership mix, particularly the increase in digital sign-ups, which have impacted renewal rates over the past three quarters,” Investing.com shared.
Costco has acknowledged this challenge in recent investor communications, according to comments from CFO Gary Millerchip made during its first-quarter earnings call.
Costco’s membership churn has increased
Millerchip shared some data on Costco’s renewal rates:
- In terms of renewal rates, at Q1 end, our U.S. and Canada renewal rate was 92.2%, and the worldwide rate came in at 89.7%, both down 10 basis points from last quarter.
“This slight decline was due to the factors we discussed last quarter and reflects new online members growing as a percentage of our total base and renewing at a slightly lower rate than warehouse sign-ups. The decline was less than anticipated due to some early success with targeted communications to expiring members,” he shared.
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The CFO made it clear that Costco has a plan to address the drop in renewals.
“Our goal is to continue to improve renewal rates by improving engagement with members who signed up digitally although, for the reasons previously shared, we may still see a slight decline in the overall renewal rate over the next few quarters,” he added.
Costco’s membership has grown
Millerchip also shared some key information on the company’s membership base:
- We reported membership fee income of $1.329 billion, an increase of $163 million or 14% year-over-year.
- Adjusting for FX, the increase was also 14%.
- Last September’s U.S. and Canada membership fee increase accounted for a little less than half of membership income growth.
- Excluding the membership fee increase and FX, membership income grew 7.3% year-over-year.
- This was driven by continued growth in our membership base and increased upgrades from Gold Star to Executive Membership.
- At Q1 end, we had 39.7 million paid Executive Memberships, up 9.1% versus last year.
- We ended the quarter with 81.4 million total paid members, up 5.2% versus last year, and 145.9 million cardholders, up 5.1% year-over-year.
Some analysts see this as a cause for concern.
Roth Capital has downgraded Costco from Hold to Sell, citing concerns despite the company’s recent earnings beat, GuruFocus reported.
“Analyst Bill Kirk highlights issues such as declining renewal rates and slowing membership growth that may turn negative. Additionally, Costco faces intensified competition from Walmart’s Sam’s Club and BJ‘s Wholesale,” he shared.
Costco has seen a slight dip in renewal rates.
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Costco has a plan
Increased churn may simply be a reality as Costco adds more younger, digital-native members.
“As we’ve brought more of these digitally signed-up members who are generally younger, they just renew at a lower rate,” Millerchip shared.
He made it clear that Costco is taking action to combat this.
“Our goal obviously is to arrest that decline as quickly as possible. And certainly, we’re encouraged by what we saw this last quarter with the improvements that we made through the more targeted and relevant communication to members who we know have signed up through that channel,” he said.
Millerchip noted that the company has changed it communication with digital sign-ups, but that it has only done that recently.
“We’re only one quarter into the change that we made. We wanted to flag that, of course, there’s still work to be done there,” the CFO added.
This is Costco’s new reality
Costco’s membership base has gotten younger.
“Nearly half of the new members are under 40, signaling a key generational shift,” Zacks.com shared.
The chain does not provide an age or demographic breakdown of customers.
Based on years covering retail trends, empty-nester households often adjust their membership habits, aligning with observed lower renewal rates. Conversely, families with children tend to purchase in bulk more frequently, contributing to higher membership retention, according to demographic analyses of renewal behavior.
“Costco’s challenge will be to engage these digital-first shoppers effectively through auto-renewal programs and targeted communication that deepens brand loyalty beyond initial discounts,” Zacks added.