Interview Synopsis

Costco – Membership Trends and New Unit Growth Outlook

  • Public Equity
  • Consumer
  • North America

Costco’s chief financial officer made headlines this week when he said the retailer’s hot dog and soda combo will stay at USD 1.5 “forever”. His comments come despite supply chain challenges, rising inflation and increasing labour costs eating into the company’s profits. According to a former executive at Costco, the company is likely to take less margin on certain items if such policies secure and drive the retailer’s customer base.

What does a recession mean for Costco?

In an Interview with Third Bridge Forum, the specialist said that as the world potentially enters a recession, Costco can learn from mistakes it made during the previous economic downturn. They said the company might need to “tighten belts” but that labour salaries are unlikely to reduce. The specialist expects Costco to be less “timid” in competing in areas where competitors like Walmart have a stronghold as it looks to expand foot traffic and sales.

In terms of competition, the specialist said Costco is the “leader in the warehouse club industry”, with 55%+ market share. We heard Sam’s Club is attempting to attract “higher-end” members to rival Costco but needs an image revamp to accomplish this, something the specialist said could take 20-30 years. The specialist does not consider BJ’s Wholesale Club a rival to Costco given the company’s problems with leadership in recent years.

Meanwhile, the specialist discussed the costs involved in building and running a new Costco unit. While they said it can depend on the location of the build, they estimated that a new unit would cost USD 33-65m. ROIs are usually discussed before the unit is built, the specialist said, with location, existing units in a location and time taken into consideration. 

At locations where there is already a Costco unit, the specialist said the company is willing to accept some market cannibalisation to build a new store based on certain formulas. For example, they told us if Costco were to build another unit in a densely populated area like Los Angeles, the company could accept a 25% cannibalisation to a USD 350m building if together the two stores accumulated USD 500m in sales over three years. However, in less-densely populated areas like Houston, taking 25% of sales out of a store to supplement another could be “tough to swallow” if the original sales do not rebound in 3-5 years. 

The specialist said 60,000-70,000 members are needed to make a successful Costco. The time it takes to recruit such numbers can differ depending on the location. For example, an area like Lafayette could take 3-4 years to reach such a number, whilst Los Angeles or Seattle could do it in 1-2 years. 

The specialist said over the next 12-18 months, an escalation of the war in Ukraine would create further supply chain challenges for Costco. They also warned that if hostilities in the Taiwan Strait were to increase then Costco’s China expansion plans could be derailed. 

However, the specialist thinks the “worst is behind” Costco and the general warehouse club industry. They said Costco’s new president Ron Vachris should succeed in driving the company’s e-commerce business – an area that the expert said has been underdeveloped. The specialist also believes Costco has the pricing authority and reputation to continue “weather[ing] the storm” brought by a recession and inflation. 

Click here to access all the human insights in Third Bridge Forum’s “Costco – Membership Trends & New Unit Growth Outlook” Interview.

The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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