Costco stock is up nearly 200% in the last 5 years, and it is unlikely to slow down anytime soon. As the retail juggernaut continues its march, it is driving its future growth from two elements: an increase in membership count and raising the cost of membership.
Costco Wholesale Corporation (COST), a prominent American multinational retailer with over 800 warehouses across 13 countries, operates a chain of membership-based warehouse clubs. Incepted in 1983 by Jim Sinegal and Jeffery Brotman, Costco has positioned itself among the largest retailers globally. A pioneer in the membership model, the company charges an annual membership fee to provide access to an extensive high-quality product range at low prices, promoting bulk-buying savings exclusively for its members.
The company’s leading products include groceries like fresh produce and packaged goods, electronics such as computers and appliances, clothing and home goods, health, and beauty products, particularly over-the-counter medications and personal care items, and Kirkland Signature: an in-house brand offering a wide range of products at competitive prices. The primary revenue drivers are the proceeds from merchandise sales and membership fees, with higher contributions from merchandise sales owing to the low-profit margin approach.
The end market comprises retail consumers seeking bulk purchases for personal use, small enterprises demanding supplies at economical rates for operational needs, and institutions acquiring in bulk for events or operations. Currently based in North America, the company is working to establish itself in international markets like Asia and Europe.
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Costco’s membership business model has faced one problem for many years: non-members doing their shopping on someone else’s card. Even though the practice is illegal, a lot of customers get away with it. Even though Costco still earns money, it loses a potential member.
The company has now implemented a solution to this problem in the form of card scanners. People using a membership card without their photo on it will additionally be required to produce an ID document. Even though the decision to implement this was taken a few months back, the test implementation has only recently been concluded. The results show a double-digit growth in membership count in the test locations.
The scanners are now being introduced at all of the company’s US locations. Analysts believe this could increase the company’s membership base by 5%. This translates to 4 million additional members!
Apart from that, the retail store also raised its membership price on the 1st of September this year. The $60 membership now costs $65 while the $120 Executive membership’s new price stands at $130.
The ongoing quarter will be the first full quarter of the price increase. This, together with the 5% bump in membership count, is what drives our short-term bullish thesis on the stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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