Key Points:

• Costco sales rose 5.2%, e-commerce 20.2%.
• Membership fees increased; sharing is restricted.
• Bulk buying and Kirkland brand drive Costco’s strategy.
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Douglas and Lee discuss recent developments at Costco (NASDAQ: COST), highlighting a significant increase in sales, particularly in their e-commerce business, which grew by 20.2%. They note that value-based consumers, including higher-net-worth individuals, are increasingly shopping at stores like Costco and Walmart (NYSE: WMT). They also discuss Costco’s decision to raise its membership fees for the first time in seven years, a move that surprised them given that membership fees are a small part of Costco’s revenue. Additionally, they mention Costco’s efforts to curb membership sharing and how this, along with the fee increase, could boost revenue. They commend Costco’s decision to keep its hot dog and soda combo at $1.50, viewing it as a smart PR move that maintains customer loyalty. The conversation also touches on Costco’s strategy of offering bulk purchases and high-end food items under the trusted Kirkland (NASDAQ: KIRK) brand, as well as the logistical challenges Walmart faces in the fresh food business.

Transcript:

So if you look at Costco, a couple of things have happened just really in the last maybe two weeks.

The first one is every four weeks they put out their sales numbers.

Their comparable sales went up 5.2% across the company and 20.2% for their e-commerce business.

So that’s healthy.

It’s another indication along with Walmart that what I would describe as the value-based consumer is still going in and shopping.

They may not be going to Tiffany’s.

Oh, absolutely. Sure.

And actually, the higher net worth people have been forced to slum to Walmart and Costco to buy groceries and things of that nature.

Yeah.

The other thing they did, and I don’t understand why they did this for the first time, I think in seven years they raised their membership fee.

So they call the basic membership, the gold star membership.

I don’t know why, but that went from 60 to 65 and the executive membership was sort of their blue chip cash back thing.

It went from $120 to $130.

And the only reason that surprises me, if you look at their financials, membership fees are a very small part of their revenue.

So I can’t quite figure out what the chess move is there.

It picks them up maybe a few tens of millions of dollars.

And maybe it’s one of those things where they just think, well, we can get away with it. So why not take the money?

Yeah. And maybe there, I guess there’s always the chance that they’re trying to thin the herd a little bit.

Yeah.

Well, you’re right because the other part of this was that people were, it was like the Netflix password sharing.

Right. Exactly.

I’d give you my card or my number, you’d go in.

So now when you go in, you’re not only paying this, which I think starts December 1st, but you’ve got to have your card and you’ve got to scan it.

Right.

If it’s expired, they very politely say that you’ve got to go over to the membership desk and get signed.

So they’re going to make money off membership in two ways.

The first one is they’re going to stop this sharing business, which actually, as you know, worked well for Amazon.

And the other one is they’re going to up prices.

The thing that impresses me, again, though, is the numbers I just described to you from Costco came out about four days before Walmart’s numbers did.

I know that retail has been a little soft a couple of places, but at these big box places right now, certainly the two leaders, the results are really, really strong.

Yeah, they are.

And you know, in a genius PR move, they decided to keep their hot dog and soda at $1.50, which is smart.

I think it’s been there for like 17 years or some incredible length of time.

But I think, you know, strictly and I’m being serious, I think from a PR standpoint, I think that’s smart because it’s something people really love.

Sure.

They’re saying, listen, there are certain things that inflation won’t affect.

Yeah.

If also, if you look at the philosophy behind how stores are laid out and where these guys make money, if you go into a Costco store, everything is supersized.

When you buy Cheerios, you buy like the equivalent of nine boxes.

Right. Exactly.

So what Costco is saying to you is, if you are willing to buy this in bulk, we will give you a very good discount.

Yeah.

In a lot of ways, that’s the philosophy behind what they do.

And they also have a lot of high end food, which you think, well, why do they do that?

And it’s, you know, because they’ve…

They’ve got that.

They’ve got the Kirkland brand, which is genius.

You know, people think it’s good quality.

They trust it.

It’s really that Costco created, invented their own trusted brand.

When you go into a Walmart, I mean, Walmart is now the largest grocery store chain in the country.

Right.

So Walmart has made this decision, which I think took a lot of guts to get into the fresh food businesses.

Because it’s not as, you know, getting televisions in, the shelf life, if it’s two days late, it’s fine.

But you’ve really got to be logistically sharp to have virtually every super center in the United States.

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