Costco customers are reconsidering their choice of membership as the giant retailer announced a change in executive leadership. The news cost Costco’s market share value as some are predicting the change in leadership will also increase the cost of membership fees.
Costco has historically relied heavily on membership fees to maintain its successful business profits, which has been making up a smaller and smaller portion of the company’s earnings in recent years.
Who Is Stepping Down?
Costco CFO Richard Galanti has decided to step down after a nearly 40-year career in the position. He has been Costco’s CFO since 1993, and many credit him for much of the success the retail giant has had over that time.
Despite stepping down from his role officially, Galanti has promised to remain with the company until 2025 to see that a proper transition can take place.
Respect for Galanti
Chief Executive Ron Vachris praised Galanti in a statement. “Over his nearly 40-year tenure as chief financial officer at the company, Richard has made innumerable and invaluable contributions to its success,” he said. (via TheStreet)
“He is widely known, admired, and respected among our shareholders, employees, business partners, and others. We express our deepest gratitude for his long and loyal service.”
Who Is Replacing Him?
Costco has tapped Gary Millerchip, an executive who formerly worked at their competitor Kroger, to replace Galanti. Costco is hoping his experience leading the finance team at Kroger will help them refocus efforts and overcome challenges in the market like high inflation.
To take the position, Millerchip is stepping down as the Senior Vice President and Chief Financial Officer of Kroger, a position he has been in for 15 years.
The History of Costco Memberships
Back when Galanti joined the company in 1984, Costco only had four retail stores. Today’s Costco operates 874 warehouse stores, with 602 of those in the United States. When the first Costco opened in 1983, an annual membership was $25 a year.
Currently, customers pay between $60 and $120 annually for a Costco membership. A membership at Costco is required for customers to purchase a majority of the items in the store.
How Important Are Membership Fees to Costco?
Membership fees made up a huge portion of Costco’s revenue for many years. Just as recently as 2019, Costco made 68% of its annual earnings from memberships alone. In recent years, this number has decreased to 52% of its annual earnings.
These lagging membership revenues have caused some to speculate that Costco will be soon increasing membership fees. Wall Street has been disappointed in this decrease, which puts pressure on the company to change.
Galanti Was Reluctant to Raise Membership Price Changes Immediately
Previously, Galanti had made statements that emphasized his reluctance to increase the price of membership.
“We haven’t needed to do it,” Galanti said. “We like providing extreme value. Certainly, while we’ve gone a little longer than the average increase, we feel we certainly have driven more value to the membership.” (via TheStreet)
The Costco Culture Price Defensiveness
Members of Costco have carved out an identity online, and are famously resistant to price changes. Part of this attitude stems from the Costco hotdog and drink combo, which has been $1.50 since 1985
A previous CEO received a threat from Costco’s co-founder over a suggestion to raise the price of the combo. To this suggestion, Co-founder W. Craig Jelinek reportedly told him, “If you raise [the price of] the effing hot dog, I will kill you. Figure it out.” (via MentalFloss)
Walmart May Start Competing for Costco Customers
Potential rumors of a possible Costco membership increase may have come at the worst time as Walmart’s “Walmart Plus” membership is increasingly swaying customers away from Costco.
Walmart Plus offers convenient features like free delivery from local Walmart stores and extra discounts on essentials like gas. In-store shopping has been losing its luster as more companies offer the convenience of home delivery at cheaper rates.
What Are Customers Saying?
On social media platform X, formerly known as Twitter, Costco customers are speaking out about the benefits of Walmart Plus.
“Costco membership is a waste of money and time, if you got Walmart Plus. Why waste time and effort at parking lot and checkout? Just have your grocery delivered free of charge for walmart. I dumped Costco membership and switched over to Walmart plus,” one user wrote.
Costco Is on Thin Ice
Costco had previously inflamed its customers last year when it instituted measures to crack down on membership card sharing. At self-checkout lanes, members were required to verify their membership with a photo ID.
Many customers were angry because they had their membership cards with family or friends who helped buy their groceries. During that time, the company faced threats of boycotts from enraged customers.
Will a Price Increase Backfire for Costco?
Given the sensitivity of Costco customers and the company’s previous attempts at shoring up additional membership revenue, a price increase could definitely hurt the company more than it hurts.
The competition from other competitors like Target and Walmart makes it easy for Costco customers to cancel their memberships without too much trouble. Any price increase in memberships by Costco should come along with news of the added value that membership brings over competitors.
