Costco Wholesale (NASDAQ: COST) One of the largest and most successful retailers in the world. Here’s a fun fact: Costco is so popular among shoppers that the company spends no money on advertising!
Its bulk-item bargains and legendary $1.50 hot dogs continue to attract loyal customers, enabling the company to grow profits over the years. But in 2024, Costco raised its Premium Club membership fee from $120 to $130 a year. This is the first time in seven years that the price has increased.
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Since then, Costco and investors have learned an important lesson that could impact Costco stock for years to come.
Retail is brutally competitive, and selling items at low prices has been paramount to Costco’s success. In the first 24 weeks of Costco’s fiscal year 2026, the company generated $134.2 billion in net sales.
Subtract merchandising costs, and all those sales generated just $15 billion in operating income, an 11.1% margin. Once you subtract $12.6 billion in general, selling, and administrative expenses, Costco is left with just $2.4 billion. That’s how thin Costco’s profit margins are.
However, during the same period, Costco generated $2.68 billion in membership fees. Those charges are almost all profits, bumping the company’s total operating income to more than $5 billion in the first 24 months of the fiscal year.
In other words, Costco can’t possibly operate in a way that allows free shopping in its stores. Membership fees stir the drink and make Costco profitable.
The way membership fees drive Costco’s bottom line means the company as a whole can grow revenue faster by increasing membership fees than by selling more merchandise.
Management reported in its fiscal 2026 second quarter earnings that members in the US and Canada renewed their memberships at 92.1%, down just 10 basis points (0.1%) from the prior year. At the same time, management attributed a third of Costco’s membership fee increase in the quarter to 2024 price increases.
That’s a 33% increase over a 0.1% decline in renewals. Now, management doesn’t want to kill the golden goose by raising fees too soon or too often. Still, the data shows that Costco’s brand strength and customer loyalty will enable management to raise fees sooner rather than later in the next seven years.
