Costco Keeps Members Enticed, Despite Economy

Costco earnings might be off in the most recent quarter, but it seems that the promotions that helped drive profits down accomplished something important for the company.

For one thing, comparable store sales were up, excluding the effects of fuel and foreign exchange rates, by five percent. Not only that, they continued to advance at the same rate in February, the first month of the current quarter. So Costco isn’t losing market share although surrounded by competitors from Wal-Mart to Macy’s who are pushing bargains at wary consumers.

Costco is battling for market share in the recession, but it is fighting for something else, too. The question some analysts and observers have is: Will consumers worried about spending in a recession fork over the $50 Costco asks to renew their memberships? Given that they are responding to promotions by spending more money, as evinced by the comp gains, Costco’s members have at least demonstrated that they continue to see the proposition it offers as attractive.

Right now, memberships are holding up. In Costco’s second quarter, membership income rose to $355.6 million up from $342.9 million in the year ago period, up just under four percent.

CFO Richard Galanti, in a recent conference call, noted that Costco had made a decision in the holiday season to slash prices ahead of anticipated cost cutting by vendors to give members extraordinary savings ahead of its competitors. As noted in this blog, that effort was geared in some measure to making them appreciate the bargains their membership fees afforded. Galanti said the company pulled back from that kind promotional strategy as the holidays closed. The question is, will the savings linger sufficiently in the minds of Costco customers to prompt them to re-up memberships? It seems to have been enough so far, but if membership renewals start to slide, Costco may have to adopt a more aggressive posture, which is something to watch not only as a barometer of its performance but, given that the company has an experienced and often creative management team, as a case study in how retailers can deal with a sticky economy.