Why didn't Costco expand internationally?
Numerous critics say prices at Costco Wholesale Corp. (COST COSTCostco Wholesale Corp165.05-0. 84% created with Highstock 4.26.6) The members-only, big-box discounters, are uncompetitive - and now the retailer has increased its fees for the first time since 2011 . (See Costco Hikes Membership Fees.) The new 2017 fees are $ 60 per year for a basic card or $ 120 per year for a 2% cash back card.
But Costco uses a subscription model for three reasons.
American food competition is intense. With several major supermarkets, Wal-Mart Stores, Inc. (WMT WMTWal-Mart Stores Inc88. 70-1. 09% created with Highstock 4, 2, 6) Supercenters, Target Corp. TGT TGTTarget Corp59 29-0.12% Created with Highstock 4.26), Sam's Club, BJ's Wholesale Club and a variety of grocery stores and farmers markets, Americans have plenty of choices about where to spend their weekly food budget.
Psychology plays a role in the success of the subscription business model. First, the Costco buyers belong to a club that requires membership. In addition, the fee motivates the action: the money has been spent; The best way to do this is to take advantage of membership.
This thinking gives Costco its greatest advantage: Customers become loyal to the business. Customers remember having paid a membership fee and are more likely to visit Costco than a non-member is likely to visit the supermarket. X shoppers shop less often in a variety of stores. (See also Sam's Club vs. Costco: Which Has Better Deals?)
Costco found a way to prevent theft in its stores: charge people to shop. Shoplifters are unlikely to spend $ 55 a year on the opportunity to steal. Costco points out in its financial report for 2014 that the theft rate of the company is "well below that of typical discount deals" and credits it to the membership fees.
In the volatile world the grocery business operates in, Costco can ensure a steady source of income: membership dues. In 2016 alone, the company, with 86.7 million members worldwide, brought in $ 2. 6 billion membership fees.
Income from membership fees is great. Aside from a few minutes of an employee's time, plus the cost of the card and subsequent promotional mailings, membership management isn't too costly. As such, Costco is $ 2.6 billion membership fee income is almost entirely profit.
When you consider that Costco's operating profit was only $ 3 in 2016. 6 billion, you can see why the company needs membership fees to stay in business. Fortunately, membership continues to grow: it increased 8% in 2014, 6% in 2015 and 9% in 2016. The company is likely to not only hold its sales and profits, but grow them for the years to come (see also Grocery Wars: Who Will Win In 5 Years?)
The bottom line
Costco has consistently low prices with a heavy consumer. With the company expanding both domestically and internationally, year-over-year profits, and its sophisticated logistics network growing, the company looks good to become a retail giant that can rival Wal-Mart. Many Americans believe that Costco only has membership dues for the money they provide, but direct profit is only one of three reasons.
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