Travis Johnson

Are Warehouse Stores Too Dependant On Membership Fee Income?

Robert,

This is undoubtedly true -- but does it mean anything? After all, the margins of 2% or so are pretty typical of grocery stores, whether that margin comes from a fee the customers have to pay or a slightly higher price. Increasing sales without increasing the customer count is the only way to become less dependent on the membership fee, and in many cases that means relying on customers to buy bigger ticket items like jewelry and electronics and furniture ... which, as you can see from your BJs chart, generally happens more often in the fourth quarter with holiday shopping. That was also the problem with Costco's results this past quarter, with lower than expected TV and furniture sales. Expanding gross margins overall would be bad for business, in that it would get rid of the value proposition, so they need to keep opening new stores, bringing in new members, and hoping for some incremental increases in sales to give a little boost to profit margins. I do find it interesting that the profit these stores make is roughly in line with their membership income -- but sales and membership fees can't really be separate in the scheme of these business plans. The stores are designed to make the payment of that membership fee seem attractive, as high renewal rates show, and overall margins for these companies are generally in line with the large discount retailers and grocery stores that are their competition.

I haven't found Costco cheap enough to buy yet, but I remain tempted ... I'm hoping for a couple more bad quarters to drive the price down.

Cheers,
Travis