Why does Costco charge a membership fee?

Expert Solution

Costco Wholesale Corporation is one of the renowned warehouse franchisers with over 700 warehouses clubs in eight countries of the world. It offers a diversified array of merchandise warehouse club services to members. Costco came in existence in 1983 when it setup its first warehouse club in Seattle, USA. Later in 1993, it bought the warehouse club “Price Club” and after acquisition of Price Club, started doing warehouse franchising business under the brand name “ PriceCostco”. The critics blame Costco for selling memberships for its warehouse clubs to people. Therefore, Costco is more a membership club than retailer selling stuffs only. Recently Costco raised its club membership fee to $60/ member for basic card in 2017. There are several reasons for which Costco charges a membership fee:

Stiff Competition in Retail market: There has been stiff competition in warehouse retail business in USA due to presence of large warehouse retailers like Wal-Mart, Home Depot and CVS Caremark. Therefore, consumers in United States have wide options of selecting appropriate retail stores where they can purchase their monthly groceries. To retain minimum market share, Costco charges membership fees from consumers so that they can purchase their monthly grocery items only from Costco warehouses.

Thefts in retail Superstores: There has been many instances in United States, when Grocery retailer suffered heavily due to theft of items by some people who visited retail stores. To minimize the incidents of thefts and losses arising out of theft, Costco restricts entry in the supermarket stores only for registered members who pay annual subscription fees to Costco.

Revenue loss: Due to cut throat competition in grocery business in USA, there has always been possibility of revenue loss for Costco. Therefore, one idea that Costco has developed is to charge annual subscription fee to people who wants to visit warehouse clubs operated by Costco. By charging membership fees, Costco has collected huge money in the form of membership fees, that also helped the retailer in bridging its revenue loss over a period. In the year 2016, the company received total membership fees of $2.6 billion.

Rahul Sunny answered 2 years ago

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