Costco (COST) does not follow the same rules as other retailers. The membership-based warehouse club has a relentless focus on offering members the lowest prices possible. That allows it to do things that customers at its rivals would see as negatives.
The warehouse club, for example, spends very little money or effort on merchandising. It more or less leaves its goods on warehouse shelves or pallets with little more than a price tag. In addition, the popular chain offers a limited number of products and very little choice when it comes to size.
You can get K-Cups, but you might have to buy a 50-pack and you'll get to choose between a few flavors, not the dozens a traditional grocery store will offer. That same logic applies to pretty much everything Costco sells. The chain negotiates with vendors to find the best way to offer lower prices.
Costco also handles credit cards in a different way than any of its rivals. It has an official credit card, the Costco Anywhere Visa Card by Citi, which comes with special cash bak offers, and it accepts any Visa card at checkout. The chain, however does not take MasterCard, American Express, or Discover in its stores.
Yes, you can use most ATM cards , but if it's not a Visa, you can't pay with credit in a Costco warehouse. That's very different than other retailers, but it's not the only unique thing about the chain's credit card policies.
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Costco Makes Money on Credit Cards
By offering an exclusive co-branded credit card Costco gets some advantages, according to CFO Richard Galanti's comments during the company's fourth-quarter earnings call.
"So on co-brand, not only the fact that we do it exclusive, which, arguably, gives us purchasing power to lower the merchant fee and to drive the reward to the member. There's typically co-brand cards, there's revenue share," he said.
Basically, Costco makes money from its partnership, but it also passes much of what it receives back to members.
"So every time that card is used outside, we share in that revenue. While we pay for some of the rewards, that's more than offset -- that's offset by the revenue sharing," he added. "So it continues to be -- fiscal '22 is a great year for the card in terms of increasing penetration and increasing rewards to our members and very, in our view, a very favorable effective merchant fee to us, which we don't disclose."
Credit Cards Help Costco With Renewals
Costco makes more than half of its profits from memberships, not what it sells in its warehouse clubs. The chain's entire business is driven by signing up members, and getting them to renew. Credit cards have become an important part of that process.
"Auto renewal, it's not just on the Citi Visa co-brand card, it's on any Visa card here and on a Mastercard that we worked out a deal with a bank and Mastercard in Canada," Galanti said.
Having members auto-renew has become a big part of Costco's business.
"In the U.S. the number is mid to high 50s that have signed up for auto renewal," the CFO said.
This has helped Costco deliver some stunning renewal rates (even by its very high standards.
"At Q4 end, our U.S. and Canada renewal rate came in at 92.6%, which is 0.3 percentage point higher from 16 weeks earlier at Q3 end when we were at 92.3%. And our worldwide renewal rate came in at the end of the fiscal year at 90.4%, up 0.4 percentage point from Q3 end when it was 90%," Galanti shared.
