Costco shares strategy members will love that surprises investors

The company often breaks the rules, but this policy might surprise long-time members and shareholders,

Feb 23, 2025 - 16:05

Costco shares strategy members will love that surprises investors

Costco operates using a fairly simple philosophy. The warehouse club does whatever it can to keep prices down for members.

The chain keeps the number of items it sells very low.

"Costco warehouses carry about 4,000 SKUs (stock keeping units) compared to the 30,000 found at most supermarkets. By carefully choosing products based on quality, price, brand, and features, the company can offer the best value to members," it shares on its website.

By keeping the number of products it sells low, Costco increases its buying power. if the chain sells one SKU of Heinz Ketchup or Colgate toothpaste, it can negotiate better deals with those vendors.

The membership-based warehouse club has the ability to tell its vendors to make packaging changes or do other things to lower costs. It squeezes every nickel out of its suppliers and passes those savings onto its members.

"Our operating philosophy has been simple. Keep costs down and pass the savings on to our members. Our large membership base and tremendous buying power, combined with our never-ending quest for efficiency, result in the best possible prices for our members," the chain explained on its website.

Costco fsmously bought a chicken farm in order to keep its rotisserie chicken priced at $5.
Image source: Shutterstock

Costco ignores Wall Street

Most retailers manage their business to make sure they meet quarterly Wall Street expectations. Managing for the short-term, however, means making decisions that may not make the most sense in the longer-term, bigger picture.

Costco could, for example, make a larger profit in any given quarter by passing price increases onto customers. In many cases, however, the chain opts to eat some of its higher costs in order to keep prices low.

That's the type of long-term thinking that keeps members happy, contributing to Costco's renewal rate of around 92%.

The chain's Board Chairman Tony James has been part of the Costco team since its founding. He shared that the board has never given in to short-term thinking.

"No, we never focused on that, and management didn’t either. The board has always been a bulwark from short-term pressures, giving [management] a safe space and support to build a great long-term business. We protected [management] from the short-term pressures public companies have these days," he told Chief Executive Magazine.

Members, he shared, always came first,

"I know. We gave them permission, in a way, to do the right things for Costco’s members no matter what, to take care of them, the employees and our suppliers [Costco’s core values]. The board would never do anything to compromise those higher priorities," he added.

Costco puts members above everything

James gave former longterm Costco CFO Richard Galanti a lot of credit for the company being able to keep Wall Street's short-term needs at bay.

"Richard was the face of the company and was very good at dealing with the analysts. It’s remarkable how little other executives participated in the earnings calls. Jim didn’t spend any time doing that, and neither did Craig [Jelinek, Costco CEO and president from 2012 to 2023]. Richard was given that mandate. He did not provide earnings guidance, freeing management to run the business as it should be run instead of making a promise you then have to deliver on," he shared.

Current CEO Ron Vachris has broken that tradition and does attend the chain's quarterly earnings calls. But, while he's there, he generally just delivers some lighthearted opening remarks.

"Our U.S. bakery division has reached new records of 4.2 million pies being sold the three days prior to Thanksgiving. In our U.S. food courts on Halloween Day, we set a new record of 274,000 whole pizzas being sold. That was an increase of 21%," he shared to kick off the chain's first-quarter earnings call.

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CFO Gary Millerchip, however, still handles most of the call.

He noted that traffic or shopping frequency increased 5.1% worldwide and 4.9% in the U.S. during Q1, while Çostco's average transaction or ticket was up 0.1% worldwide and 0.3% in the U.S.

He also shared the company's most important numbers.

"In terms of renewal rates, at Q1 end, our U.S. and Canada renewal rate was 92.8%, down 0.1% from Q4 end. The worldwide rate came in at 90.4%, also down 0.1% primarily due to the U.S. and Canada," he said.

Millerchip explained why renewals have taken a slight hit.

"As we mentioned on the last quarterly earnings call, our renewal rates are seeing some impact from higher growth in digital sign-ups, which renew at a slightly lower rate than our base as a whole. Underlying renewal rates and membership growth remain strong, but this mix shift is likely to have a continued effect on our published renewal rate for the remainder of 2025," he added.