The warehouse club retailer released second-quarter fiscal 2017 comparable store sales and profits that missed Wall Street's forecasts. Shares of the company, which were fresh off hitting an all-time high, subsequently took a hit.
Costco is just the latest grocery store company to report worse-than-expected earnings. Kroger(KR) - Get Reportalso released Wall Street-disappointing results last week, with a same-store sales dip of 0.7%.
Competition in this space has grown fierce, with retailers battling it out in a price war. Thanks to a produce glut, food prices have been plunging. And discount retailers such as Aldi and Walmart(WMT) - Get Report are taking even bigger pieces of market share due to investments in lower prices. In fact, Walmart and Target(TGT) - Get Reportrecently unveiled plans that should drive food prices down even further, putting the squeeze on other industry players. And to make matters worse, Amazon(AMZN) - Get Report has entered the fray, offering low prices and efficient and convenient home delivery.
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Costco is hoping to boost revenues in this challenging environment by raising its membership fees. According to the company, in 2016 it derived roughly 72% of its operating income from these recurring fees. Now, starting on June 1, the company will raise the annual price of Goldstar and business memberships from $55 to $60, while executive memberships will take a $10 hike, to $120 per year. About 35 million Costco members will be affected by these changes.
It might be time to pass on Costco. In a market where consumers value convenience and price more than ever, raising membership fees seems like a bad move. After all, thanks to Amazon, consumers can pay just a little more for Prime and/or Fresh memberships and have their food delivered straight to the doorstep, without hassling with Costco checkout lines or parking lots.
The entire grocery industry is a risky bet right now, and Costco is one of the least inspiring players in the field. Instead, keep an eye on Walmart as the company rolls back its grocery prices and expands its organic food departments even more.
The author is an independent contributor who at the time of publication owned none of the stocks mentioned.
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