Costco’s crackdown on membership could lead to Netflix-like revenue increases. Morgan Stanley analysts say they are seeing “amazing conversion rates” among shoppers who pay. Analysts estimate that Costco could increase its U.S. membership by about 8%, or about 4 million people.
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There continue to be some similarities between the largest wholesale club retailer and the world’s largest streaming giant.
A year after Costco launched a Netflix-style crackdown on membership, including increasing the number of ID scanners at front doors, analysts say Costco could see similar revenue increases.
Morgan Stanley’s retail team, led by analyst Simeon Gutman, said in a note this week: “Costco’s push to roll out membership card scanners in U.S. clubs could soon lead to a Netflix moment. ” he said. The bank rates Netflix stock “overweight.”
Business Insider first reported on the ID scanner’s testing earlier this year at a warehouse near the company’s headquarters in Issaquah, Washington.
Morgan Stanley says it has observed “amazing conversion rates” in some stores that have implemented the new technology, with membership numbers increasing in double digits as previously non-member shoppers choose to pay the fee. He said there was an increase in the first half as well.
Morgan Stanley estimates that Netflix’s membership has increased by 13% since the password-sharing crackdown, while Gutman’s team estimates that Costco has increased its U.S. membership by 8%, or about 4 million people. He said the basic scenario is that the company can increase the number of new members.
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On the revenue side, analysts said Costco would collect an additional $324 million in fees even if only one in five new signups were high-priced executive memberships.
They estimate that the actual ratio of existing Gold Star members to executive members is closer to 50/50, and that if new registrations followed suit, fee income would increase by nearly $400 million.
Costco is the world’s third-largest retailer by sales after Walmart and Amazon, but the company makes most of its profits from membership fees.
Costco and other warehouse clubs don’t make much money from products sold at markups so low that they’re close to cost.
In other words, like Netflix, the key to profitability is charging members for exclusive access to its products and services.
“Our analysis is theoretical and we do not intend to change our expectations,” Morgan Stanley analysts said.
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