Costco's Membership Moat: Can Fee Hikes and Perks Fix a Softening Flywheel?

Costco's business model is built on a powerful flywheel: members pay a fee to access a warehouse, and their continued renewal funds the company's low-margin retail operations. The health of this flywheel is measured by the membership renewal rate. For the latest quarter, that rate stood at 92.3% in the U.S. and Canada, a slight dip from historical highs. While still remarkably strong, this marks a softening that management has explicitly acknowledged.

The company's explanation points to a deliberate growth strategy. CFO Gary Millerchip attributed the decline to a higher number of online sign-ups reaching the renewal stage, including a large cohort from a December 2023 campaign. This is the core tension. On one hand, these digital acquisitions are a net positive, helping to grow the base and introduce younger members to Costco. On the other, they represent a shift in the membership mix. The evidence suggests nearly half of new sign-ups are now under age 40, a demographic that may initially renew at slightly lower rates than the traditional cohort.

This signals a potential vulnerability. The growth rate of total paid members has also slowed slightly to 6.3% year-over-year. While still robust, the combination of a declining renewal rate and a slower-growing base suggests the flywheel's momentum is easing. The company's recent fee hikes and new perks are now tasked with not just boosting revenue, but also reinforcing loyalty within this evolving membership base. The question for investors is whether these initiatives can stabilize the renewal rate and ensure the younger, digital-native members eventually match the decades-long commitment of the traditional Costco loyalist.

Costco's Response: Fee Hikes and New Perks

Costco's response to a softening membership flywheel is a two-pronged strategy: directly boosting revenue through price increases while simultaneously enhancing the perceived value of the membership to reinforce loyalty. The first pillar is a straightforward fee hike. In September 2024, the company raised annual membership fees by $5 to $10 across its core tiers, with the Gold Star membership jumping from $60 to $65 and the Executive membership from $120 to $130. Management has stated this increase contributed a little under half of the 14% year-over-year growth in membership income to $1.33 billion in the first quarter of fiscal 2026. This move demonstrates the company's pricing power and its ability to convert a portion of its growth into immediate, high-margin revenue.

The second, more complex pillar is a suite of new perks and operational changes aimed at making the fee increase feel worthwhile. For 2026, the focus is on convenience and tangible savings. Executive members now get earlier store access, with openings moved to 9 a.m. A new 5% cash back reward on Costco gas purchases provides a direct financial incentive. On the digital front, the company is rolling out a password-less sign-in for the app to improve the online shopping experience. These are classic value-adds designed to deepen engagement and justify the membership cost.

Complementing these digital and benefit upgrades are operational tweaks focused on efficiency and experience. Some stores are introducing faster checkout systems and adding more self-checkout stands. More notably, Costco is requiring members to scan their membership IDs for food court purchases, a move aimed at curbing freeloading and freeing up space. These changes reflect a broader effort to refine the membership experience, ensuring the core value proposition of low prices and high service remains intact even as the customer base evolves.

The bottom line is that Costco is actively managing its membership flywheel. The fee hike provides a reliable revenue boost, while the new perks and operational improvements seek to stabilize renewal rates by enhancing the day-to-day value for members. The success of this strategy will hinge on whether these initiatives can successfully convert the company's younger, digitally acquired members into the long-term, high-renewal loyalists that have historically powered its model.

Assessing the Moat: Strengthening or Eroding?

The core question for any value investor is whether a company's competitive advantage is widening or narrowing. In Costco's case, the membership model remains a fortress, but its walls are being tested by a new generation of customers.

On the strength side, the numbers are undeniable. Membership income grew a robust 14% year-over-year to $1.329 billion in the first quarter of fiscal 2026. This isn't just revenue; it's nearly pure profit that funds the entire low-margin retail operation. The model's durability is further proven by the company's operational moat: its strict control over entrances and exits helps keep inventory shrinkage well below typical retail levels, a critical cost advantage that protects margins.

The primary risk to this moat is a sustained decline in renewal rates, which could signal weakening loyalty. The recent dip to 92.3% in the U.S. and Canada is the clearest signal. Management's explanation-that a higher number of online sign-ups, including a large cohort from a December 2023 campaign, are reaching renewal-is a double-edged sword. While these digital acquisitions are a net positive for long-term base expansion, they represent a shift in the membership mix toward a younger demographic that may initially renew at slightly lower rates.

The bottom line is one of measured durability. Costco's pricing power and operational discipline provide a wide moat, but the company is now managing a flywheel with a subtly different weight distribution. The success of its fee hikes and new perks will be judged not just by immediate revenue, but by their ability to convert this younger, digitally acquired cohort into the decades-long, high-renewal loyalists of the past. For now, the moat remains wide and deep, but its width is being tested by the very growth strategy that is expanding the membership base.

Value Investor's Perspective: Price vs. Durability

The market's recent verdict on Costco is clear. After a 6% decline in 2025, the stock has staged a strong recovery, gaining 13% year-to-date in 2026. This re-rating suggests investors are looking past last year's underperformance and focusing on the fundamentals. For a value investor, the critical question is whether the current price adequately reflects the durability of the membership moat, or if it's pricing in too much optimism about the company's ability to manage its evolving flywheel.

The key catalysts to watch are the very metrics that define the flywheel's health. First, the trajectory of renewal rates, particularly the 92.3% U.S. and Canada rate, is the single most important number. Management has acknowledged the rate is likely to continue declining, so the market will be watching for stabilization or improvement. Second, the pace of new member acquisition, especially the shift toward online sign-ups, will reveal if the growth strategy is sustainable. Finally, the execution of new store openings, with several planned for the first half of 2026, will test the company's ability to scale its model efficiently.

The core investment question, then, is one of intrinsic value versus price. The current price must reflect the durability of the membership model. If renewal rates stabilize or improve, it signals that the company's fee hikes and new perks are successfully reinforcing loyalty, preserving the model's pricing power and the wide moat. If the renewal rate continues to decline, it would indicate a deeper erosion of loyalty, particularly among the younger, digitally acquired members, and would put the model's long-term pricing power at risk. The 92.3% U.S. renewal rate is the critical benchmark. It remains strong, but it is no longer at historical highs. For the stock to continue its climb, the company must demonstrate that this level is the new floor, not the beginning of a longer slide.