Costco's Upgrade Push: Three Perks, One Main Goal

Costco's stock is a story about its membership model. That engine is the main character, driving both the financial results and the upgrade push. Right now, the market is paying close attention to the numbers that show this engine is still powerful, even as it faces new challenges.

The latest quarter delivered a strong beat. Membership fee income grew 14% to $1.724 billion, a solid increase that was fueled by three things: a rising base of members, more people upgrading to the pricier Executive tier, and a fee hike implemented last September. That 14% jump is the headline, but the real story is in the upgrade rate. Executive members now represent 74.2% of global sales, making their growth a critical metric for the company's top and bottom lines. The upgrade trend is clear, with Executive memberships growing 9.3% to 38.7 million last quarter.

Yet, the growth story isn't without a hitch. The total paid membership base did climb 6.3% year-over-year to 81 million, but the growth rate has slowed from the prior year. More importantly, the renewal rate-a key health indicator-eased slightly. The worldwide renewal rate dipped to 89.8% from 90.2% the quarter before, with the U.S. rate falling 40 basis points to 92.3%. Management attributes this partly to a higher mix of online sign-ups, including promotional campaigns, which may bring in younger, more digitally active members who have a "modestly higher churn rate."

This tension between strong fee growth and a slight dip in renewals is the core of the current setup. The stock has been under pressure, declining 6.5% over the past year while the industry grew. That underperformance, coupled with a premium valuation, means the market is watching this membership engine closely. The upgrade push is a direct response: by adding benefits like a monthly Instacart credit and extended hours, Costco is trying to lock in those newer, digital-savvy members and improve renewal rates before they become a bigger problem. For now, the engine is running hot, but the next move will be all about maintaining that momentum.

The Dangling Carrots: Analyzing the Three Perks

Costco's upgrade push is built on a simple equation: add tangible value, and members will pay more to get it. The company is dangling three specific perks, each designed to pull members toward the pricier Executive tier. The most visible is now a universal benefit. Exclusive early shopping hours for Executive members have rolled out across all U.S. warehouses, giving them an hour to shop before the crowd on weekdays and weekends starting at 9 a.m.. This isn't just a convenience; it's a direct attempt to reward loyalty with a time advantage, a classic tactic to make the higher fee feel justified.

The numbers show these carrots are working. Executive membership growth accelerated to 9.3% in Q4, significantly outpacing the overall paid membership growth rate of 6.3%. This tier now accounts for 74.2% of global sales, making its expansion the single biggest lever for boosting the top line. The company also implemented a $5 fee increase for individual memberships and a $10 increase for Executive memberships in September 2024, a move that contributed to the strong fee income growth accounting for slightly less than half of the total membership fee income growth last quarter.

So, why these specific perks? The answer ties directly to the core renewal rate challenge. Management noted the worldwide renewal rate dipped slightly, with a higher mix of online sign-ups-including promotional campaigns-bringing in younger, more digitally active members who have a "modestly higher churn rate" . The new benefits are a targeted response. The monthly Instacart credit and extended hours are digital-first perks that appeal directly to this newer, tech-savvy cohort. By locking them in early with these tangible, high-attention benefits, Costco aims to improve their renewal rates before they become a bigger problem. The early hours, meanwhile, create a sense of exclusivity and immediate value that can strengthen the emotional connection to the brand. In essence, Costco is using these perks not just to sell memberships, but to lock in the future of its membership engine.

Catalysts, Risks, and What to Watch

The upgrade thesis hinges on a few key metrics that will serve as market attention triggers in the coming quarters. The next quarterly report is the first major test. Investors will be watching for two things: the pace of Executive membership growth and, more critically, the renewal rate. The company has already seen a sequential dip in its worldwide renewal rate to 89.8%, with the U.S. rate falling 40 basis points. Any further softening would signal the upgrade push is not fully offsetting churn, especially among newer, digital-savvy sign-ups. Conversely, a stabilization or rebound in renewals would confirm the new perks are working and that the upgrade momentum is sustainable.

The main risk is saturation. With Executive members now representing 74.3% of total sales, the pool for new upgrades is shrinking. The company can only push so many members to the premium tier before it hits a wall. This creates a fundamental tension: the upgrade push is the primary growth lever, but its effectiveness is diminishing as the target market gets smaller. The market is already pricing in this dynamic, with Costco's stock underperforming the industry by over 10% in the past year.

A key catalyst is the company's ability to maintain high renewal rates while pushing upgrades. The loyalty engine is fueled by retention. The U.S. renewal rate of 92.2% is still strong, but it's down from the prior quarter. If Costco can lock in its newer members with the Instacart credit and extended hours, it could improve their lifetime value and keep the renewal rate elevated. This would be the ideal outcome: upgrades boost revenue, and high renewals ensure that revenue is sticky and recurring.

From a search volume perspective, the market is likely googling terms like "Costco renewal rate," "Costco Executive membership growth," and "membership saturation." These are the exact metrics that will confirm or challenge the upgrade thesis. The stock's premium valuation makes it especially sensitive to any stumble in these numbers. For now, the setup is clear: the upgrade push is the main character, but its story depends on maintaining the loyalty that keeps the engine running.