Why do warehouse clubs like Costco and Sam’s Club usually require membership to shop there? It’s my understanding that they operate by selling high-turnover products in bulk quantities with “no frills” like nice shelving and whatnot. So it seems like they’d only earn a modest amount of their income from membership fees. Isn’t it possible they’d be better off if they just did away with memberships and let anyone shop there (that is, the additional number of people spending money would more than offset the loss of membership fees)?
I would think that the memberships might drive more business their way because people who have a membership will have more impetus to use it.
And someone like Sam’s club, who also runs Walmart, can offlay any comments about charging one price in one place and a cheaper price at another, can point to the privileges of membership as the reason.
I think it’s just to make it seem like an “exclusive” type of place even though anyone can join. Just a marketing gimmick.
When VCRs were first popular many rental places charged you $20 or so to join. Once a few places had free membership they were all forced to drop the membership charge.
No cite, but I’ve heard that Costco actually makes much of its profit on the annual membership fees, and just about breaks even on the actual merchandise, between wholesale costs, labor, location, taxes, etc.
The CostCo website sez:
So presumably it’s more than a “modest” amount, and it locks in the buyers too they are more likely to visit a place they are members of?
Why not keep costs down by not charging a fee to shop there? 
Another benefit of membership is that in exchange for membership you relinquish certain rights you may have. You can search for one of the many interminable receipt checking threads for details, but warehouse clubs can insist on checking receipts as a condition of membership.
I think it’s to keep Groucho Marx out.
I thought that at one time manufacturers would set minimum retail prices for their products and that having an outlet that required membership got around those rules because it wasn’t a real retail store. Not sure if that is true. These days places like Costco often get special models of products that have different model numbers and slightly different features so customers can’t go out and directly compare prices between a retailer such as Sears and a warehouse store such as Costco.
Yeah, the annual report is pretty upfront about it:
They netted $7.5 billion on merchandise and $1.5 billion on membership fees (with an 87% renewal rate.)
They are in a situation where dropping the membership fee now would be a very risky play.
I wonder what their shrinkage rates are like when you need ID to get in and they check all receipts at the doors? I was at my high school reunion a few years ago and one fellow left early. He was a Walmart manager in a poor area of town, and said he had to “get up early to open the store for the shoplifters”.
But of course, the membership proceeds are almost all net profit? I read somewhere where Costco attempts to keep all markups to 18%. And did they pro-rate operating costs against membership or is the 7.5billion after fixed costs too?
I was under the impression that at the beginning they viewed themselves as semi-wholesalers (or maybe as jobbers). I think that sales to small retailers are still a significant part of their business and there are certain hours that are restricted to businesses. They didn’t want to be seen as competing too vigorously with their best customers.
However, their business model has, in part, changed. They don’t insist on your buying a dozen ipods or laptops and they are plainly retailing them. And you cannot get a discount on your ipod. But most of their foods are sold in semibulk. You cannot buy just can of tomatoes, or one pound of chicken parts.
Among other things their strategy encourages members to shop there more often, to amortize the annual membership fee.
I Think There are a couple of reasons
I Believe they originally started as Business to Business stores only, and membership used to be restricted to other registered businesses offering them lower prices without charging them for the ambiance. Later on they opened up the membership to the public but the membership fees remained.
Also, I think its psychological. People are more likely to go there and shop there is they have already invested the money in a membership. It also servers as a barrier from bargain shoppers who just come in for the loss leaders or casual browsers who are not going to buy anything. As such it provides a better buying experience.
In NC Sam’s can’t be called a wholesale store because they let anyone join. By NC law wholesale means a place only sells to other businesses.
Yeah, I oversimplified, the real balance sheet is just revenue and expenses.
REVENUE
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,889
Membership fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,533
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,422
OPERATING EXPENSES
Merchandise costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,335
Selling, general and administrative . . . . . . . . . . . . . . . . . . 7,252
FWIW, I’ve never been all that impressed by the prices at places like Sam’s Club. There are bargains here and there, to be sure, but it’s not at all uniform.
A for-fee membership encourages members to shop exclusively at that store. After a while those members tend to forget the prices offered by competitors, since they don’t shop at competing stores anymore at all; they no longer notice that some of the items aren’t really that good of a deal (inasmuchas they are available at competing stores for less).
Back 20 years ago, when I joined one of these for the first time, they were supposedly only for union members and then people who worked for specific companies. I don’t know if that was real or to make it seem exclusive.
I shop at CostCo, and I’ve found you have to be careful about getting tons of stuff for a price no better than you can get it at a grocery during a decent sale. Some prices are great, and I suspect that membership keeps people from zipping in and skimming the cream of the deals. It night be the same reason that there are no express lanes.
Membership might also be good for setting expectations correctly. You know it is different, so you don’t mind having to buy 50 soup cups packaged together.
Costco claims express lanes are not any faster, not sure why but that’s their reason for not having any.
The whole appeal of Sam’s and their competitors is that you can purchase items in bulk quantities (and thus lower unit cost) than in outside stores. When my wife and I had twins, we saved a bunch on disposable diapers by buying them in bulk, IIRC cases of 300.
They sell a lot of stuff that isn’t bulk – DVDs, electronics, etc. – and I suspect they’re not remarkably competitive in terms of pricing on those types of items.
Another interesting wrinkle I heard of…
Most property taxes are assessed on the value of the property, taking into account finishing etc. Not only is a bare concrete warehouse cheaper to make, but apparently your property taxes are also significantly lwoer on the unfinished building. So between a rough concrete and bare wall Costco and Sams vs. a finished Walmart or Target, the taxes are lower.
Also, their model is mostly - if we can get a deal, we’ll stock it. If not, go elsewhere. Hence, they don’t need to stock everything and can put the screws to suppliers more liberally. A department store, OTOH, wants to have certain items and certain variety always in stock.
Finally - nobody really discounts current iPods much. Apple somehow controls this. It used to be illegal to fix retail prices in some jurisdictions, but this seems to have disappeared. I blame Republicans, because it’s a cheap shot.