Costco's New Polarizing Policy Is Making the Company Bank -- Though Not All Members Are Happy About It

For years, Wall Street has been driven higher by technological innovations. For instance, the evolution of artificial intelligence (AI) promises to alter the long-term growth trajectory for a variety of industries. According to the analysts at PwC, AI has the potential to add $15.7 trillion to the global economy by the turn of the decade.

But there's an even bigger trend, in nominal-dollar terms, that can make global waves: the retail industry. Based on estimates from Mordor Intelligence, the worldwide addressable market for retail is expected to grow from nearly $27.3 trillion in 2025 to a shade over $36.9 trillion by 2030.

With a figure this large, it's no wonder the retail arena is competitive. But for the select few companies that manage to stand out, such as warehouse club Costco Wholesale (NASDAQ: COST), e-commerce kingpin Amazon, and superstore Walmart, the rewards can be bountiful.

Image source: Costco Wholesale.

While all three of these retail juggernauts possess well-defined competitive advantages, it's Costco's ability to adapt to changing consumer habits -- along with its sometimes-polarizing perks -- that really stand out.

"Value" is Costco's biggest competitive edge

From mom-and-pop stores to giants like Costco and Walmart, shoppers have no shortage of options when it comes to spending their money and purchasing basic needs goods and discretionary items. Costco's long-term success has effectively boiled down to being able to undercut most of its competitors on price.

One of the more obvious advantages Costco brings to the table can be seen from the parking lot: its size. Costco's warehouses are huge, thereby providing a broader selection of groceries and discretionary products than most local stores and grocery chains. Being a large business allows the company to buy products in bulk, which in turn reduces the per-unit cost for each item. These cost savings are then passed along to its shoppers.

There's also a degree of nostalgia when shopping at Costco, compared to other predominantly brick-and-mortar retailers. The company sells luxury, one-off, and out-of-the-ordinary goods, such as top-of-line diamond jewelry, watches, and gold bars, which can intrigue shoppers to visit its warehouses. Although the operating margin on groceries (the primary lure used to bring foot traffic into its stores) tends to be razor-thin, just one discretionary purchase can boost the profitability of a visit.

It should be mentioned that selling basic need products, such as groceries and toiletries, shields Costco during recessions. While the company might lose some of its pricing power on discretionary items during economic downturns, the predictability of revenue from basic need goods ensures steady cash flow year after year.

But what ties everything together is its membership model. Consumers and businesses pay either $65 (Gold Star/Business) or $130 (Executive) annually for the right to shop at Costco. As you can imagine, paying for a membership gives cardholders incentive to get as much as possible out of this annual fee. Therefore, they typically make their biggest purchases at Costco.

Image source: Getty Images.

Costco just made a polarizing policy change that's lining the company's pocketbook

However, Costco memberships aren't static. The perks associated with buying an annual membership have been known to change.

For example, Costco has begun scanning membership cards or QR codes on smartphones at the entrance of its stores to ensure that only paying members are doing the shopping, which helps keeps its prices lower than the competition. It also stopped selling its famous $1.50 hot dog combo to folks without a Costco membership in the food court.

Yet the biggest recent change, and by far the most polarizing, is the introduction of special shopping hours for its top tier of cardholders. Though this change was initially announced in June, Costco began enforcing a new policy on Sept. 2 that allows Executive members to shop exclusively from 9 a.m. to 10 a.m. on weekdays and Sundays, and for a 30-minute window on Saturdays, from 9 a.m. to 9:30 a.m.

Before this announced change, Executive cardholders already held a few key advantages over Gold Star and Business members. Notably, they were eligible to receive 2% back annually (up to $1,250) on purchases, and were privy to a $10-per-month credit on eligible Instacart orders topping $150.

But exclusive shopping hours for its top tier of cardholders is a new line in the sand that clearly divides its membership base. While tens of millions of U.S. Gold Star and Business shoppers are probably unhappy with this policy change, management and Costco stock shareholders are too busy reaping the rewards of this decision.

During Costco's fiscal fourth quarter conference call with analysts (Costco's fiscal year ended on Aug. 31), CEO Ron Vachris stated, "We estimate these incremental hours [for Executive members] have added about 1% to weekly U.S. sales since implementation."

To put this statement into context, Costco is projected to report nearly $297 billion in sales for fiscal 2026. A 1% incremental increase would provide a boost of almost $3 billion. Even with retail sales producing relatively low margins, this can make a difference in the company's bottom line.

This polarizing new policy makes even more sense when you realize how important Executive members are to Costco's sales and profits. Although fewer than 48% of all global cardholders are Executive members, this top tier accounted for more than 74% of net sales in the fiscal fourth quarter. Pleasing Executive cardholders and getting these folks to renew their membership is paramount to the company's success.

Furthermore, Costco's management team hinted that this policy shift has caused some of its Gold Star/Business members to upgrade to the Executive tier. The bulk of Costco's profits come from the annual membership fees it collects.

Although not all Costco cardholders are going to be happy with this latest move, the company's management team couldn't be more pleased with the early returns.

Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool recommends Instacart. The Motley Fool has a disclosure policy.