Executive members are driving Costco’s record earnings and increased consumer spending.
Costco’s recent earnings report revealed a significant shift in the retail landscape, demonstrating impressive growth driven largely by its most affluent customer base. Specifically, Costco’s “Executive Members” now account for an impressive 74.3% of total sales, a slight increase from the previous quarter. These high-tier members, who pay twice the annual fee and receive 2% cash back on purchases, are pivotal to the company’s success and offer a key insight into broader consumer spending trends. This demographic shift is fundamentally altering Costco’s business model and reflects a larger trend in the economy.
The Executive program, launched in 1997, initially garnered limited interest from Costco members. For decades, penetration of the Executive program remained below 50%, gradually increasing into the low 60s by the mid-2015 before steadily climbing toward the near 75% observed today. No other single metric better illustrates Costco’s transformation – from a retailer focused on providing value to middle-class shoppers to one driven by its wealthiest, most loyal, and most financially secure customers. This focus is evident across numerous key performance indicators.
The company’s Black Friday e-commerce performance reached a record $250 million in orders, representing a 20% increase in digital sales compared to the previous year. Holiday food volumes were exceptionally high, including 4.5 million pies sold in the three days leading up to Thanksgiving, and 358,000 pizzas served over the Halloween weekend. This data suggests that while Costco’s shoppers are price-conscious, they are also engaged in celebratory, bulk purchases, often within households with greater financial means, ample storage space, and a propensity for large-scale consumption.
Costco’s strategic price reductions, such as bacon at $16.99 per pound and walnuts at $12.99 for a three-pound bag, align with the spending behaviors of these affluent consumers. These customers are not seeking to trade down; they’re simply optimizing their purchasing decisions. The overall increase in wealth, fueled by rising stock markets and property values, is dramatically impacting consumer spending patterns. As noted by The Wall Street Journal, consumers tend to spend around $35 to $50 for every $1,000 increase in their investment portfolios – an effect largely attributable to increased confidence stemming from higher asset values, rather than immediate cash outlays.
Federal Reserve Chair Jerome Powell articulated this trend concisely when discussing the earnings reports of consumer-facing companies. He highlighted the observed divergence in consumer behavior: companies dealing with lower- and moderate-income households reporting tightening belts, changes in product purchases, and reduced spending, while those serving wealthier consumers demonstrate continued spending strength. This difference is primarily attributable to the significant wealth held by individuals with substantial investments in housing and securities, supported by historically low mortgage rates. This dynamic creates an "arbitrage" opportunity, where individuals leverage low-interest debt to benefit from rising asset values, leading to increased discretionary spending.
The U.S. housing market has experienced substantial growth since 2020, increasing in value by nearly 60% and adding approximately $20 trillion to homeowner wealth. This growth is compounded by the ongoing benefit of remarkably low mortgage rates, facilitating substantial borrowing and investment. The resulting spread— a difference of 2-3% on loans compared to the appreciation of homes around 6-10% and stock market returns exceeding 10%— directly fuels increased spending. Simultaneously, the S&P 500 has climbed approximately 90% and the Nasdaq has posted similar gains. Consumers with substantial equity in their homes and exposure to the stock market through 401(k)s, IRAs, and brokerage accounts are not only wealthier in terms of net worth but also possess greater confidence in their financial situation, which is reflected in their elevated spending habits. For Costco’s “whales,” this combination of low debt, rising asset values, and favorable investment returns translates into substantial discretionary spending power – power that is appropriately celebrated with offerings like Kirkland Signature Crème Brulee Bar Cake and Kirkland Signature Champagne Brut.
