Oxford Dictionary defines “Rip Off” as “cheat someone, especially financially“. Decide for yourself if Costco‘s behaviours discussed in this report meet this definition of “rip off” or there are simply a lot of “misunderstanding”?
New & long time Costco members caught in the scheme
Since the world plunged into Covid19 global pandemic in March 2020, millions of grocery shoppers in US, Canada, UK, and around the world have become brand new Costco members and started bulk buying. Who can forget news and social media photos of empty shelves of “essential goods” from toilet paper, household cleaning items, flour to even dry pasta. When medical experts advise us to physical distance and stay at home, bulk-buying at places like Costco seems like a good way to reduce our risk of contracting Covid19.
It may surprise some long time Costco members who have no idea that they have been caught in Costco‘s scheme for years. So the millions of new members who recently joined Costco since March of 2020 need to pay special attention and arm yourselves with knowledge in order to avoid being ripped off. For the record, this reporter’s family has a Costco membership. We shop at Costco periodically. One recent Costco experience was bad enough that it became the proverbial last straw and impetus to conduct this in-depth research and share with you these findings so you can judge Costco for yourself.
Guess what item
So what item does Costco rip members off the most? Hint: Some members get ripped off depending on your shopping habits and can add up to millions of dollars a year. Cosmetic, Costco chickens, or diamond rings? No, it’s what gets you in the door … your membership! For fiscal year ending August 30th 2020, Costco made a whopping $3.54 billion from membership fees.
By this reporter’s estimation (see below), Costco is potentially ripping off members worldwide from US$15 million to US$59 million a year, give or take a few million dollars. Not small change. So how does this scheme work?
The most troubling time of your Costco membership year
Costco membership agreements have pages of fine print. How many of the millions of new (since the start of the pandemic in March 2020) or existing 105.5 million worldwide members/cardholders have actually carefully read every word of the membership legal contract before they signed on the dotted line? One member in 50,000 or less?
You are not alone if you didn’t have time to read before signing it. Few years ago this reporter spent almost 10 minutes standing at the membership counter to read the legal fine print before giving up and signed on the dotted line without finishing like everyone else. Yes, this reporter is happy to say that bit of embarrassment has finally been corrected while researching for this report. Let’s take a quick look of the legal mumble-jumble and see if you notice the problem before it is explained with examples. Ready?
After reviewing five “Member Privileges & Conditions” contractual languages for renewals for Costco U.S. (pix), Canada (pix), U.K. (pix), Australia (pix), and Taiwan (pix), this reporter concluded that they are similar enough. So let’s look at the contractual languages used by the original and mother of all Costcos, Costco U.S. (pix),
“Memberships renewed within 2 months after expiration of the current membership year will be extended for 12 months from the expiration date. Memberships renewed more than 2 months after such expiration will be extended for 12 months from the renewal date. All renewals will be assessed at the membership fee in effect on the date the membership fee is paid.”
To make things easier to explain, we will use a concrete example with dates. Let’s say your membership expired on November 30th, 2020 (actually our family’s case), if you renew your membership within 2 months after expiration, even on January 30th, 2021, that is the last day of that “within 2 months” period, then you are one of the members that have been “ripped off“.
How so? Costco‘s contractual language forces you to pay 12 months of membership fee but only give you 10 months of membership benefits. Your renewed membership expiration date is unfairly backdated for two full months to November 30th, 2021, a rip off of 1/6 of the fee paid by loyal & renewing members! Making membership renewal time the most troubling time of your Costco membership. The kicker is that brand new customers signing up on the same date of January 30th, 2021 as you would get an honest expiration date of January 31, 2022.
How Costco China members are NOT ripped off?
Costco opened its first China store in 2019 August even though Costco co-founder and former CEO James (Jim) Sinegal first visited China over 25 years ago and had thought long & hard of how to be successful in China for years. This news clip posted by Guardian on Aug 28, 2019 is worth a thousand words of the business potential in China, “Opening-day frenzy at first Costco store in China“
Let’s take a quick look of the legal fine print used by Costco China (pix-Chinese). If you don’t read Chinese but love to solve puzzles, here is a big hint: you can actually make a good guess by focusing on what number is present or missing in the Chinese. Feel free to skip to the next paragraph if you wish.
“3 无论您是否行使会员权利，会员卡有效期自注册成功当日生效，12个月后到期。若在本年度会员卡到期前续约，有效期自原到期日起算，12个月后到期；若在本年度会员卡到期后续约，有效期自续约付费成功当日起算，12个月后到期。 “
“3. Membership is for a 12-month period based on the date of initial enrollment, whether or not shopping privileges have been exercised. If renewal of membership occurs prior to the expiration date of the current membership year, the renewal will be extended for 12 months from the current expiration date. However, if the membership is renewed after the expiration of the current membership year, the membership will be extended for 12 months from the date of successful payment of the renewal fee.”
“[…] Memberships renewed within 2 months after expiration of the current membership year will be extended for 12 months from the expiration date. […]”
“[…] However, if the membership is renewed after the expiration of the current membership year, the membership will be extended for 12 months from the date of successful payment of the renewal fee.”
Removing the SIX WORDS that rip off Costco members worldwide
The Costco genius who wrote these insidious & cancerous SIX contractual words
“… renewed within 2 months after expiration …”
into the membership contract deserved to be “honoured” with a big fancy gold plaque.
Did Costco co-founder former CEO Jim approved these insidious & cancerous SIX Words or at least keep them in the contract in U.S. and around the world for years during his time as Costco CEO? Why are they now removed in Costco China membership contract? One way to understand this action is that they were NOT removed by random accident. The insidious & cancerous SIX words were removed proactively for Costco China (pix-English). Renewing Costco China customers will always get 12 months of benefits without the unfair practice of backdating membership to an earlier date resulting in shorter duration of membership benefits.
Why Costco China members are NOT ripped off?
It feels as if Costco has gotten comfortable in making lots of easy money in treating members in Canada, U.K., Australia, and Taiwan equally unfairly as it has treated members in U.S. So why the change for China now? Costco under the leadership of co-founder former CEO Jim must have conducted its due diligence and detailed market research before entering the Chinese market. And it is safe to think Costco management had concluded that Chinese shoppers are not gullible enough to accept clearly unfair membership renewal terms.
Can you imagine for a moment what smart Chinese shoppers would do if they were to discover those insidious & cancerous SIX Words actually existed in the membership contract during the renewal process? As a start, most Costco China members would simply cancel their memberships in protest and may might even publicize this unfairness widely in Chinese social media. Costco would have destroyed its brand, reputation. The dream to be successful in China for the last 25+ years would have disappeared and gone before it has a chance to talk of “membership loyalty“. No members, no loyalty to speak of.
Costco’s easy profit
Why generations of Costco senior executives from co-founder & former CEO Jim and late co-founder Jeffrey Brotman, to W. Craig Jelinek (current CEO & President), to senior Costco lawyers & accountants, to Costco corporate board of directors did not suggest nor did anything to correct the unfair “Member Privileges & Conditions” contractual language remains a “small mystery”?
Why have these experienced leaders, indirectly or by their inactions, decided to keep a membership contractual term that rips off members for 1, 2, 3, 4, 5, … up to 59, 60, 61 days (“within 2 months”)? Is the most obvious guess for this “small mystery” simply to be a love of easy profit and forget about what is morally right?
How much Costco’s SIX Words rips members off?
A precise amount of how many million dollars Costco rips off its members over the last 20-30 years in U.S. and globally can be calculated if Costco makes public its precise Membership Renewal Time Lag data. By Membership Renewal Time Lag data, they are the annual individual number of members who renew 1, 2, 3, 4, 5, … and up to 59, 60, 61 days late (ML1, ML2, ML3, … ML60, ML61) but still within the infamous 2 months after expiration.
Costco may have Membership Renewal Time Lag data (maybe in a different name) ready which is great. If not, the data can be created by querying Costco online membership database with help from the IT team. If these extra fees paid for no benefits happen for even a percentage of Costco 58.1 million total paid members and 105.5 million total cardholders (Costco 2020 Annual Report), they can add up to meaningful millions as you will see below.
In short, the yearly Membership Renewal Time Lag data for each country where a variation of the insidious & cancerous SIX Words exist in their contractual language for renewals in Costco U.S., Canada, U.K., Australia, Taiwan, etc will help calculations on a per country basis of Costco‘s rip off amount for the last many (20-30? or more) years.
For now, without Costco’s precise numbers, let’s try to gain some insights using rough estimations by creating a few scenarios. It will be easier to understand these estimates by using round numbers. One in 20 members (renew after expiration but within 2 months) means 5% of members. One in 10 members means 10% of members. Let’s add two more scenarios assuming members are ripped off for one month (on average) to two months (maximum of 61 out of 365 days). Note that actual Costco‘s data may lead to the amount being worse or better than these estimates, so readers beware.
Based on the above scenarios and estimations, Costco can potentially be ripping off members in the range of approximately US$14.75 million to US$59 million a year, give or take some millions. Not small change. These money constitute members’ hard earned money globally paid for no membership benefits because of backdating of membership expirations.
Costco’s “Reputation”, “Member Trust”, and “Membership Loyalty”
“Membership loyalty and growth are essential to our business. […] Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations.”
Knowing members are treated differently during renewal time by Costco China compare to Costco in the rest of the world, how do you think and feel as Costco‘s talk about “Reputation“, “Member Trust“, and “Membership Loyalty“?
Talking “Reputation“, talking “Member Trust“, and talking “Membership Loyalty” are easier than doing. How does a business build or destroy “reputation“? Does it enhance or destroy “member trust” if you selectively treat some members fairly but let it be “business as usual” for members in other countries including the country where the company is founded? Does it create or destroy “membership loyalty” when “loyal” and “renewing” members are treated worse off than brand new customers? These questions are simple but they apparently are not simple enough for Costco management.
Now speaking from my Costco Canada experience, this reporter is severely allergic to being ripped off. When our family’s Costco membership needed to be renewed for the first time a few years ago, we took time to go to the membership counter to politely ask for 12 months of membership benefits for 12 months of fee. The first customer service agent refused and insisted on backdating our membership expiration. And then it took more time to talk to one more agent plus a Costco supervisor in charge who unwillingly gave us the fair 12 months membership benefits for 12 months of fees we felt rightfully deserved upon renewal.
In January 2021, this reporter’s condition of being severe allergy of being ripped off has not improved so we again politely asked for 12 months of membership benefits for 12 months of fee. The first agent refused. “Lucky” for me this time as a Costco membership renewal manager was standing nearby. I thought, “Great, this fix would be easy as a manager must be better trained and understand how unfair the membership renewal clauses are and could help us quickly.”
It turned out neither easy nor quick as the next 10-15 minutes would seemed forever and painful. Instead of a quick fix, the manager proceeded to argue that no change was allowed. Hello “… renewed within 2 months after expiration …” my insidious and cancerous old friend! (“Hello darkness, my old friend. I’ve come to talk with you again. …“)
The membership renewal manager told us 12 months of benefits for 12 months of fee was not possible. Few minutes passed, and the manager “improved” the offer and tried to ask us to accept a lesser amount of rip off, as if being ripped off for LESS should be “good enough”. At one point, I got fed up so I politely and firmly asked to be ripped off FULLY (as the manager had wanted to do initially) so we could go on to shop. I mentioned politely that I would be contacting the store general manager later to try to get this fix when I found some time. We just wanted to shop and leave quickly and had never planned to waste so much time in renewing our membership during a deadly pandemic!
At the end of this long 2021 pandemic Costco membership renewal ordeal, the renewal manager ended up agreeing to give us 12 months of membership benefits for 12 months of fee as I asked for politely in the first place. One worthy note, the current research happened AFTER the renewal so at the time this reporter did NOT know Costco China members never have to suffer this rip off scheme EVER.
Let’s repost the core problem using the much loved Costco Chickens: Should members be ever asked to pay for 12 Costco Chickens and then only be given 10 chickens (or 10 chickens plus one with both wings missing and only one leg left, or … some random number of partial chickens less than 12) at the checkout counter to take home? The answer must be no! Money paid for 12 Costco Chickens must always let you bring you 12 chickens home!
What is Selective Honesty? Is it be about treating members of Costco China fairly during renewal time but then staying “business as usual” for members in US, Canada, UK, …?
Story of Costco co-founder Jim Sinegal owing a Seattle Beer & Wine License Inspector “thanks”
I love Costco co-founder Jim‘s 2017 telling of an insightful story. Jim said he owes “thanks” to a Seattle Beer & Wine License Inspector (who caused Costco multiple delays, asked for a name change and conducted intensive audit) at the start of Costco because, to quote Jim,
The title of this report is a question, “Why Costco rips millions off members in US, Canada, UK, … EXCEPT China?” I will now let you the readers decide for yourself if Costco‘s behaviours meet Oxford’s definition of “rip off“? Or the above are simply some “misunderstanding”?
P.S. Smart Costco shopper #ProTips: We don’t shop at Costco every week or even every month. And we only buy items when we see great value. We make sure to buy everything we need from Costco on our last month (and sometimes last day) of our annual membership. This way, we can and will wait at least a month or two before going to Costco again. Saving one to almost two months of membership fee and saving time because of Costco’s long lineup at checkout.
At the end of the day, 12 months fees for 12 months benefits is the most honest and fair way to go worldwide, and not just for China! We shoppers are smart in Canada, U.S., U.K., Australia,, Taiwan, … and want to be treated fairly and as well as our fellow Costco China members.
Thanks: I want to thank (without quotes or reservation, a straight thank you) the Costco Canada membership renewal manager that day for leading me to conduct the required research and write this report. What I experienced made me realize I could NOT easily fix even my own yearly problem without painful and time wasting chats. I need to think bigger.
By writing this article, this reporter tries to borrow a page from Air Passenger Rights Advocate Dr. Gábor (Gabi) Lukács’, who I’ve interviewed many times over the years, great volunteer work in fighting Air Canada and getting bumped Air Canada passengers $200, $400, or $800 compensation. (Yes, a compensation that Gabi fought and won in 2013 for *ALL* Air Canada passengers.)
About Research: During the research process, this reporter found and watched hours of online talks by Costco co-founder and former CEO James (Jim) Sinegal sharing his Costco experiences with business school students reminding this reporter of his student days pursuing an MBA degree years ago. While Jim deserves thanks for sharing his insights widely, this report poses serious questions to Costco (and Jim indirectly even he is now retired).
Legal note: This reporter takes his independent reporting seriously and realizes Costco has large teams of lawyers around the world including in Canada, so extra care have been exercised to cite words of Costco co-founder Mr. James Sinegal himself plus relevant legal clauses from Costco‘s membership agreements around the world. Costco‘s financial and membership figures are straight from Costco‘s annual report that you can read and review yourself. When numbers are estimated, they have been clearly labelled as such and readers are warned of those numbers are estimates only. I know I won’t enjoy Costco lawyers writing me to threaten me with legal actions to try to force me to take this report down. Extra care have been taken to ensure this published report is treated as “material of public interest” and considered as “Responsible Communication” as defined by the 2009 Supreme Court of Canada “Grant v. Torstar Corp.” decision. Sorry for these legal mumble-jumble because Jiminy Cricket thinks this legal note is cute, and yes of course, Costco has very large teams of lawyers. I hope you enjoy reading this report as much as I in writing it. After all, you are reading the last line of a long legal note in a long report.
20210130 Various edits making things less repetitive and more readable. [Thanks to my friend Melissa for providing some great feedback and edit suggestions.]
20210129 Minor edits.
20210128 Added an example using the beloved Costco chickens to help illustrate the unfairness.