It can be a good deal for some, but there are big risks involved.
Spending $55 a year to join Costco (NASDAQ: COST) already represents a bit of a risk as it's easy to make shopping mistakes that make the warehouse club's excellent prices less of an overall value.
Taking the next step and spending $110, a full extra $55, on an Executive Membership seems like an added risk, but it may actually be a safer choice. That sounds counterintuitive, but the more expensive membership comes with a major perk that may actually make it a better deal than the cheaper $55 Gold Star offer.
All Costco membership levels are risky
Before you buy any Costco membership, it's worth remembering that just because the chain offers good prices does not mean that you will save money. It's possible to lose out on joining the warehouse club if you buy items you don't use or get tempted into purchases you don't need.
It's very easy for that to happen because the chain generally sells in bulk. That means it's possible to get a good price on anything from cereal to ketchup, cleaning supplies, or medicine, but actually pay more when you don't use the items purchased before they expire.
In addition, Costco changes some of its selection regularly. That can lead to customers buying an 8-foot stuffed bear, a giant pool toy or some other unneeded, not actually wanted item that seemed like a good idea at the time.
"Taken as a whole and over a span of years, the answer is that warehouse clubs almost never save money for the individual shopper," Billie Blair, an organizational psychologist who serves as CEO of Change Strategists, Inc., told The Motley Fool in an email. That, she added, is due to "membership fees, wastage from overbuying (produce and such), the necessity to buy in quantity (canned goods that sit on shelves and have to be discarded), etc."
If you overbuy or make purchases you never would have made, it does not matter which membership you buy. If, however, you take a disciplined approach to buying and you buy enough, the Executive Membership can be a better choice despite costing more.
Why is spending more better?
The Executive Membership offers 2% back on qualified Costco purchases, with a maximum reward of $750. There are other perks offered with the $110 membership, including "lower prices on check printing and identity protection, free roadside assistance for vehicles covered through the auto insurance program, and extra benefits on select Costco Travel products," according to the company's website.
Costco lays out what counts as a qualified purchase on its website, but it's fair to say that most things count. That means that a customer who spends $100 a month ($1,200 a year) will receive $24 in cash back. Assuming a cardholder takes no other discounts from using the card and ignoring any savings from the chain's lower prices compared with traditional grocery stores in general, it takes just over $450 in monthly spending to earn the sign-up payment of $110 back.
That's certainly not a small amount to spend, but it's also not crazy to think that a family that buys groceries, clothes, and the occasional piece of electronics or other big-ticket items from Costco could get there.
Is the Executive Membership worth it?
If you were going to join anyway, the point at which it becomes beneficial to join the higher tier is at an additional spending of roughly $225 a month, an amount that would earn you your extra $55 back.
The Executive Membership can be a good deal, but it may not bet the best one Costco offers. For truly disciplined shoppers, it makes more sense to get the chain's Visa (NYSE: V) rewards card. That Costco Anywhere Visa has a $55 annual fee, which includes membership to the store. It offers the same 2% back on purchases at the warehouse club as the Executive Membership, but the reward total is not capped. In addition, the Visa card offers 4% back on gas purchases (up to $7,500), 3% back on eligible restaurant and travel buys, and 1% back on all other purchases.
If you are disciplined enough to pay off your balance each month, the rewards card makes more sense than an Executive Membership. For those who are not, or people who simply don't want or need another credit card, the Executive Membership can be worth it if used well (and often).
Daniel Kline has no position in any stocks mentioned. He does not get good value from his Costco membership but avoided the giant bear. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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