Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Costco Board Kept the Membership Model Sacred
Transcript
- Lucas: There are very few companies where the board's most important job is to say no. And I think Costco's board might be the best example of that discipline in American retail. Luna: Say no to what exactly? Raising prices? Adding services? Lucas: Both, honestly. But the core of it is the membership model. Costco's board has one job above all others: protect the sanctity of the membership fee. Because that fee—currently sixty-five dollars a year for a Gold Star membership—is not just revenue. It's the entire profit engine. In fiscal 2025 Costco brought in four point two five billion dollars in membership fees. That's more than the company's net income for the year. Luna: So effectively their profit is membership fees. Everything else—the merchandise, the gas stations, the rotisserie chickens—just covers costs. Lucas: Exactly. The company famously caps merchandise markups at fourteen percent. For Kirkland Signature items it's even lower. That's not a marketing gimmick—it's a board-level policy. The logic is simple: if members see that the prices are genuinely unbeatable, they renew. And Costco's renewal rate in the U.S. and Canada is ninety-two point seven percent. In some regions it's above ninety-five. Luna: That is insanely high for any subscription business. Most streaming services would kill for that. Lucas: Right. But here's what I find fascinating about the board's role: they've had to defend that model against internal pressure to raise fees faster or loosen the markup rule. The most instructive moment came in 2009, during the Great Recession. Most retailers were slashing prices and cutting costs. Costco raised its annual fee from fifty dollars to fifty-five. First increase in three years. The board backed it unanimously. Luna: Raise fees during a recession? That seems counterintuitive. Did they lose members? Lucas: Short term, same-store sales dipped slightly. But renewal rates barely budged. And the fee increase added roughly two hundred million dollars to the bottom line that year. The board understood that members weren't price-sensitive about the fee itself—they were sensitive about value. As long as the warehouse experience stayed compelling, people would pay. That discipline has carried through every subsequent increase: 2011, 2014, 2017, 2022. Each time the board waited until the value proposition was so obvious that the increase felt like a non-event. Luna: But what about the board's composition? I've read that Costco's board is unusually insular. Many directors have been there for decades, and several have ties to co-founder Jim Sinegal. Lucas: That's a fair point. As of 2026, the board has eleven members. The average tenure is about fifteen years. Sinegal himself served on the board until 2018. His successor as CEO, Craig Jelinek, joined the board in 2012. There's a lot of continuity. Critics would say it's too cozy. But the defense is that this board understands the culture deeply. They've resisted the temptation to install outside retail executives who might push for higher margins or more SKUs. Luna: There is a risk though. If the board is too insular, they might miss signals from the outside. Like the shift to e-commerce. Costco was slow to build a robust online presence. Lucas: They were. And the board acknowledged that in the 2020 annual report. But they framed the response in terms of the model: e-commerce shouldn't cannibalize the warehouse experience. So they invested in buy online, pick up in warehouse, and in same-day delivery via Instacart. They didn't try to become Amazon. That's the board's philosophy—you don't fix what isn't broken. You just make the broken thing slightly less broken. Luna: I want to ask about succession. Jelinek stepped down as CEO in 2024 and was replaced by Ron Vachris, a company lifer who started as a forklift driver. How did the board handle that? Lucas: It was a very deliberate process. Jelinek had been CEO since 2012. The board started discussing succession formally in 2019. They considered external candidates but ultimately decided that the model requires someone who breathes the culture. Vachris had been president and COO. He'd worked in warehouses for decades. The board's view was that you can teach a leader strategy, but you can't teach them instinct for the membership model. That instinct takes years to develop. Luna: But if the board always promotes from within and resists outside voices, doesn't that risk groupthink? Especially as retail changes—tiktok shop, ai driven supply chains, whatever comes next. Lucas: It's a legitimate concern. And the board has tried to address it by adding a few independent directors with tech backgrounds. In 2021 they appointed Susan Decker, formerly of Yahoo, to the board. In 2023 they added a partner from a venture capital firm. So there is some fresh perspective. But the majority of the board is still retail operators. They believe that the fundamental model—pay a fee, get low prices, buy in bulk—is durable regardless of the channel. Luna: And so far, the numbers back them up. Costco's same-store sales have grown in every quarter for the past five years, even through inflation. The stock has outperformed the S&P 500 by a wide margin. Lucas: Look, we spend a lot of time on this show talking about boards that faced existential crises—Boeing, BP, Disney. And those are important. But there's also something to learn from a board that just quietly does its job well for decades. Costco's board isn't flashy. They don't issue dramatic statements. They just protect the model. And that protection has created enormous shareholder value. Luna: It reminds me of what Warren Buffett says: the most important job of a board is to pick a great CEO and then let them run the company. Costco's board has done that twice—Sinegal and then Jelinek. And now Vachris. Lucas: Exactly. And if these kinds of case studies help you think differently about your own work or your own organization, that's exactly why we make this show. We deliberately keep it ad-free so the conversation stays focused on the strategy, not on selling you something. If you find value in that, the simplest way to support the show is buy me a coffee dot com slash fexingo. No pressure, just a way to keep these episodes free for everyone. Luna: Yeah, it's a small gesture that makes a big difference for us. And it keeps the show exactly what it is: a conversation, not a commercial. Lucas: So back to Costco. One more thing I think is worth highlighting: the board's approach to digital membership. In early 2026, Costco started testing a premium membership tier that includes free delivery on all orders and early access to certain deals. They're charging a hundred and twenty dollars a year for it. Luna: Is that a departure from the model? It sounds like they're adding perks, not just lowering prices. Lucas: It is a departure, but the board has been careful. They tested it in only three states for the first six months. They're tracking whether premium members shop more frequently or just shift their spending. The board's requirement is that the premium tier must increase the overall renewal rate, not just generate incremental fee revenue. If it dilutes the core value proposition, they'll kill it. Luna: So even when they innovate, they stay true to the same principle: protect the membership. Lucas: Exactly. And that's the lesson. A board that knows what it's protecting can make strategic decisions without losing its identity. Costco's board knows the model is the moat. They're not going to trade a ninety-two percent renewal rate for a short-term fee bump. That discipline is rare. Luna: Do you think that discipline will survive the next generation of leadership? Vachris is sixty-one. The board will probably have to choose another CEO in five to ten years. Lucas: That's the test. The board's current composition leans heavily on directors who worked alongside Sinegal. As those directors retire, the board will need to recruit new members who share the philosophy but aren't just clones. If they can replicate the culture without replicating the people, Costco's model has another forty years in it. If not, they might end up like so many retailers that lost their way. Luna: It's a fascinating case study in how a board can be both conservative and successful. Lucas: Conservative on strategy, but not on execution. They're constantly improving the warehouse experience—better lighting, more self-checkout, expanded pharmacy services. The board approves capital expenditures for those improvements every year. They just won't touch the pricing model. That's the firewall. Luna: And that's what makes Costco one of the most admired companies in the world. Not because they're flashy, but because they're consistent. Lucas: Exactly. Consistency is underrated in business. We celebrate disruption, but sometimes the best strategy is just to keep doing what works, and let the board make sure no one messes with it.