Consumer confidence is low, prices are up, and talk of recession is in the air. That explains why some shoppers are trading down, meaning that they’re purchasing cheaper versions of products (generic versus name brand, for example) rather than foregoing them altogether. Just look at the fast food giant McDonald’s, which is already seeing benefits from customers trading down from more expensive eateries, according to CNBC. That news got us thinking: How might Costco — known for its low prices and bulk buys — and its stock do in a recession? We spoke to experts and looked at market data to find out.
How Costco Stock Could Benefit From a Recession
High prices and an economic slowdown could work to Costco’s advantage, according to Krieg Tidemann, an assistant professor of economics at Niagara University.
“More households may be induced to purchase a Costco membership and purchase most of their goods from the retailer, especially if prices remain high and pose considerable financial strain on consumers' disposable income and savings,” Tidemann told Cheapism.
In the same way that consumers are eating at McDonald’s to save money, shoppers might frequent Costco to save cash on groceries. And the pressure to shop at cheaper stores could mount if the economy slows like it did during the 2008-2009 Great Recession, which saw significant consumer shifts from high- to low-quality goods.
“When the possibility of unemployment is high, households tend to pull back on their consumption spending and become more price sensitive,” Tidemann explained, noting that the possibility of a recession could boost Costco stock (COST).
That certainly seems to be true today. Since September 2021, COST is up more than 17%, and the company has survived four recessions since it went public in the early 1980s.
The Motley Fool’s Luke Meindl recently described the stock as “consistent and durable,” noting that its membership policy ensures a solid customer base. And with membership renewal at over 90% as of its second quarter, Costco loyalty seems unshakeable — even in the face of inflation.
we can all invest in Costco stock and then buy a bunch of hot dogs and make a killing
— Yusong Liu (@YusongL) December 8, 2020
How Costco Stock Might Suffer in a Recession
Costco might benefit from consumer trade downs, but it won’t be entirely immune to a recession’s effects. A look at the past explains why.
Bill Mann, senior analyst at The Motley Fool, points out that during the worst of the 2008-2009 financial crisis, Costco’s revenues and profitability dropped.
“These drops happened in a period of time when guest visits remained strong, but the mix of products skewed more toward food and away from big-ticket items, and as a result overall revenue per visit dropped,” Mann told Cheapism, adding that those “same conditions are most likely in place today.”
So yes, Costco is a “natural beneficiary” of consumer trade downs, but at the same time, revenue might also drop, Mann said. There’s also the fact that Costco is an international wholesaler with 31% of its stores located outside the U.S.
“As the US dollar has risen sharply against nearly every other foreign currency, overall results for the company may be dramatically negatively impacted on a constant dollar basis,” Mann explained.
The Bottom Line
It’s true that consumers will likely continue to trade down in a recession, potentially boosting Costco’s membership base. But other factors — like consumer spending habits and the wholesaler’s overseas stores — might counterbalance the benefits Costco reaps from an economic slowdown. That said, COST remains a resilient stock that’ll likely outperform other businesses in a downturn.
