Tuesday, October 11, 2011

Don't Believe Everything You See On Cable Business Channels

Neil Cavuto hosts a 4PM weekday program on Fox News which he tries to make into a blend of political and business news, typically beginning the hour by discussing the US equity market performance of the day.

Last week, I caught a few minutes of a misleading and, frankly, just wrong-headed segment in which a guest contended that Costco will be losing business by raising its membership fee.

I forget the woman's name, but she had an axe to grind against the warehouse discount store chain. All the woman could talk about was that Costco was raising its annual membership fee by about 10%, so she alleged, to around or just below $55. For the record, I know Costco has raised my annual fee once since I joined over four years ago. It was $50 when I joined, and I just wrote them a check for $53.50 last month.

In the past year, I realized that there is almost nothing which I used to buy at my former usual grocers, Kings and Stop 'n Shop, that I cannot also buy at Costco for roughly half the price. The biggest surprise was how much I save on staples- milk, juice, lettuce, chicken breasts, cereal, salad dressings and fruit. I now buy a package of six romaine lettuce heads for about $5, or what two heads cost at Kings.

I probably visit Costco once per week, since it's located within a couple of miles from my fitness club. My actual visits per week probably average 1.3.

While there, usually after playing squash and working out, I usually eat a light dinner for a laughably small sum. It's hard to spend more than $3.50 to eat dinner there, and the choices include a surprisingly healthy array of choices.

While having dinner and reading the editorials in the Wall Street Journal, I also watch the parade of shoppers checking out and leaving the store. I'd say roughly half are families or a couple with a very full shopping cart. Just from my experience behind people buying large amounts of food, and my own bills, I'd estimate that a full cart can easily represent $200-300 worth of groceries. Multiply that by 50 weeks, and you have at least $12,500 annual sales for a family that shops at Costco. I'm reasonably sure that's a low estimate.

On that base, a $5 annual fee increase is 4 hundredths of a percent! Even for me, it would be only about a tenth of a percentage point.

Yet the woman whom Cavuto had as a guest railed against Costco needlessly increasing its fee, insisting that many families would bolt the warehouse chain to return to their local grocery stores.

To use a phrase, 'in a pig's eye!'

Has this woman ever seen families carting out a 40" flat panel plasma TV? A workbench, chair or bicycle? You can't believe the bargains to be had on high-end electronics- camera, TVs, gaming accessories, laptops and tablets. Microwave ovens, office furniture, and medium-sized appliances. All half-price.

You can't seriously believe anyone who uses Costco frequently would change stores over much less than a doubling of the membership fee. The economics are simply too compelling.

Yet Cavuto himself was unable to do this math on air and challenge the woman's assertions. It was really pathetic. She was a moron clinging to a totally indefensible viewpoint, while Cavuto just sat there and expressed dumbfounded surprise, without asking the woman why such a small fee increase would matter to people spending thousands of dollars per year at Costco.

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