Amazon’s Showrooming & Rapid Growth
Showrooming refers to the phenomenon where shoppers visit physical stores to find products, compare their prices on different websites and buy them cheaper online. It is no longer just a media hype, but is becoming a real concern for a number of retailers. Amazon has emerged as the biggest threat on this front. The company offers and promotes free mobile apps to encourage its customers to compare prices of various products while walking in different stores. Amazon’s focus on showrooming is evident from the fact that it offered special holiday discounts on purchases made through its price-check apps in 2011.  According to a survey conducted by a Seattle based startup Placed, apart from retailers such as Target (NYSE:TGT), Best Buy (NYSE:BBY) and Bed Bath & Beyond (NASDAQ:BBBY), showrooming can also impact the warehouse giant Costco. 
This study included the response of 15,000 customers as well as their movement analysis through the physical world. According to the study, about 45% of Amazon’s prime customers (who pay $79/year for free two-day shipping) will more likely shop at Costco than an average shopper.  Moreover, there is 38% more chance for Amazon’s showroomers to visit Costco as compared to other showroomers.  This indicates a big overlap between Amazon’s and Costco’s customers, which is not a good news for the latter.
Considering the rapid growth of Amazon’s product categories, showrooming becomes an even greater threat. The company has demonstrated the ability to quickly grow the product portfolio, modify it to remain in line with Costco’s products and deliver merchandise within two days. Amazon offers a compelling range of consumer electronics and jewelry items, categories which have been important for Costco’s growth. A couple of years back, Amazon bought Quidsi, the parent company of Diapers.com, Soap.com and BeautyBar.com, to expand its merchandise selection and start selling in bulk.  In addition, it also operates a local grocery-delivery service known as AmazonFresh. Although online grocery business hasn’t been successful in the U.S., this service somewhat places Amazon on Costco’s turf. The continued growth of the online retailer might raise more concerns for Costco in the future.
How Sam’s Club Can Be A Competitive Threat
Although Costco is the leading warehouse retailer in the U.S., it faces stiff competition from its closest competitor, Sam’s Club. While Costco has a larger customer base, there are some factors that make Sam’s Club a more attractive choice for customers, thus making it a potential threat for the warehouse giant. Compared to an annual membership fee of $55 at Costco, Sam’s Club charges only $40 from its members. While an executive member at Costco pays $110 per year, Sam’s Club’s plus members pay only $100. The rewards offered by both the retailers are quite similar, and amount to 2% of their annual purchases. It appears that Sam’s Club has a clear competitive advantage in terms of membership fee.
Costco operates 439 stores in 40 states of the U.S. and Puerto Rico, with high concentration around California. The retailer earns about 24% of its domestic revenues from the region.  On the other hand, Sam’s club is evenly spread across the U.S. with 620 stores in 47 states and Puerto Rico. Additionally, Sam’s Club is the only warehouse club that offers Apple (NASDAQ:AAPL) products, which gives it a slight edge over Costco.  Sam’s Club also provides excellent services for delivery, installation and technical support. When it comes to groceries, which is the largest product category sold by both warehouse retailers, Sam’s Club was found to be cheaper than Costco.  Overall we believe that Sam’s Club has an edge over Costco due to its low membership costs, good customer service and generous return policies.
How Can This Impact Costco?
Costco can suffer if its customers shift to Amazon and Sam’s Club, as it has primarily relied on increasing membership base and store expansion for its growth. Over the past four years, Costco’s comparable store sales have increased at an average annual rate of 4.5%. This healthy growth can be attributed to its expanding customer base since the average spending per Costco member has grown by only 1% annually.  In fiscal 2012, over 4 million customer signed up at Costco, which was significantly more than previous four years’ average. The company cannot afford to lose out to Amazon and Sam’s Club in a competitive retail environment, and should be careful about how it manages its future growth. It needs a strong online channel, and international expansion can help mitigate some of the risk that it faces in the U.S.
Our price estimate for Costco stands at $117, which is in line with the market price.Notes: