Why Costco Needs To Watch Out For Amazon & Sam’s Club?
Costco (NASDAQ:COST), the largest warehouse club in the U.S., has maintained a strong growth momentum over the last couple of years despite the edgy retail environment. The company’s total merchandise sales have grown at an average annual rate of nearly 10% for the past four years, exhibiting both gradual expansion and sturdy comparable sales growth. [1] Even this year, Costco’s comparable sales have grown at an impressive rate every month, while major retailers such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are struggling for positive growth.
While everything seems to be going right at the moment, there are some factors that can pose a serious threat for the company in the long term. Amazon‘s (NASDAQ:AMZN) rapid growth and growing showrooming are ringing alarm bells for a number of retailers, including Costco. The online giant has expanded its product portfolio aggressively over the last few of years, which has incentivized buyers to stay at home and shop online. Amazon isn’t the only player who can challenge the warehouse giant in the long run. Sam’s Club, which offers a lower membership fee, has a wider reach and can leverage Wal-Mart’s (NYSE:WMT) huge size to get better discounts from its vendors. It can also turn into a threat for Costco. In this analysis we discuss why Costco needs to take them seriously.
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Amazon – Showrooming and Rapid Growth
Showrooming refers to the phenomenon wherein shoppers visit physical stores to examine products first hand, only to find and buy them cheaper online. It’s no longer just a media hype, but has become 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. According to a survey conducted by Seattle-based startup Placed last year, 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. [2]
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. [2] Moreover, there is a 38% greater chance for Amazon’s showroomers to visit Costco as compared to other showroomers. [2] 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 in less than two days. Amazon offers a compelling range of consumer electronics and jewelry items, categories which have been important for Costco’s growth. A few 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. [3] In addition, it also operates a local grocery-delivery service known as AmazonFresh. Although the online grocery business hasn’t been that 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.
Sam’s Club – Cheaper Membership and Wider Reach
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 $45 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 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 just over 450 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, indicating that it is susceptible to self-cannibalization. [1] On the other hand, Sam’s club is evenly spread across the U.S. with 630 stores in 47 states and Puerto Rico, clearly implying that it has a wider geographical reach and fewer risks of auto-cannibalism. 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. [4] Overall we believe that Sam’s Club has a small edge over Costco due to its lower membership costs, good customer service and generous return policies. It may not be a concern for Costco right now, but Sam’s Club can turn into a formidable threat in the future.
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- Costco’s SEC filings [↩] [↩]
- Survey: Showrooming a threat to Costco, too, The Seattle Times, Feb 27 2013 [↩] [↩] [↩]
- Amazon Expands in Bulk With Diapers, Soap Deal, The Wall Street Journal, Nov 8 2010 [↩]
- Best Warehouse Store: BJ’s, Costco or Sam’s Club?, Yahoo Finance, Jan 6 2013 [↩]