Retailers Push for Amazon Sales Tax, But Should Costco Care?

by Trefis Team
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Retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are campaigning to force Amazon (NASDAQ:AMZN) to pay sales taxes. While these retailers headline the effort and would certainly gain from any such decision, other large players like Costco (NASDAQ:COST) have (relatively) flown under the radar. Could Costco see the same benefit? Costco traditionally competes with warehouse club operators like BJ’s Wholesale Club (NYSE:BJ) and Sam’s Club, in addition to companies like Wal-Mart, Best Buy (NYSE:BBY) and Target.

Our price estimate for Costco’s stock stands at $64.67, a roughly 10% discount to the stock’s current market price.

A Brief Look at the Campaign

The Wall Street Journal states,

“The big-box stores are backing a coalition called the Alliance for Main Street Fairness, which is leading efforts to change sales-tax laws in more than a dozen states including Texas and California.” [1]

The reason being that, the way tax rules work, internet retailers like Amazon hold an advantage over traditional retailers that rely on physical store models. Internet retailers do not have to impose sales taxes and, therefore, can keep prices lower.

Costco Still Holds an Edge on Pricing

Costco operates a warehouse club model wherein it charges annual membership fees to customers and, in turn, offers deep discounts on selected merchandise. How does this relate to Amazon? Since Costco can offer deep discounts to members, Amazon’s price advantage fades in comparison. Of course, Costco customers must still deal with indirect costs regarding time and expense of making trips to the store.

On typical items that need to be replenished often, Costco almost always beats Amazon on pricing. [2] Amazon also has a subscribe & save offering which offers further discounts to customers that subscribe for certain items to be shipped at regular intervals to their homes. However, Costco even beats Amazon on price when items are discounted for subscription.

Apart from the typical consumer, Costco generates a healthy portion of sales from businesses that buy in bulk. While Costco offers better prices, it doesn’t offer all brands. But do these business customers really care if they can not find their favorite soap at Costco? Probably not. What matters most are the deep discounts they get on bulk purchases.

Given Costco’s edge on pricing, we believe that the impact from Amazon’s ability to avoid sales taxes is already diffused. Consequently, should Amazon be ordered to impose sales tax, it shouldn’t have much impact on Costco’s revenue per square foot.

See our full analysis and $64.67 price estimate for Costco stock

Notes:
  1. Retailers Push Amazon on Taxes, The Wall Street Journal, Mar 17 2011 []
  2. Adding It Up: Amazon Ship vs. Costco Shop, The New York Times, Mar 4 2011 []
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