How Costco & Sam’s Club Are Losing Out To Amazon Prime

Amazon (NASDAQ:AMZN) has a dominant market position in the e-commerce industry in North America and is gradually becoming a much bigger threat to traditional retailers than previously anticipated. A recent note published by Cowen & Co. reported that Amazon Prime had increased its household penetration in the U.S. from 20% in August 2013 to 44% in August 2016, surpassing Costco and Sam’s Club’s relatively flat penetration rate of around 30% each. Amazon’s 44% household penetration rate in the U.S. is an all-time high for the company and implies total membership of about 49 million. ^[1]In the period August 2013-2016, households who were members of only Amazon Prime more than doubled to over 16%, while Sam’s Club-only and Costco-only member households declined significantly to around 10% each. Interestingly, households who were members of both Amazon and Sam’s Club increased from 4.8% to 8.5% and households who were members of both Amazon and Costco increased from 4.8% to 11.3%. This likely indicates that many of Costco and Sam’s Club’s existing members are joining Amazon Prime, and that both these retailers are gradually losing out on exclusive customers at the expense of Amazon Prime.

Driving Prime Memberships Through Added Conveniences

Amazon’s Prime Members spend more than twice as much on Amazon than non-members and are generally more loyal (95% retention rate), according to an analysis from Consumer Intelligence Research Partners. Given this favorable spending trend, Amazon is focused on retaining its existing Prime Members and growing this base. Offering conveniences such as free shipping, free photo storage and access to a large on-demand video and music library are ways in which Amazon is able to attract members. The retailing giant also recently launched a photo printing service for Amazon Prime and Amazon Drive members, offering affordable prints of digital photos which are shipped via Amazon’s free standard delivery.

All these efforts are aimed at increasing Amazon Prime membership and building a loyal customer base to drive growth and profitability. In the first six months of this year, Amazon’s net shipping cost increased to 7.4% of the cost of goods sold, compared to 6.7% in 2014, owing to the rising number of Prime subscribers who expect faster delivery. However, the company’s operating income in North America grew by 131%, driven by better economies of scale and Amazon’s increasing pricing power on account of the improved quality and diversity of services offered through the Prime membership.

Going forward, we expect Amazon’s EBITDA margin to improve in both the U.S. and international markets. After posting negative operating margins in 2014, Amazon showed improvement and reported a 2.1% operating margin in 2015. We expect Amazon’s General Merchandise EBITDA margin to increase moderately from around 9.9% in 2016 to 10.6% by the end of our forecast period. If the General Merchandise EBITDA margin rises to 13% in that period, there could be a potential 10% rise in our price estimate for the company.

See our complete analysis for Amazon 

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1. Amazon’s Prime membership is eating into Costco and Sam’s Club’s territory, Business Insider, Sept 27 2016 [↩]