Does Costco Need To Rethink Its Online Strategy?

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E-commerce retailers such as Amazon are opening physical stores to attract grocery shoppers.  And Walmart is innovating to make its check-out process easier and faster for customers.  In contrast, Costco‘s (NYSE:COST) has been lagging behind in its online initiatives as it seeks to expand on its model. The company believes that for its warehouse store model to succeed, it is essential for customers to visit its locations.  Relying on member loyalty, Costco constantly works on ways to attract consumers to its stores.  However, with millennials looking at convenient shopping options, Costco’s current model might need tweaking to adapt to the new consumer generation. Its Q1 2017 results were disappointing as both revenues and earnings missed consensus estimates. However, membership renewal rates remained strong at around 90% in the U.S.  According to Costco, consumers spend more when they come to its stores and less online. While it recognizes that it needs to do more to increase its e-commerce sales, the company’s focus remains on attracting consumers to its warehouses.

Value At The Cost Of Convenience

Costco believes that the company has a value proposition which attracts consumers to its stores who are willing to forego the convenience of online shopping to make purchases at its warehouses. In its recent earnings call, company officials mentioned that the average age of membership at Costco is coming down, which is an indication that the younger generation is also attracted to its deals. The company feels that its products aimed towards the health conscious consumers such as organic produce and price advantage give it a competitive edge over players such as Amazon, who are attracting consumers on the convenience factor. However, according to a report in the Wall Street Journal, millennials visit supermarkets less frequently and spread their purchases across new options, which includes online shopping.  This trend can impact Costco’s model which is aimed towards bulk shoppers who visit the warehouse store with their lists and stock up on groceries and other essentials. While Costco realizes that it needs to do more on the e-commerce aspect of its business, it does not seem to be ready to experiment with innovative ideas. Since the company’s model works on thin margins and high volumes, it cannot sell smaller quantities and hence it is going slow on its online initiatives. For Q1 2017, Costco’s e-commerce sales increased by 8% which is not a very significant number.

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We expect Costco’s revenue per square foot in its U.S. stores to increase steadily from $1,520 in 2016 to nearly $1,650 by the end of our forecast period. This increase is primarily due to its growing membership (strong renewal rates) and a unique model which offers deep discounts to customers.

While consumers will continue to remain attracted to the discount model of Costco, convenience is also likely to play a significant role going forward. As younger generation moves away from bulk shopping and prefers the convenience of online shopping, a stronger e commerce strategy might be critical for Costco. While the company currently seems to be undeterred by the innovative technology solutions being offered by other retailers, we believe it will need to adapt to changing consumer preferences in future.

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