Can Costco Be Threatened By Amazon’s New Prime Visa Card?

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Costco‘s (NYSE:COST) membership based warehouse model has been going strong despite e-commerce companies offering several conveniences for grocery shopping. Its loyal customers still prefer to visit its warehouse-like stores with their shopping lists and buy groceries and other home supplies in bulk. Costco has been slow in its e-commerce initiatives but the company does not seem to be overly concerned about this. Costco prefers its customers to visit its warehouses, since they are likely to spend more in a physical visit than online. However, Amazon now appears to be taking Costco head on by launching a new credit card which gives its Prime customers an additional 5% discount on all purchases on its platform. This is a Visa card that can be used by customers everywhere and earn discounts in both restaurants and gas stations as well. Amazon has more than 60 million Prime members and it is luring them through these discounts to shop more on its platform. Amazon’s Visa card is similar to the new Visa card launched by Costco last year after the company ended its long term relationship with American Express . These cards entitle its members a 2% cash back on all purchases at Costco and discounts on gas stations and restaurants.  However Amazon’s Prime members get a 5% discount on purchases on its platform via its new Visa card. Amazon could be targeting Costco’s loyal member base through this new Visa card which offers higher discounts on its platform.

There is a high degree of overlap between Costco and Amazon members. A Morgan Stanley survey based on 2,700 people revealed that 45% of Costco members had a Prime membership indicating that both players can co-exist and Amazon’s gain need not necessarily be Costco’s loss. Costco has an edge in the groceries segment while Amazon sells everything from fashion products to electronics. However, the latter is now increasing its focus on groceries and looking at ways to add to customer conveniences. Its Amazon Go experiment, if successful, can disrupt the traditional convenience stores and supermarkets. The Morgan Stanley survey reveals that both Costco and Amazon have a loyal user base which is difficult to break. Amazon is using customer convenience as the biggest incentive to attract customers – which should appeal to the millennial population who are looking at saving time for grocery shopping. However, Costco’s value for money model also appeals to a large section of the population including millennials.

The new Visa card does appear to be Amazon’s initiative to attract more customers to its Prime umbrella. While U.S. households are okay to hold two memberships currently and the overlap is high, this might not last for long with users looking to give up one of the memberships, especially if the perks and discounts are similar (or slightly better). Familiarity and comfort with one player might become the deciding factor. Amazon can have the edge here since its membership offers several other perks such as prime video, music subscriptions and even photo printing. However, Costco’s edge in grocery supplies is not very easy to surpass. Costco has a formidable competitor, but the company seems to keeping up with this challenge for now.

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