Here’s Why Costco Is Expanding Its Home Delivery Service

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Recently, Costco (NYSE:COST) partnered with online grocery delivery service Shipt to expand the test of its grocery delivery service. Costco already offers home delivery in some locations via Instacart, and its partnership with Shipt is an indication that the company is looking to expand the scope of this service. As customers look for convenience in grocery shopping, a home delivery service (at an additional cost) can benefit Costco. Both Shipt and Instacart are online platforms through which consumers can place orders and choose Costco as the store. Personal shoppers from these companies then pick up the groceries from Costco and deliver them to the customer within a specified time period. While Costco has been slow in rolling out its e-commerce initiatives, we believe that by expanding its home delivery network the company can offer a high degree of convenience to its customers, building a competitive edge over players such as Wal-Mart and Amazon Fresh.

Combining Convenience With Quality And Value

Costco’s membership-based business model differs from most grocery stores, and its target customers are generally more affluent than those of Wal-Mart, spending heavily at its warehouses by buying items in bulk. Accordingly, Costco’s average revenue per square foot is much higher than Wal-Mart’s. Despite very thin margins, Costco’s profitability per square foot is also higher compared to Wal-Mart as a result of its strong revenue per square foot (see The Key Difference Between Costco And Wal-Mart). Due to this business model, Costco does not need a strong online presence to increase the efficiency of its business. However, it does need to provide convenience to its customers to retain its loyal member base in the face of significant competition, and the partnership with Shipt should do just that. While many shoppers prefer to buy fresh produce in person so they can hand pick the products to ensure quality, Shipt’s personal shoppers aim to maintain that desired quality. Expanding its home delivery service through partnerships with Shipt and Instacart should ensure that Costco provides convenience, quality and value to its customers.

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As more and more consumers prefer the convenience of e-commerce, it is vital for Costco to refine its online presence in order to remain competitive. We believe the strategy to partner with grocery delivery companies can help the company maintain and grow its loyal customer base.

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