Costco is Still Amazon-Proof... Relatively Speaking

Outperforming the industry despite the online giant's looming presence

Author: Andria Cheng

August 3, 2017

Across almost every sector in the retail industry, Amazon poses an existential threat. For warehouse club Costco, Amazon's planned acquisition of Whole Foods appears to sharpen that threat. 

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And yet Costco continues to outperform. The company late Wednesday reported a better-than-expected comparable sales gain of 6.2% in July, including a 6% increase in the US, its home, and largest, market.  Even excluding the impact of gasoline sales, US sales rose 5.5%, again beating expectations. And domestic customer visits increased 4.2%, quite a contrast with many physical retailers, which are seeing declines in foot traffic.

In fact, Costco’s sales performance has topped expectations in six of the first seven months this year, according to Retail Metrics. Its data also showed that since 2010, Costco’s quarterly comparable sales have for the most part outpaced both the discount segment and the broader retail industry.

“By every measure these results are best in class,” said Barclays analyst Karen Short in a note Thursday. “The company remains insulated from Amazon.”

But Amazon's purchase of Whole Foods could change the equation. Barclays’s Short estimates Costco counts on the food category to drive about 90% of customer visits. And a Cowen consumer survey showed that 64% of Costco members as of Q2 in calendar 2017 were also Amazon Prime members, up from 28% in Q1 2013.

“We think the competitive threat from Amazon will likely continue to pressure” Costco, Cowen analyst Oliver Chen said in a late July report.

That said, he wrote Thursday, he is “impressed by Costco’s strong traffic momentum.”

Costco has plenty of advantages that make it hard to poach its customers: Its rotisserie chickens, of which it sells 80 million a year, are just $4.99 apiece. Its $1.50 hot-dog-and-soda meals haven't changed price in 30 years. It has its own meat processing plant; it is building a poultry farm that’s expected to supply a third of the chicken sold at its stores; and it has a strong direct relationship with farmers. These are advantages that are “hard to replicate in a cost-effective manner,” Chen wrote in June, in the wake of the Amazon and Whole Foods news.

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But Costco continues to have little ecommerce presence, which seems risky given Amazon's purchase of Whole Foods and Walmart's aggressive investments in the digital space. Ecommerce will represent less than 3.5% of Costco’s sales this past fiscal year, Costco CFO Richard Galanti predicted in May when Costco reported its fiscal Q3 earnings.

On the company’s Q3 earnings call, many of the questions directed to Galanti focused on ecommerce. One analyst made a point of comparing Costco’s Q3 online sales gain of 11% with Walmart's 69%.

“Not to be arrogant or cavalier about it but we feel good about what we are doing,” Galanti said at that time. “We have got a lot of things going on the online side but we are not really worried about what others are doing…. We haven’t really seen a big change like people are buying less something at Costco because of other formats out there.”

Costco has made various improvements and additions to its online service, improving search, streamlining the checkout process both on mobile and desktop, and improving members’ ability to track orders, Galanti said.

Costco, which also has some delivery partnership with Google Express and Instacart, also will expand home grocery delivery in a deal with startup delivery company Shipt. 

While Costco still has a lot to catch up with on the ecommerce front, for now it does seem to have plenty of edge. In a survey of more than 65,000 US respondents, Satmetrix’s 2017 Net Promoter Score Benchmarks study of nearly 190 individual brands across 23 U.S. industry sectors found Costco scored the highest of all the brands across sectors including retail and grocery. That means in terms of consumers’ likelihood to recommend a brand to others, Costco, known also for its treasure-hunt environment, ranked higher than that of Amazon, Whole Foods or other popular grocers such as Trader Joe’s and Publix.

Meanwhile, in a Market Force Information ranking of consumers' favored grocery retailers released this year, Costco topped Whole Foods.

Then there’s also the Costco gas stations that accompany most of its stores, where gasoline sells below market rates. In the grocery and big-box segment, Costco took the No. 1 spot, beating Sam’s Club, BJ’s, Kroger and Walmart as the place Americans love to fuel up, Market Force Information found in another study this year.

"Super-value" retailers like Costco exhibit “un-Amazon-Able qualities (including) low prices, deep value, and/or a treasure hunt in-person experience,” Cowen’s Chen said in late July.