Costco Takes New Steps to Keep Amazon at Bay

Delivery service addresses potential gap

Author: Andria Cheng

October 6, 2017

Costco has consistently delivered results that make it seem relatively impervious to Amazon, but the threat is hardly going away.

“With the increasing overlap of people having both a Costco membership and an Amazon Prime account, and the fact that more and more people are having groceries delivered by everyone, is this the beginning of something that will impact Costco?” said Costco Chief Financial Officer Richard Galanti on the company's earnings call Thursday. 

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That question, he said, is one that Costco is getting “literally every day.”

He conceded that Amazon's purchase of Whole Foods only complicates things further, noting that Costco stores “essentially overlap everywhere” with Whole Foods.

That's not the only measure showing significant areas of overlap. According to a Cowen & Co. survey, overlap between Costco and Amazon Prime members rose to 64% in Q2 this calendar year, compared with 28% in Q1 2013. 

And yet, the impact—so far—has been nil. “I’m not trying to be cute, but other than reading about it on the news, we don’t believe we’ve seen an impact from it,” he said.

With few exceptions, Costco's latest quarterly results show enviable health. Global same-store sales in the quarter ended September 3 rose 6.1%, led by a 6.5% increase in the US. In another measure of performance that would be the envy of most of its brick-and-mortar counterparts, US customer visits rose 4.4%. 

Still, Costco this week introduced free two-day nationwide delivery of nonperishable items for orders over $75. It’s also expanding a free same-day delivery of both nonperishable and fresh groceries with orders of at least $35 via a partnership with delivery startup Instacart. That’s available in most metropolitan areas in the US, the company said on its website.

The nonperishable delivery option, which is available throughout the continental US, means that Costco can reach locations where it doesn't have a physical presence.

Costco has more than 500 stores in the US and Puerto Rico. Nonmembers can purchase from even though they may have to pay “an additional surcharge,” according to the company website.

Costco “is evolving at an accelerated pace,” said Barclays analyst Karen Short. The company can now offer home delivery for comparable products vs. Amazon, including fresh items, and at lower price points, she said.

As to the potential risk of it losing customer traffic to stores as Costco expands more online, Galanti thinks the odds are still in Costco’s favor. Online ordering, he said, seems be more more a "fill-in" than a replacement of a store visit.

Concludes Short: "Costco is well insulated from Amazon.”