Costco grows in both channels

Costco store. Photo: Dreamstime
Costco's true money-spinner is its membership programme, which offers additional deals for a yearly fee. With renewal rates of nearly 90%, it breeds loyalty and supplies Costco with much of its annual income. Photo: Dreamstime
By Reidar Molthe

12 March 2019 07:00

Costco grows in both channels

Costco Wholesale Corp speeded past analysts’ estimates for quarterly profit on 7 March as the warehouse club operator’s margins were lifted by lower gas prices and a shift to lower-cost sourcing, sending its shares up 5 percent. The company also said pricing pressure on its groceries business had decreased, adding to the optimistic sentiment.

Costco, America’s fourth-largest retailer continues to grow despite escalating competition from Amazon and Walmart.

However, Costco has had its problems: In December 2018, stocks fell brutally after poor monthly results. Since then, trust in the company has reappeared. Its massive, warehouse-style stores, which offer cheap prices for bulk purchases, remain a popular destination for discount hunters.

Membership programme very profitable

The company’s true money-spinner is its membership programme, which offers additional deals for a yearly fee. With renewal rates of nearly 90%, it breeds loyalty and supplies Costco with much of its annual income, writes

The bricks-and-mortar retailer is becoming one of Americans’ favorite e-commerce destinations, after a late entry, and its online store topped the American Customer Satisfaction Index in its latest survey. That is free publicity for a company that saves money by barely worrying to advertise.

The lesson from Costco must be that it is not a matter of either investing in shops or online. If you want to survive you have to be good on both.

Online growth 25.5%

A highly competitive U.S. grocery industry, coupled with the looming threat of Inc expanding its presence, forced Costco and other grocers to slash prices last year and to invest heavily in both stores and online.

Costco has also strengthened its delivery operations and offers same-day grocery delivery in corporation with Instacart.

The efforts have paid off, with online comparable-store sales, excluding the impact of fuel price and currency changes, rising 25.5 percent in the second quarter ended 3 February.

However, Chief Financial Officer Richard Galanti played down expectations of easing competition in the grocery space.

“I believe there is little less pricing pressure. But don’t get me wrong. As soon as we have a good quarter, the next quarter will change that.”

For the twenty-two weeks ended February 3, 2019, the Company reported net sales for $63,7 billion, an increase of 9,2 percent from $58,3 billion during similar period last year.

Key insights

  • Costco is the lead dog in the U.S. warehouse-club market, but its rivals are gaining some ground.
  • Shares of smaller rival BJ’s Wholesale Club Holdings Inc. have risen about 13 percent this year and it just reported its best-ever membership renewal rate, giving it the confidence to raise its annual fee.
  • Sam’s Club, owned by Walmart Inc., has posted 12 straight quarters of comparable-store sales gains thanks to improvements in fresh food and private label goods, as well as new technologies that help get shoppers through the store faster.
  • Costco added a line of Apple laptop and desktop computers just in time for the holiday season.
  • Has expanded its same-day grocery delivery service to cover most of the U.S. and will open its first store in China later this year.
  • Costco currently operates 770 warehouses, including 535 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, two in Spain, and one each in Iceland and France.
  • Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, and Taiwan.

Sources: Costco, Espresso, Reuters, Bloomberg.

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