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Costco sticking to store-first approach
While Costco acknowledges shortcomings in its digital approach, Richard Galanti, EVP and CFO, last week inferred the wholesale club has no plans to become an omnichannel retailer.
“Our value proposition is best served for us when it’s in-store, getting members to come in and buying when they can see everything there that we have,” he said on Costco’s fourth-quarter conference call.
The response followed recent investor concerns over Costco losing ground to Amazon and that its secondary digital focus was a liability in attracting Millennials.
Mr. Galanti said that Costco had no illusions that it was “Amazon proof” as some analysts have alluded. But he said the impact of internet selling depended on the category and the warehouse club overall was “impacted less” because of its unique membership model.
In particular, he noted that 90 percent of members come to Costco for a fresh food item, a category that remains a challenge for online sellers. Said Mr. Galanti, “We’re glad that fresh is difficult.”
He also said “part of our strength is what we do” and that includes not offering smaller-sized packages at budget prices or having a full assortment of products. Those features work against online selling and are even sometimes perceived as an inconvenience to shoppers.
“We have never been big on convenience,” stated Mr. Galanti. “Our success has been based on pricing value, quality and quantity at the lowest possible price. We do appreciate that value also is convenience.”
Online, Costco is enhancing category assortments and making the process more user-friendly. But Mr. Galanti stressed Costco is “not freaking out about” catching up to competitors digitally. For instance, while it may partner with an Instacart or Google Express in some regions, it has no plans to roll out two-hour grocery delivery.
“You will see some differences and mostly the differences are from an offensive standpoint, not a defensive standpoint,” Mr. Galanti said of Costco.com. “But we look at our core business of getting you in the store still is paramount to what we want to do.”
- Costco Wholesale Corporation Reports Fourth Quarter And Fiscal Year 2016 Operating Results – Costco Wholesale Corporation
- Q4 2016 Costco Wholesale Corporation Earnings Conference Call (audio) – Costco Wholesale Corporation
- Costco Wholesale’s Q4 2016 Earnings Call Transcript – Seeking Alpha
- Costco’s CFO doesn’t believe his company is ‘Amazon-proof’ – Business Insider
Discussion Questions
DISCUSSION QUESTIONS: Does “shop anywhere, anyhow, anytime” not apply to the Costco model? How would you approach Costco’s digital business if you were running the company?
Poll
BrainTrust
Ian Percy
President, The Ian Percy Corporation
Richard J. George, Ph.D.
Professor of Food Marketing, Haub School of Business, Saint Joseph's University
Costco is not wrong in sticking to its knitting, especially while it continues to have the opportunity to open more of its destination stores around the country. (It started with one store in the Milwaukee area and gradually grew to four.) It’s also clear from observing grocery carts at the checkout lane that fresh goods and bulk groceries are key drivers of Costco sales. (And it’s also clear that the switch from Amex to Visa was a win.) It would be tough online to duplicate the variety of goods bought on a typical Costco shopping trip if you’re looking online for a single item.
That being said, Costco can do better online — not only in terms of product sales but especially in terms of ancillary services. B2B, insurance, travel, etc. are all big opportunities to leverage the Costco website.
I think Costco has recognized its differential advantage as well as the challenges of being Amazon-like. It has done a terrific job of focusing on its strengths and target market and of concentrating its resources at the point of attack, namely its wholesale club brick-and-mortar stores.
Having said this, I still believe the challenge of Millennials is real. However, there is no reason to believe that Millennials do not seek the experiential dimension of shopping/sampling/touring a Costco. While it is important to develop an online strategy to appeal to the wired or, rather, wireless generation, this should be part of an overall strategy to attract this generation that is increasing in size and importance. According to recent research (Wells Fargo) on this segment of the population, they carry a median student-loan balance of $19,978, and 48 percent say they are living from paycheck to paycheck. Clearly, these statistics support the value proposition espoused by Costco.
Costco gets it. They are one of the few retailers in the industry that has navigated the fine line between value and experience. Experience you say? Absolutely. The Costco experience is one of discovery in that the impulse buy drives their profits and the stickiness of their value proposition.
Almost universally, Costco customers, in a dismissed relent, talk about how much the experience of shopping at Costco has cost them beyond the reason they made the store a destination in the first place. It is this retail discovery that keeps the customers loyal and coming back.
With current technology being what it is, the online experience has not yet found a way to duplicate this phenomenon. When it does, Costco will embrace it and adjust to the new venue.
I wish I had said it this well, Tom. Totally on target.
Costco is misguided in this regard. I hope they are saying one thing to The Street and doing another behind the scenes. This is classic disruptive theory behavior to have the incumbent’s management team dismiss a structural shift that is slowly eating away their business from the bottom. This may end up being one of those tragic HBS case studies.
Do we really want to totally diminish retail to a situation devoid of human connection where you actually see and touch the product before you buy it, buy something you hadn’t even thought of or simply had an emotional and physical experience? Heck, in Canada’s Costco you can actually get poutine in the food court. How do you beat that? We all periodically have the need for “retail therapy” and you just don’t get that by ordering online.
Let us pray that Costco remains a truly human experience.
Two-hour grocery delivery with Instacart? Might be worth it not to continue paying a membership fee and let Instacart do the shopping. I probably only buy about 10 items a year at various times. Those giant rotisserie chickens are a steal that Walmart or others can’t touch. Large bags of organic frozen fruits and vegetables. And that quarter-pound hot dog and drink for $1.50. There are definitely new opportunities in digital shopping, but they might come at the expense of existing customers switching to shopping services and dropping their memberships.
I have to disagree with most of my esteemed fellow panelists here.
When you look at Amazon’s Prime (vs. Prime Now) offerings, it’s my opinion they are going after Costco way more than traditional supermarkets. The packaging is similar to Costco (multiple items in a pack) and the quantities are definitely geared towards pantry packing, just like Costco.
Costco probably has little to fear in its B2B business, SO FAR, but Amazon is moving into the B2B space and I think Costco really does have to address its complete lack of consistency between online and offline offerings.
“Anytime, anywhere shopping” does not mean all within one retailer’s ecosystem. Indeed, that would be a classically myopic retailer view of how consumers view shopping. Consumers have a set of acceptable retailers to fill each orbit of their own ecosystem — which revolves around them, not Amazon, Costco, Kroger or Circle K. What Costco is choosing to do is to be the go-to choice for consumers whose ecosystem includes club or warehouse stores. And that’s a smart focus.
Costco is different and the membership club business model and GTM are different compared to traditional retail. The headlines here being that in the low margin Costco model: 1.) Upwards of 80 percent of operating income is derived from membership fees; 2.) the Costco value proposition is targeted at higher disposable income consumers and small business owners and; 3.) Member purchase volume is essential to driving the efficiencies of the model (people who make more money have more money to spend, etc.).
Since day one Costco has lagged with their online product because — up until now — they made the decision that selling online is very much a “nice to have” and not a “necessity” to driving growth, etc.
Operational example: For a long time Costco would not offer any SKUs online that a member could already buy in the warehouse. The last thing they wanted to do was give members an option that would keep them from visiting the warehouses (and hence driving that treasure hunt/impulse buy dynamic that Costco specializes in.). Costco.com was there to “augment” the physical warehouses, not be integrated with them.
The main things Costco senior leadership is losing sleep over is how to maintain the volume-driving fundamentals that the efficiencies of the model are built upon while adapting to the new (generation-driven) retail realities (especially around the current and future impacts of that Amazon Prime Factor! Amazon Prime is modeled after the “material member value” perceptions and realities of the Costco — fellow Seattle based company — membership model.).
Going to work for Costco, on my first day, I was told the following: “We keep it simple here. We always have a plan for two things: Getting members into the box (warehouse) and making sure only good things happen in the box. (great value, treasure hunt atmosphere, friendly and well-trained employees).” Costco’s challenge now and into the future is adapting the business model, culture and GTM sensibilities to the new technology-empowered consumer in an increasingly digital world.
— Deloitte Digital 2016
When things are going well, it is easy to say that we are following the right model and are going to stay the course. If there is a soft quarter or two, they will change their position on this. There is no reason they cannot come up with an online concept that ENHANCES rather than REPLACES the in-store experience.
I see Costco and the experience very differently. For sure the membership fee is of huge importance, but the experience is of entering a HUGE warehouse where you can “see” a very large share of the store soon after entering their huge, wide dominant aisle. This single wide path circumnavigates the store in a HUGE u-turn, so that the dominant path of the majority of shoppers loops the store, with towering warehouse fixtures reaching for the ceiling around the outer perimeter. And the entire center of the store is low tables or displays, not impeding the view of the furthest reaches of the store.
I could say a lot more about the Costco SELLING experience, contrasted for example with the SHOPPING experience in Walmart’s rat-maze store design, typical of retailers. In fact, the SELLING experience in Costco is so astounding — and not even mentioned in this entire discussion – that I wrote a Views a few years ago, with Costco as a focus, titled “Selling Like Amazon… in Bricks & Mortar Stores!” This became the third chapter in my new edition book.
Of course the transactional stuff discussed by others here is also very relevant. But the real tragedy of the missing online competence of Costco, is the inability to deliver the LONG TAIL, that “Everything Store” of Amazon, which is always Amazon’s ace in the hole. I often describe bricks retailers as “merchant-warehousemen” who rely on unpaid “stock-pickers,” aka “shoppers” for the final mile of delivery to the customer. Costco is perhaps the best retailer in the world, leveraging that concept. Others, like Walmart, use their own Long Tails to actually suppress sales of the BIG HEAD. Oh, wow, Wow, WOW!!! How could THAT be?
Costco is a Big Head store, and that alone moves them to the head of the pack among the warehousemen. But a long tail store like Amazon may eventually move into the bricks world with something other than a hybrid “Apple-type” store. Or a Costco-type store may get a clue and integrate online INSIDE their bricks stores. Integration of the shopping experience across the phony online/bricks wall may already be happening at Saks. “Why Can’t a Store Be More Like a Website? – WSJ“
Where Costco is lagging is the inconsistency between their online/mobile offering and the store. Their online presence doesn’t enhance, extend or support well the in-store experience. It really feels like a separate business and it’s frustrating. I don’t think it’s always about replacing store trips with online transactions. It’s also about making that trip to the store better, and extending the customer interaction around that store trip to include using their online presence to prepare for my trip or to address customer service needs after my trip.
Well said. At a minimum, at least.
Being both an Amazon Prime member and a Costco executive member, I would say Costco’s strength is in the community building with local small business and large households products and services, best served with large stores where they can incorporate their services.
I shop at Costco almost every weekend for produce and meat plus browse for other items. The loyalty of the regular shoppers there with the interaction with cashiers and managers is what drives Costco’s success — if you haven’t witnessed it you won’t believe it. Amazon Prime I use for items not available at Costco or other specialty items. There is room for consumers to use both.
Small business B2B is also a big strength for Costco, which causes them to be welcomed in more areas compared to other discount stores.