Does Costco need to significantly undercut Amazon’s prices?
Costco has long stated that its focus is driving customers to its clubs where members often spend more due to the treasure hunt experience. So why is the retailer aggressively underpricing Amazon on costco.com.
According to a BMO Capital Markets study, Costco’s national brands prices were 19 percent less expensive on its website versus Amazon.com, while its Kirkland private-label brand was 16 percent lower.
“We believe Costco is testing ways to become more of a destination for convenience-oriented fill-in purchases online,” BMO wrote in the note, according to MarketWatch. As evidence, BMO noted that Costco recently increased its number of online fulfillment centers to 19, up from seven last year, and also is testing one- to three-day delivery out of Bedford, IL to 17 states.
However, the investment boutique compared 54 items at Costco in-club, on Costco online, and on Amazon. The analysis showed that Costco’s in-club prices were the lowest.
In its third quarter ending May 7, Costco’s e-commerce sales rose 11 percent but remained relatively under-indexed for the industry at approximately 3.5 percent of revenues. Beyond wanting to drive traffic to stores, a lack of smaller-sized packages and its limited assortment of products both work against online selling, officials have said in the past.
Asked if the concept is seeing any changes in customer’s shopping patterns due to Amazon’s success, Richard Galanti, EVP and CFO, said on an analyst conference call, “So far it’s been business as usual.”
Costco’s traffic in the U.S. climbed four percent, supported not only by its low prices and treasure hunt experience, but its focus on fresh food, gas and the Kirkland brand.
Regarding its online investments, Mr. Galanti stated that, although the warehouse club operator is “newer” at online selling versus many competitors, efforts to expand products, improve functionality and translate the in-store “member experience” online is starting to pay off. He added, “We still want you to come into the warehouse of course.”
- Costco’s online prices are lower than Amazon’s, study finds – MarketWatch
- Costco: Maybe It Really Is Amazon Proof? – Barron’s
- Costco Wholesale Corporation Reports Third Quarter And Year-To-Date Operating Results For Fiscal Year 2017 – Costco
- Costco Wholesale’s (COST) Management on Q3 2017 Results – Earnings Call Transcript – Seeking Alpha
- Costco Wholesale expands test of home grocery delivery through new third-party service – CNBC
DISCUSSION QUESTIONS: Does Costco need to hold its prices significantly below Amazon’s to support its competitive positioning? Do you see the strategy more as gearing up for future online growth or protecting its warehouse club traffic?