Does Costco need to significantly undercut Amazon’s prices?

Discussion
Photo: Costco
Jun 22, 2017
Tom Ryan

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.”

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?

Braintrust
"I’ve always thought that Amazon was a bigger threat to Costco than to other grocers and general merchandise stores."
"If Costco really wants to grow digital traffic, and it’s very important that it does, the company needs to start engaging its shoppers digitally."
"First, I’m thinking of getting a Costco tattoo. Just to let you know where my loyalties are."

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29 Comments on "Does Costco need to significantly undercut Amazon’s prices?"

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Max Goldberg
BrainTrust

Costco does need to undercut Amazon’s pricing wherever possible to maintain competitiveness. The biggest reason to do this is Costco’s limited assortment. Most consumers do not think of checking Costco’s website when considering a purchase; they start and end their search on Amazon.

Paula Rosenblum
BrainTrust

I’ve always thought that Amazon was a bigger threat to Costco than to other grocers and general merchandise stores. When you buy something like spray cleaner online from Amazon, you get Costco-sized containers, i.e. two or more strapped together, rather than single units.

There’s no doubt that sooner or later Costco is going to have to synchronize its stores and online offerings but, in the meanwhile, it needs to maintain its image as the low-cost provider.

Art Suriano
BrainTrust

I see both. Costco needs to remain competitive as all retailers must do and they need to use their strengths to sell against Amazon. The warehouse is a significant advantage and customers, myself included, love the treasure hunt experience. Every retailer today has to take a hard look at themselves to see what they can do to stand out and appeal to customers differently than their competitors. And it’s not all price. Price is important but so is the experience. Costco is taking notice and focusing on their strengths both in-store and online. Customers like choices and browsing different options. Costco is smart to recognize that. They’re re-inventing their business carefully and, apparently, it’s working.

Celeste C. Giampetro
BrainTrust

I agree, Art. Competing on price alone is a losing strategy. Costco should focus on differentiation — namely, why buy from them instead of Amazon? Is it for that Kirkland brand which is credible and quality? And yes, let’s not undercut the in-store experience that some people want and look forward to. Hopefully they have a separate innovation unit building out that ecommerce experience to help define what’s different/better about costco.com

Ian Percy
BrainTrust

First, I’m thinking of getting a Costco tattoo. Just to let you know where my loyalties are.

All three items on RetailWire today feel like an invitation to be a motivational speaker on the Titanic. Everything is about pricing, seeing who will go lowest before paying people to take stuff for free. A new success formula: winning at marketshare while sinking.

It seems that price is the only weapon available to retailers … and now we’re discussing if it’s an offensive or defensive weapon. Truth is, it doesn’t matter if it’s approaching 2:20 AM and someone’s singing “Nearer my God to thee.” There just isn’t much more time to change our thinking.

I am available to be your closing motivational speaker.

Tony Orlando
BrainTrust

Hi Ian! Well my friend, it seems the obsession with three retailers is never-ending and it seems that what I have been saying for years is now being confirmed by our guests and panelists, and that is that PRICE IS KING.

You can merchandise your way to infinity and, with the over saturation of food retailers both brick-and-mortar and online, customers will simply click or seek out the lowest price on just about everything, as it is easy to do. Yes there are exceptions and in-store customer service is crucial but if you don’t bring the heat then your stores will remain ghost towns. Walmart, Aldi, Amazon, Costco and the new darling Lidl will be the subjects of ongoing discussions for many online sites. For the independents, we must continue to find ways to fight through the “fog of price wars” or we shall perish.

Making a profit will continue to be an issue for us, and it is now reaching critical mass, so for now I hope to stay ahead of the game. My post I’m putting up on Facebook today will be interesting reading for my followers. Have a great day everyone!

Ron Margulis
BrainTrust

If Costco really wants to grow digital traffic, and it’s very important that it does, the company needs to start engaging its shoppers digitally. I’ve been a Costco member for more than 20 years and I haven’t received more than a dozen emails related to product or services offered (although they were very good about the switch from Amex to Citibank). I’ve checked to make sure I’m not on some “do not contact” list, but a quick survey of acquaintances reveals I’m not alone. I get something from Amazon just about every day. I don’t open most of them, but I do open some that have interesting subject lines. I just don’t see how Costco can keep up with Amazon without a concerted digital engagement effort.

Sterling Hawkins
BrainTrust

Price is important. And so is a really fluid omnichannel experience. Costco is catching up in the online world and competitive pricing is a key factor in attracting more customers. It’s important, to Ron’s point here, that they keep those customers via really great omnichannel engagement including email, in-store, mobile, etc. Otherwise it’s just giving away discounted product with no long-term results.

Ben Ball
BrainTrust

Hi Ron: Late to the party today so nothing of substance to add — but I am curious about your experience with Costco digital marketing. I get emails with weekly flyers, one-off specials and other “treasure hunt temptations” at the rate of two or more a week.

As far as I know, the only thing that I have done “special” is order from Costco.com a few times and not opt “out” of their emails.

Ricardo Belmar
BrainTrust

Every retailer has to face the competitive giant that is Amazon and identify their strengths to focus on. Costco’s greatest asset is their warehouse experience and they’re right to drive traffic there rather than expecting their sales to be driven from online sources. Every new study that looks at product discovery tells us that the majority of product search starts with Amazon. The latest I’ve seen is the Shopper Insights 360 Study by RIS News & TCS, which found that 77 percent of product search starts on Amazon. Costco doesn’t have the best website to foster discovery — it’s more of just a way for their customers to order online for items they already know about. Over time I see this changing as Costco will need to grow their digital-based sales to compete but, for now, they need to keep leveraging their strengths.

Di Di Chan
Guest

Costco really needs to cut its long lines to be more competitive because Amazon is winning on convenience. Last week Forbes reported that 64 percent of American household (about 80 million) now have Prime membership. That’s catching up to the number of members Costco has (about 88 million members) globally!

One of the main reasons for Amazon’s rise is the changing demographics. The 2015 US Census shows that 53 percent of Americans are single. With smaller and smaller family units, convenience matters more than buying cheap in bulk.

JJ Kallergis
BrainTrust

Exactly what I was thinking about the long lines! Costco needs to do something to alleviate the long lines, since it is a major drag on the customer experience when you are on your way out of the warehouse.

Customers demand convenience and frictionless shopping, and if Costco would like to broaden its customer base and drive more traffic, they should get serious about their checkout lines. And, some organized way to put products back in the cart and into the car trunk would also be nice, while we are at it….

In terms of pricing, Costco is and always has been the price king. You end up having to buy in bulk and maybe more than you would like to compared to packages at Walmart and Target. So, they should continue on the same path, focus on their logistical efficiency and in-and-out items, and also tinker with E-commerce to drive incremental revenue especially on items that are bulky and difficult for customers to pick up. IMHO, they are moving in the right direction to remain relevant, and provide a lot of value to their members by taking low margins and operating efficiently!

Ricardo Belmar
BrainTrust

I’d agree with you! In fact, I don’t think we can fault Costco’s approach in the store overall given their success to date. Online is a different story, and I do think they’ll adapt over time there to make improvements. The same goes for mobile, where they’ve been a bit of a laggard in the design and usefulness of their app. And now that you mention the checkout experience — it reminds me of another low-cost leader — Walmart. I have to agree that the convenience factor can’t be ignored here. I myself have said, “I won’t look for that at Costco because it will take too long to check out. I’ll just search the Amazon app” and then 2 days later I have my item. That scenario should worry Costco as more and more consumers adopt the same mentality.

Adrian Weidmann
BrainTrust

Costco needs to stay competitive. That requires a multifaceted solution, not simply a one-dimensional answer. Price is but one element in that equation. Costco offers a great balance between go-to grocery items — pumpkin pie, rotisserie chicken, etc. — and an experience where you can discover new items that surprise and delight. It will be important for Costco to be mindful of pricing to stay competitive with Amazon but it must continue to explore and present new products that Costco shoppers can discover — keeping their attention and interest for return trips.

Joan Treistman
BrainTrust

Without question lower prices are essential to remaining competitive. It’s the necessary but not sufficient part of the equation. Right now, Costco has the “c’mon in and explore” allure for typical grocery shoppers. But there is still that entrepreneur who depends on those quantity purchases that control profits. In both cases great prices are primary objectives and benefits, be they real or imagined.

I’ve seen products in Costco that are not competitively priced. But if you’re there and you believe you’re achieving overall savings, even if one or two items are not a real cost savings but always at least comparable to other retailers — it’s OK.

Finally, I think there’s something to walking around, picking up your groceries, etc. and putting them in your cart. It can feel more efficient than scrolling and clicking, and more satisfying. But that satisfaction will dissipate without the expected competitive pricing.

Ian Percy
BrainTrust

Nicely put Joan. We’re talking about a spiritual shopping experience here!

Ken Cassar
BrainTrust

There is a ton of customer and product overlap between Amazon and Costco. However, I believe that Costco should stick to its knitting. Large pack sizes, good prices, high quality, treasure hunt. While other retailers need to reinvent themselves to counter Amazon, I think that it would be a mistake for Costco to do so. In this order (declining importance), I believe that Amazon’s threat level, by channel is Specialty, Mass, Drug, Grocery, Club, Convenience, Dollar.

Richard J. George, Ph.D.
BrainTrust

I believe Costco recognizes the real threat to the center store-focused offerings in its club stores that Amazon, Jet and others are courting. It is cheaper to defend market share than it is to win it back. To the extent that center store food items will continue to migrate to online at an even faster rate, this defensive pricing strategy both protects it warehouse club strategy and positions it as a viable player in the online world.

Meaghan Brophy
BrainTrust

The Kirkland brand’s discounted gasoline pumps and discount liquor are some of Costco’s largest assets. As long as they keep focusing on those experiences, Costco’s warehouse traffic will remain steady. However, to plan for a successful future, Costco definitely has to gear up their online growth. Choosing one over the other would be a mistake. Costco’s online prices don’t need to be significantly lower than Amazon, but keeping them so low definitely doesn’t go unnoticed.

Herb Sorensen
BrainTrust
In terms of actually closing sales to shoppers, Costco uses methodology that is amazingly similar to that of Amazon. In fact, Costco was exhibit A in my 2013 report on “Selling Like Amazon… in Bricks & Mortar Stores!” But there is another vital similarity: Costco’s MEMBERSHIP and Amazon’s PRIME. Both of these provide a bedrock of pure profit, allowing both companies to pursue the 100-year-old retailer strategy of as close to ZERO margins as possible. See: “The Great A&P and the Struggle for Small Business in America” by Marc Levinson. A year ago, Costco was the number two global retailer but now has been passed by Amazon. The future belongs to Amazon because their business model is more easily scaled than is ANY brick-and-mortar retailer. But at least Costco’s more plodding growth is built on a solid SHOPPER based business plan, as contrasted with other brick-and-mortar retailers’ SUPPLIER-based business plans. As The Wall Street Journal recently quoted in READER RESPONSE: “Herb Sorensen of Oregon shared: ‘Brick-and-mortar store logistics are designed to deliver pallets to their own ‘neighborhood warehouses,’ a.k.a. stores. Amazon’s logistics are built from the ground up, to deliver items to individual shoppers. Fresh food is, of course, a… Read more »
Ralph Jacobson
BrainTrust

Regardless of the retailer, I still believe competing on price alone is a tough life to live and be profitable long term. The services available to the shopper are the differentiators, like free shipping on everything, BOPIS, etc.

Craig Sundstrom
Guest

Here we are again seemingly questioning the decisions of a superbly-run retailer. Costsco has a huge and loyal customer base and can set its prices as it feels is optimal, certainly keeping competitors — like Amazon — in mind, but not in simple-minded reaction to them.

Shep Hyken
BrainTrust

It’s not just about price, but also about value. Costco has a short window to prove to their customers why they should continue to shop there versus Amazon — or any other competitor. And, if price is the only reason to shop at Costco, that is another problem. The margins in grocery are already too small. Competing just on price is a dangerous strategy.

Min-Jee Hwang
BrainTrust

Costco’s traffic rose 4% due to a variety of reasons. Costco members who enjoy the treasure hunt experience or are loyal Costco gas customers, will continuously go into Costco over shopping online. While Costco should not lose focus of their in store experience, it should be looking to the future to compete with Amazon online sales, and to address the busy customers that would prefer to online shop over the long lines at Costco on a Sunday.

I would agree that Costco needs to hold its prices below Amazon’s or at least remain competitive to support its positioning as a low cost retailer. In addition, Costco would need to provide a wider product selection online to compete with Amazon. Costco isn’t known for having everything under the sun, like Amazon is, but the treasure hunt in their stores will keep customers coming back.

Dave Bruno
BrainTrust

Full disclosure: I am a loyal and avid fan of Costco. Having said that, however, I recognize their flaws. And one of them is the lack of a truly integrated digital experience. Prices vary from online to offline, assortments vary, and digital marketing is almost non-existent.

If I were Costco I would focus on expanding and enriching the digital aspects of their experience, and focus much less on price wars. I believe a huge part of their success is value (much more so than price), and they really are masters of assortment. If they can extend that value and assortment magic to the digital world and better leverage digital marketing assets, perhaps they can avoid a race to the bottom with Amazon.

Jennie Gilbert
Guest

Price is important. But price is not everything. If having the lowest prices was the magic bullet, Costco would already be winning according the research in this article. But … they are not. Consumers don’t buy paper towels from Amazon because it’s the cheapest place to get them, they buy paper towels from Amazon because it’s the most CONVENIENT place to get them!

Some will always argue that “Price is King” but I have to disagree: today, user-experience is the way into consumers’ hearts and wallets. Amazon gets it — why do you think their logo is a smile?

Jackie Breen
Guest

In order for any retailer to compete with Amazon, they have to identify unique and engaging ways to drive customer loyalty. Costco is no exception. However, price does not have to be the key differentiator, and for a brand like Costco, with such strong advocacy among its shoppers, it probably shouldn’t be. That being said, until Costco can identify the right ways to seamlessly link their brick and mortar locations with their digital presence, they will need to continue to compete on price against Amazon to remain competitive.

Christopher P. Ramey
BrainTrust

Costco, like all retailers, should be constantly testing marketing and models. Pricing isn’t an issue if the research is accurate and Costco is 19% less on national brands.

The next critical issue for Costco is delivery and ease of shopping; not pricing.

Alex Senn
BrainTrust

Interesting thought here, but if you were to completely undercut Amazon in the whole foods, what might end up happening is a significant number of retail arbitrage systems being set up. Since Amazon’s new move into groceries, they will buy up the product — or people will — then post it to the Amazon seller platform and earn the profit on the difference.

The other side of this is when the people shopping at Costco realize the “other stuff” Costco can do for them. In this case, however, it ends up being a bit of a wash for Costco currently as they don’t offer much of an ecosystem to engage with. This does, however, give them an opening since they already have the “Prime for Costco” going for them.

In closing, I don’t think they really need to undercut Amazon, they really need to get more technical with their approach to delivery and become more dominant there.

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Braintrust
"I’ve always thought that Amazon was a bigger threat to Costco than to other grocers and general merchandise stores."
"If Costco really wants to grow digital traffic, and it’s very important that it does, the company needs to start engaging its shoppers digitally."
"First, I’m thinking of getting a Costco tattoo. Just to let you know where my loyalties are."

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