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Does Costco need to follow a different path online?
There’s one thing you can say about Costco’s management team. They are confident in the company’s position in the marketplace and don’t feel the need to follow what retail rivals are doing even when Wall Street wants them to do so. Richard Galanti, Costco’s chief financial officer, made that clear on the company’s quarterly earnings call earlier this week.
As on past calls, Mr. Galanti talked about Costco’s e-commerce efforts. While he mentioned steps the company was taking to improve its performance in this area, he also made clear that Costco’s greatest focus was its warehouse club operations.
Mr. Galanti described online sales for the latest quarter as “pretty choppy” with comps up seven percent overall. He said sales fluctuated from being up by mid-single digits at the start of the quarter and to up low-double digits at the end.
Costco’s CFO said the company was looking to improve its merchandise mix online including “adding more exciting high-end brands in merchandise on an everyday basis.”
He also said Costco was improving its online search function, shortening the steps to check out, making it easier for customers to track orders and automating returns.
Mr. Galanti also said Costco is improving its distribution logistics.
“We have increased the number of depots from where we fill online orders, so closer and faster and less expensive delivery,” he said (via Seeking Alpha). “And again, look for more improved and quicker distribution comments from us in early calendar 2017.”
Asked about the split between e-commerce sales coming from mobile devices, Mr. Galanti said Costco has trailed industry averages on that front, but that those numbers are “improving quickly.”
He also said that while Costco had looked at click and collect, it didn’t make sense at this point because of the space it would require in clubs to make it work. Making room might be a good idea if volume at club locations was down, but that isn’t an issue at Costco locations. He also said there were not a lot of requests from members for Costco to add the service.
Discussion Questions
DISCUSSION QUESTIONS: Should Costco pursue e-commerce and omnichannel initiatives more aggressively than it currently appears to be doing? What do you see as the biggest threat to Costco’s continued success? Where do you see areas of opportunity?
Poll
BrainTrust
Frank Riso
Principal, Frank Riso Associates, LLC
Paula Rosenblum
Co-founder, RSR Research
I do not see Costco aggressively improving their online business. The key to warehouse club shopping is the hunt for new stuff that was not there last month or even last week. A real treasure hunt! I have yet to find any real threat to the Costco model except maybe in the purchase of large items such as outdoor furniture. It is easier to have these items delivered for free than to haul them home from Costco. Costco does carry some items online that don’t appear in their clubs. Continuing to carry those items and more may be their greatest opportunity online.
E-commerce and omnichannel are as much a part of retailing today as merchandising and marketing. Costco has enjoyed tremendous success, but everything is always changing and so too must Costco. Success can breed complacency, and in Costco’s case this affords them the luxury of evolving their programs more slowly than other retailers. However, consumer expectations and competitive pressure will ultimately force Costco to launch more online services. They need to keep thinking fast, even if they act more slowly and methodically.
I think they have to. It’s too confusing trying to figure out what they have in stores vs. what they have online. Treasure hunts get tiresome.
The loyal member base of Costco is a huge asset. After valuation and brand equity, the highest priority of any business is to develop and monetize assets. So in direct answer to the question, yes, Costco must be more aggressive in e-commerce and omnichannel areas, striking while the iron of improved marketing and communications is hot. Loyalty depends on it.
What Costco needs is patience and grit. The last thing Costco wants to become is another Blockbuster. They need to continue to track into the e-commerce space AND pursue omnichannel sales. Costco is in a prime position for omnichannel sales, given that they have warehouses (clubs) distributed geographically. Costco’s opportunity is that it should be easier for them than most retailers to add ship-from-store capabilities and pickup locations. Seeing businesses failing to pick up on the omnichannel wave feels like being transported to the early 2000s and watching the fatal errors in the video rental business. Not adapting to the new retail space is a clear red flag.
Costco is today’s bazaar of old. Letting shoppers stroll the aisles and discover items that surprise and delight. Introducing new items on a regular basis to keep the shopping experience fresh and exciting. This formula keeps the Costco experience a destination. Their physical store is woven into the fabric of the entire experience. As long as Costco keeps their inventory fresh and new, shoppers will continue to visit the store. Their magic formula would be compromised if they tried to replace this process with an online version. It simply isn’t the same.
It would be an interesting study to build a “stroll the virtual aisles” type of “discovery” UX approach versus categories and sections as we are programmed to see online. You bring up some interesting points about in store that I agree with. Wonder if it could be replicated online? I’d love to design and validate your “wandering and discovering” approach from the physical store, online.
Costco should definitely step up their initiatives to keep pace with where the consumer is going. They have done a great job of keeping the in-store customer loyal. Now is the time to step up the e-commerce initiatives. This is a good opportunity because much of online shopping is a treasure hunt. The largest threat to Costco’s success is to fall behind in the fastest growing method of shopping.
There are many contributors on here who think that Costco needs to move into e-commerce much more aggressively, and I understand their thoughts on this. However, I admire Costco’s stance on how they want to do business and, speaking as a brick-and-mortar guy myself, not everybody wants or needs to do e-commerce to stay in business.
Costco understands the cost of doing BOPIS, and have stated it is something they choose not to do for several reasons. It costs money to do this and it takes away consumers from going in and buying stuff they didn’t plan on getting, and they would have to alter the physical facility to make this happen, which again costs a lot of money.
The push for e-commerce to be the only way to continue on in retail is overstated somewhat, and I understand why some on our panel feel so strongly about doing both. The retail stores of the future will have to be very creative in building a very high-tech modern store that makes all forms of commerce available to all of their customers, and Amazon is setting the bar high with their concept. So yes I agree that as we move forward, things will evolve into a seamless transaction without traditional checkouts and with as few employees as possible to keep costs down — and so be it. There will always be a need for the human touch for some customers that want the relationship with a real person, be it the owner or a top notch employee that will happily guide them through the sale. And yes they will always come back, as it is why we have choices where we want to shop.
Kudos to Costco for doing it their way without listening to Wall Street talking heads who think otherwise.
Because the landscape has changed and many consumers of today and tomorrow expect an online option, it is clear that Costco has to pursue both channels, albeit not necessarily so aggressively as more traditional retailers. The biggest area of opportunity for Costco is to sell the hard-to-carry items online. Those who shop Costco for jars of pickles to put in their coffee shop probably will go and pick them up as will those who buy toothpaste and meat. But larger items that will be delivered are more likely to be purchased online.
Costco and Amazon are the two players most worth watching on the global retail stage. Costco because they are number two globally at about 20 percent of Walmart’s sales, and Amazon very roughly half of that. Both Costco and Amazon are relatively impregnable, and are far in advance of everybody in their spaces and positions and are GROWING. I used Costco as the “Amazonian” sales king in “Selling Like Amazon… in Bricks & Mortar Stores!” (Expanded a bit as Chapter 3 in the second edition of my book.
Just as it has been obvious to me for several years that Amazon would become a major brick-and-mortar retailer (pending) it is obvious that Costco can take their time to become an online juggernaut. I often cite the fact that Costco is the number one seller of fine jewelry in America, just as they are the number one seller of fine wines. These facts are intended to shock the listener from far-outmoded “warehouse club” images. Same for Amazon’s movement into brick-and-mortar retailing, as sure as God made little green apples!
The scientific, holistic view of the world of retailing is VERY different than the common, superficial view of “merchant warehousemen relying on unpaid stock-pickers” (aka shoppers) to take what they want from their “neighborhood warehouses,” aka stores. Couple that with a detailed history of retailing and a deep respect for the “meeting of the minds” PROCESS of selling, and you get a more reliable picture of retailing, past, present and future.
I get plenty of online merchandising from Costco. It’s not like they are void in the space. But we already have a successful online presence for treasure hunts and bargains on name brand goods — it’s called Amazon!
Brick-and-mortar retailers are always citing the fact that shoppers don’t always want to shop online — entirely true. Costco has one of the most compelling propositions in the industry for why to shop there when you aren’t online. They are strategically correct to focus on optimizing that point of difference and understanding that online will always be a “rear guard flanking action” tactic for them.
While it is true that Costco customers buy less when they shop online compared to when they visit physical stores, they are visiting stores a few times less per year. These two facts suggest a modification of strategy to address these issues. While Costco is not a fan of click and collect, research indicates that customers who shop both online and in-store spend more than shopping in either channel separately. I am certain Costco is aware that omnichannel is about customers, not channels.
For my money Costco is the most trusted retailer in the marketplace. Their quality/price/value equation is unmatched. I have sold them product in past lives so I know them to be adamant about quality and tough about price. All of those attributes transfer directly to the web. Costco may prefer people to shop in the stores. I recall reading anecdotes about the shopper who goes in for toothpaste and walks out with a set of new patio furniture, or something like that. It’s that kind of shopping experience. That might not happen on the website, but so what? Of course Costco will develop their omnichannel profile, but they will execute in a manner that works for both them and the customer. Costco understands “best use of space” better than anybody. Just because a website doesn’t have the physical constraints of fixturing doesn’t mean they should rush to broaden their assortments there.
Costco does not need much advice on what they should do — they are doing it all very well. Sure they could and will soup up online, but they are doing the right things today to satisfy their broad array of shoppers — from mills to early boomers. Visit a Costco on any Saturday at 11am. You know they are doing the right thing. They want to improve the supply chain performance side of things per their CFO and that is the smart thing to address — we will see more of this improvement by many retailers in 2017. They are improving their merchandising and assortments and their inventory service levels, and stores are better than ever.
Quit trying to find a problem with the top performers. Costco is a top success that will hold that status for many many years.
Costco may or may not be better off doing things differently; indeed it’s doubtful every decision their management makes is absolutely the best. But it’s far more doubtful some random stranger is, on average, going to do better. If it’s between their seasoned leadership and “Wall Street,” or some other self-appointed expert, the choice is too obvious to bother asking about.
Costco has a winning solution and combination right now. There products are larger, more expensive and reflect limited choice. This is contrary to most ecommerce. Plus, almost half of their offerings in the clubs are food items. Food is not a winning online combination. Costco should continue to focus on the model that makes them successful, while continuing to have a smaller presence online.
Costco’s online shopping model could be improved simply by making the vast amount of products more readily available through enhanced search capabilities, product bundling, advanced pickup and shipping options, creative financing terms online versus offline and clean and easy to navigate UX. They do not want to get caught behind by NOT focusing on e-Commerce but could do subtle and iterative enhancements over time.