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Column: E-commerce leads Costco's growth strategy

Bulk goods retailer looks to compete in the e-commerce space with two-day delivery service

Stewart Samuel, program director with IGD, reviews Costco’s fourth quarter and full year performance and the launch of its two-day delivery service.

Success through uniformity

Both the Q4 and full-year results reflect the enduring strength of the Costco business model. During a time when other retailers are focusing on shrinking their store formats, localizing their offers and driving more personalization, Costco can deliver success through a relatively uniform global footprint and operating model. However, the retailer is tracking the moves of many of its grocery peer group with two new e-commerce initiatives. It may be late to the e-commerce party, but with two-day and same-day delivery programs, it will be looking to drive this part of the business much harder than before, though it will be monitoring carefully any impact on club traffic.

Strengthening performance throughout the year

Costco’s fourth quarter sales increased by 15.8% to $41.4 billion, reflecting an additional trading week in the quarter. Comparable sales, excluding the impact of fuel and currency, increased by 5.7%. Food and sundries comps were up around 4%, led by spirits, deli and frozen. Fresh food comps were in the mid-single digits.

For the full year, net sales were up 8.7% to $126 billion, with net income up 14.0% to $2.7 billion. The growth in comparable store sales represented an uptick on its performance in the third quarter, reflecting how its sales have strengthened over the past 12 months. In the first five weeks of the current financial year, comparable sales improved further to 6.2%.

E-commerce sales up 13%

E-commerce growth was the highlight of the retailer’s results, with sales up 21% in the quarter. Sales from e-commerce sites operating for more than one year were up 30% in the five-week September period compared to the comparable year-ago period. Full year e-commerce sales were up 13%. Underpinning this growth has been the improvements made to the site’s functionality including search, checkout, returns and the ability to track orders. Costco has also improved its non-food offer, adding more premium, branded items, expanding its private brand ranges and improving the value proposition with a series of limited time promotions. A key focus for the business is to build awareness through email campaigns and in-store signage. It plans to expand e-commerce to additional countries over the next 18 months.

Moving into the grocery e-commerce space with delivery service

While Costco has frequently been accused of lagging many of its grocery store competitors in the e-commerce space, it has launched a nationwide, two-day delivery service for non-perishable and sundry items, encompassing around 500 products. Free delivery is available for orders over $75. Orders are fulfilled at several of its business delivery centres and dispatched via UPS.

Expanding same-day delivery partnership with Instacart

It has also expanded its white label, same-day grocery delivery service with Instacart. Currently live in 376 U.S. locations, it offers 1,700 fresh and dry goods items. Under this new program, Costco members have access to promotional prices and cash back incentives, and offers more competitive pricing than previously. A key concern for Costco in moving further into grocery e-commerce is the impact on club traffic. The retailer believes while it may lose some larger customer trips, they will be more than offset by an increased number of in-fill trips.

No concerns on Amazon’s Prime membership model

Addressing concerns that Costco’s membership model could be challenged by a growing number of Costco’s members also holding an Amazon Prime membership, the business sought to provide some reassurances. While new store openings continue to add around 60,000 new members in each location, there has been some degree of membership cannibalization. The timing of new store openings and online membership drives have also skewed sign-ups. However, memberships in the U.S. and Canada, which account for most of its memberships, were up 4% year over year, excluding new store openings and those clubs impacted bycannibalization.

Twenty-five new clubs planned for the next 12 months

Costco ended the financial year with 741 warehouses in operation including 514 in the U.S., 97 in Canada and 28 in the U.K. The retailer opened 12 locations in the quarter including its first stores in Iceland and France. Looking ahead, Costco plans to open 25 clubs and relocate six. Around two-thirds of new clubs will be in the U.S., with the remainder in Canada, Australia and Asia. Opening clubs in China continues to be of interest to the business, though no planning permits have yet been secured.

Stewart Samuel is program director with IGD, a global grocery and food industry research firm

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