While my recent coverage of retail and the “war on Amazon” has focused on Target, Walmart and Best Buy, one question that hasn’t been examined yet is where iconic warehouse club Costco Wholesale fits in.
Like most, Costco offers customers bricks-and-mortar as well as online shopping experiences. Similarly, like most, Costco strives to set itself apart from the competition. From a shopper’s point of view, I think Costco does a pretty good job presenting a self-contained shopping extravaganza, but more importantly, I’m not alone. Costco’s loyal customers and foot traffic are proof that free samples and cases of two dozen paper goods are still en vogue with consumers.
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At the end of last month, Costco reported better-than-expected fourth-quarter earnings alongside a revenue miss. The quarter benefited some from its hotly-publicized break up with American Express and transition to Visa, which Costco said provided it with lower fees. It is estimated that Costco currently operates around 715 warehouse clubs, with about 501 locations in the U.S. and Puerto Rico. Importantly, traffic for the month of August rose 3%, while September rose 1%.
Shares are down 7% year-to-date.
Even with this fairly upbeat news, it’s still undeniable that Amazon and Amazon Prime present a cannibalization threat. For the shopper in a hurry or the client looking to sidestep free samples and get in and out, the amount of time and energy it takes to go in is still a pain, which is where Amazon steps in to fill the void. In a recent update, Cowen & Company’s Oliver Chen and team noted that Costco members that are also Amazon Prime members have essentially doubled from roughly 29% in 2013 to 57% in 2016.
“Overall, latest Cowen survey data indicates Amazon Prime as now the largest retail membership club in the U.S. with an estimated penetration of 44% of total U.S. households versus an estimated 34% of respondents indicating they live in a household with a Costco membership,” wrote Chen’s team.
Even so, in his recently-updated sentiment on Costco, Edward Jones analyst Brian Yarbrough predicted sales growth of 7% over the coming years, alongside EPS growth of 10% annually, down from 13% prior.
“We believe Costco could add up to 100 more stores domestically. At its current rate of expansion, we think Costco has many years of solid growth,” wrote Yarbrough. “We also expect Costco to continue to grow its store base internationally, as only about 30% of its store base is outside the U.S. today.”
Because Costco and Amazon Prime require membership, analysts also looked into what this could mean overall. A base membership at Costco runs the consumer $55, which still undercuts Amazon Prime’s rate of $99. However, Chen noted that Costco typically raises its fee every five-to-six years and the last increase occurred in November 2011, when the company imposed a 10% hike on members. Despite this potentially coming due, Chen noted it will “likely see little resistance.”
Yarbrough also noted that renewed Costco memberships are at 88%, while 94% of its small business customers renewed their membership. “It is estimated that Costco’s small business customers shop two to three times more often than individual customers and spend 20% to 30% more per store visit,” wrote Yarbrough.
For the short term, Conlumino conducted a survey of 10,000 American shoppers to gauge where they planned to spend their cash on non-grocery items this holiday season. Amazon won second place with 59% of respondents saying they plan to do “at least some of their holiday shopping” there. Conlumino noted that interest spiked 11.3 percentage points compared to last year.
“The patterns for holiday shopping reflect the ongoing transformation of the retail sector, with a distinct shift to value and discounters as consumers try to maximize what they get for their dollar,” wrote Neil Saunders of Conlumino. “Online players like Amazon also stand to make gains, thanks to their convenience, sharp prices and broad ranges.”
As we head deeper into fall, and more specifically, holiday season, it will be interesting to see what retailers roll out in order to maintain their “it factor.” As for Costco, it’s clear that a giant store stuffed with stuff and free samples continues to receive customer love. To date, I have yet to find a website that can offer that. Just my two cents.
Note: Cowen & Company most recently rated Costco Outperform with a $170 price target; Edward Jones rated Costco at Hold.
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