Costco Must Evolve if it Wants to Avoid the Amazon Effect

Costco Wholesale Corporation (NASDAQ:COST) has grown to be the #2 brick-and-mortar retailer in the country with over $113 billion in annual revenue, but its position is threatened by e-commerce giants like Amazon.

All isn’t gloomy for the membership warehouse operator, however. In fact, things are going very well, and the stock is near all-time highs. From The Motley Fool:

Costco has one of the most dependable customer bases in retail. Its membership renewal rate was 91% in the U.S. and Canada last year and 88% globally. Those members spend about $2,500 on average.

Costco offers individual and business memberships for $55, and executive memberships, which come with additional benefits such as 2% cash back, for $110. It closed last year with 34 million individual members and 10.6 million business members. 39% of cardholders are executive members, up from 38% the year before, and executive members spend more than regular members, making up two thirds of sales, a trend that should help profitability in the future.

Those membership fees represent almost all of Costco’s profit, as the company just hopes to break even on merchandise sales after accounting for other expenses:

The most important factor about membership fees is that they go straight to the company’s bottom lines. Costco operates its warehouses on essentially a breakeven basis, making its profits on memberships instead of merchandise. Last year, for example, net income was $2.38 billion, just shy of the $2.53 billion it brought in in membership fees.

But like all retailers, COST is vulnerable to the Amazon effect. The company has been slow to adopt common conveniences that many consumers now take for granted, and its online presence isn’t great:

For now, Costco’s membership model seems solid, with a North American renewal rate of 91%, but the rise of e-commerce could present a threat. The company has resisted basic features like in-store pick-up, as management wants to drive traffic through the store rather than encourage a trip to a single counter — but as Amazon Prime continues to gain in popularity, it could present a threat to Costco.

Going forward, membership renewal rates and fee growth will continue to offer a window into the company’s future. If renewal rates begin to slide, Costco may have to rethink its value proposition.

So while Costco’s business is humming along, management might be caught whistling past the graveyard here, ignoring potential pitfalls by refusing to change in the face of an evolving retail landscape.


Costco shares fell $0.62 (-0.37%) to $167.34 in Thursday afternoon trading. COST has gained 3.6% since the start of 2016, compared with a 7% rise in the S&P 500 during the same period.

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