Costco Reaction to The Amazon Threat

Introduction

Costco has been immune from the Amazon threat because Costco “has built one of the most powerful retail models in the world upon compelling merchandising and pricing, and the power of its substantial membership fee annuity” (Petro, 2016). According to Investopedia, the membership fees in 2016 accounted for 2.6 billion dollars of Costco’s revenue. In addition to the retail model and recurring membership fees, loyalty to the Kirkland brand, which garners high ratings among both consumers and critics, helps defend Costco from straying consumers. Even though Amazon has purchased Whole Foods and now has a brick-and-mortar presence, they still have a lot of work to do before being a true threat to Costco. Costco shoppers enjoy the Costco experience and the discounts from the wholesaler, with which Amazon and Whole Foods will have difficulty legitimately competing, especially since a large percentage of Amazon shoppers prefer to stay out of a physical store location. Unless Amazon can find a way to appeal to the Costco shopper, Costco will continue to be immune from the Amazon threat going forward.

Strengths of Costco

Notable Costco strengths that make it almost Amazon-proof are its memberships and simplicity. First, with membership fees making up 75% of the company’s earnings, Costco has the ability to charge very low prices (Petro, 2016). Second, by keeping its selection relatively small, Costco simplifies the supply chain, and increases the retailer’s purchasing power. A major weakness for Costco is their e-commerce site.

Costco's Reaction to the Amazon Threat

I’m not sure Costco needs to react to the Amazon threat, other than to perfect what they are currently doing. According to CNN Business journalist Nathaniel Meyersohn, as memberships are the main driving force for Costco, membership renewal as of June 2018 was around 90% (Meyersohn, 2018). That 90% return rate is a great indicator of how Costco is faring in the war with Amazon. “Costco has successfully defended against an Amazon threat through low prices, offering fresh food and gas, and creating a treasure hunt buying experience that can't be copied online” (Meyersohn, 2018).

Potential Improvements

Other than creating a more competitive website, to leapfrog competitors on the e-commerce side, Costco could implement other incentives to drive consumers to their existing website. They could offer online-only discounts or cash back incentives for all orders placed via Costco.com. Also, Costco could implement an online-order fast pickup or delivery service, like the ones adopted by Walmart and Target. Amazon’s recent purchase of Whole Foods could potentially threaten Costco down the road. For one, it provides Amazon a physical brick-and-mortar presence that will be more appealing to Costco shoppers who enjoy the shopping experience. “While those brick-and-mortar locations will add to Amazon's delivery network and the company's purchasing scale should allow it to lower Whole Foods' pricing (if it chooses to do that). What they won't do is take away the reasons Costco shoppers frequent the warehouse club” (Petro, 2016). Also, lower Whole Foods’ pricing does not necessarily mean the pricing will compete with Costco pricing. Costco has pricing flexibility because of the membership fees, and also because they deal in large quantities of a limited variety of products. While Amazon’s efforts may eventually prove to be a threat to Costco, that threat is still a ways off. Aside from e-commerce, which Costco is steadily improving, there is no counter action in which Costco should delve.

Conclusion

As mentioned above, Costco has an incredible business model that has supported continuous growth and success. Their attention should be on perfecting what they are currently doing. By focusing on their unique value propositions such as low prices, high-quality products, and a distinct shopping experience, Costco can continue to thrive in the competitive retail landscape.

References

Investopedia. (2016). Membership fees. Retrieved from https://www.investopedia.com

Meyersohn, N. (2018). How Costco is winning the war against Amazon. CNN Business. Retrieved from https://www.cnn.com

Petro, G. (2016). Why Costco is winning the retail wars. Forbes. Retrieved from https://www.forbes.com