RetailAnalysis
02 March 2017
Five things we learnt from Costco’s Q2 results

We review Costco’s second quarter performance, including a new focus on EDLP pricing.

1. Sales improved despite stronger cannibalisation impact

Costco’s second quarter net sales increased by 5.7% to $29.1bn, with comparable store sales up 3%, excluding currency and fuel impacts. Net income fell by 5.7% to $515m. This represents a marginal improvement on the comp sales performance in Q1, despite a stronger impact from cannibalisation, particularly in Canada where it is opening eight new locations this year. Cannibalisation is currently running at around twice the average rate for the previous two years. In the US, the retailer continued to see deflation of around 1.0% to 1.5% in food categories.

2. Shifting its strategy towards EDLP pricing

In the US, it has also started to tweak its pricing and promotional strategy, with a revamped program for its multi-vendor mailer. It has started to reduce the number of items per mailer, and the number of days for which it runs. Partly this is due to the mailer becoming less effective in driving volumes and activating new customers to purchase some items. In response, it has been shifting investment into EDLP pricing, which has helped to grow sales and drive traffic. Although it remains early days, the retailer is pleased with the initial results of the program. This is a major change in strategy for the retailer, but one where it appears to be working closely with its suppliers to deliver value to its customers in a new way.

3. Online initiatives gaining momentum, more third-party tests to come

Costco’s ecommerce sales increased by 12% in the quarter, improving on the 8% growth recorded in the first quarter. The retailer has been investing significantly in this channel recently, improving the online experience, product availability on fast moving items and the product offer. New brands have been added in electronics, clothing and upscale beauty, with more to come over the next few months. With a focus on driving profitability and efficiencies, orders are now picked from 11 depot fulfilment centres in the US and Canada.

It is also working with Google Express and Instacart to directly fulfil orders from clubs, with the latter working in 132 clubs across 26 cities in the US. Costco will start to test with two other third-party delivery services in the next month. While there are no plans to offer in-club pickup in the short term, expect to see more innovation in terms of the products offered, and the speed with which it delivers to its customers.

4. New international markets set to launch in late May; China in its sights

Costco opened four new clubs during the quarter, with 12 opened for the year to date. A further 17 will open in the second half, most of which will be in the US and Canada. It is also expected to open its first outlets in France and Iceland in late May. In China, it continues to see good progress with its Tmall business, and expects to open its first physical club in the country in the next few years. While there are no plans to test a smaller format concept, it continues to see solid potential with its Business Center model, which could grow to 40-50 units in the US.

5. Membership fee increase set for June

The retailer will also be increasing its membership fees in the US and Canada in June. These countries account for just under 90% of all members, and around 35m households will be impacted. The last fee increase was in 2011, and renewal rates have remained strong as the retailer’s value proposition continues to resonate with shoppers. This is expected to boost the retailer's bottom line and ability to invest more in value.

Click to view our latest insight presentation, Trading with Costco, to see how it plans to win over the next five years.




Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage on Costco globally. He is also responsible for shaping IGD's research program across North America. Contact Stewart at stewart.samuel@igd.com for further insight on the region.
@Stewart_IGD
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