Costco feels deflation impact

Date : 07 December 2016

We review Costco’s first quarter performance, including its latest ecommerce and market entry initiatives.

Growth led Mexico, the UK and South Korea

Costco’s first quarter net sales increased by 3.2% to $27.5bn, with comp store sales, excluding fuel and currency impacts, up 2%. The retailer continued to see the strongest comp sales growth in Canada, while Mexico, the UK and South Korea delivered the strongest net sales growth. The retailer’s growth was dampened by deflation, primarily in food and hardlines, a factor which has impacted most retailers across the US this year. Costco continues to see significant velocity in pricing, with major swings in several key commodities. It expects the trading environment to remain deflationary for a few more months. The retailer saw strong profit growth with net income increasing by 13.5% to $545m.

Improving the online experience

Costco saw solid growth in online sales, up 8% during the quarter, as the retailer continues to make several improvements to its offer, focused on three key areas. These include enhancing the merchandise offer through introducing more exciting and value-added products and improving the availability of high velocity items, improving the customer experience through improved functionality including a shortened checkout process, better search, and better order tracking, and optimising distribution and logistics through increasing the number of fulfilment locations, bringing it closer to the customer and reducing shipping costs.

Costco has lagged many of its US competitors in this space, and while it is investing in the channel, it remains focused on driving store traffic. However, it is not currently looking at introducing store pickup for online orders, partly due to lack of customer demand and also due to the lack of space within its clubs.

On track to open first stores in France and Iceland

Costco plans on opening 31 new locations in the current financial year, with just over half opening in the US. The retailer continues to see significant opportunities within its domestic market particularly in medium sized markets. Eight new clubs were opened during the quarter, with plans on track for its first outlets in France and Iceland. These are expected to open in late spring and early summer respectively.

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 [email protected] for further insight on the retailer and the region.