Ecommerce leads Costco’s growth with new grocery delivery services launched

Date : 06 October 2017

We review Costco’s fourth quarter and full year performance, and its launch of two new grocery delivery services.

Our view: success through uniformity

Both the Q4 and FY results reflect the enduring strength of the Costco business model. During a time when other retailers are focusing on shrinking their store formats, localising their offers and driving more personalisation, Costco can deliver success through a relatively uniform global footprint and operating model. However, the retailer is tracking the moves of many of its grocery peer group with two new ecommerce initiatives. It may be late to the ecommerce party, but with both two-day and same-day delivery programs, it will be looking to drive this part of the business much harder than before, although it will be monitoring carefully any impact on club traffic.

Strengthening performance throughout the year

Costco’s fourth quarter sales increased by 15.8% to $41.4bn, reflecting an additional trading week in the quarter. Comparable store sales, excluding the impact of fuel and currency, increased by 5.7%. Food and sundries comps were up around 4%, led by spirits, deli and frozen. Fresh food comps were in the mid-single digits.

For the full year, total revenues were up 8.7% to $129.0bn, with net income up 14.0% to $2.7bn. The growth in comparable store sales represented an uptick on its performance in the third quarter, reflecting how its sales have strengthened over the past 12 months. In the first five weeks of the current financial year, comparable sales growth improved further to 6.2%.

Ecommerce sales up 15% to $4.6bn

Ecommerce growth was the highlight of the retailer’s results, with sales up 21% in the quarter. Full year ecommerce sales were up 15% to $4.6bn. Underpinning this growth have been the improvements made to the site’s functionality including search, checkout, returns and the ability to track orders. Costco has also improved its non-food offer, adding more premium, branded items, expanding its private brand ranges and improving the value proposition with a series of limited time promotions. A key focus for the business is to build awareness, including through email campaigns and in-store signage. It plans to expand the service to additional countries over the next 18 months.

Moving into the grocery ecommerce space with two new services

While Costco has frequently been accused of lagging many of its grocery store competitors with a move into grocery ecommerce, two new services have been launched this month. It has launched a nationwide, two-day delivery service for non-perishable and sundry items, encompassing around 500 products in total. Free delivery is available for orders over $75. Orders are fulfilled at several of its business delivery centres, and dispatched via UPS.

Expanding same-day delivery partnership with Instacart

It has also expanded its white label, same-day grocery delivery service with Instacart. Currently live in 376 US locations, it offers 1,700 fresh and dry goods items. Under this new program, Costco members have access to promotional prices and cash back incentives, and offers more competitive pricing than previously. A key concern for Costco in moving further into grocery ecommerce is the impact on club traffic. The retailer believes that while it may lose some larger customer trips, they will be more than offset by an increased number of in-fill trips.

No concerns on Amazon’s Prime membership model

Addressing concerns that Costco’s membership model could be challenged by a growing number of Costco’s members also holding an Amazon Prime membership, the business sought to provide some reassurances. While new store openings continue to add around 60,000 new members in each location, there has been some degree of membership cannibalisation reflecting new store openings. The timing of new store openings and online membership drives have also skewed sign-ups. However, memberships in the US and Canada, which account for most of its memberships, were up 4.0% year-on-year, excluding new store openings and those clubs impacted by cannibalisation.

25 new clubs planned for the next 12 months

Costco ended the financial year with 741 warehouses in operation, including 514 in the US, 97 in Canada and 28 in the UK. The retailer opened 12 new locations in the quarter including its first stores in Iceland and France. A total of 28 new units were opened in the year. Looking ahead, Costco plans on opening 25 new clubs, and relocating six. Around two-thirds of new clubs will be in the US, with the remainder in Canada, Australia and Asia. Opening clubs in China continues to be of interest to the business, although no planning permits have yet been secured.

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Stewart Samuel, Program Director, IGD Canada: based in Canada, Stewart heads up all of IGD's research and coverage on Costco. He is also responsible for shaping IGD's research program across North America. Contact Stewart at [email protected] for further insight on the region's markets, channels and retailers. Follow Stewart on Twitter: @Stewart_IGD