Sales growth slows at Costco

Date : 26 May 2016

As Costco reports slowing comparable store sales growth for the third quarter, we look at what’s been driving its performance.

Profitability improves as sales growth eases

Costco’s third quarter sales increased by 2.5%, with comparable store sales (excluding fuel and currency impacts) up 3%. This included an increase of 8% in Canada, its strongest international performance. Profitability also improved, with net income attributable to Costco up 5.6%. While this remains very much a solid performance from Costco, it does mark a slowdown, with comp store sales coming in at between 5% and 6% over the previous three quarters.

Consumer spending in the US remains robust

In the US, the business was impacted by deflation in a number of grocery categories, including fresh foods. The retailer estimates that this is running at around 1% and is the main drag on sales growth. From a consumer spending perspective, Costco saw some improvements in spending on non-discretionary items, including furniture and electronics, suggesting a fairly healthy economic outlook.

Driving growth through fresh foods

Fresh foods continues to be a key area of investment for Costco. It has been developing its global sourcing initiatives while also investing in the organic supply chain, a key segment for the retailer. Produce in particular is a significant business for Costco, generating sales of around $6bn annually, broadly level with its protein sales. As consumers continue to focus in on health and wellness, the retailer expects its fresh foods penetration to also grow.

Strong performance from ecommerce but could move faster in the channel

Costco’s ecommerce sales increased by 14% in the quarter. The retailer currently offers online shopping in six markets, having recently launched in South Korea and Taiwan. In the US it continues to partner with both Instacart, in around 20 markets, and Google Express, in six markets. The retailer has been relatively cautious in its approach to ecommerce growth, particularly as it’s very focused on the impact of the channel on traffic to its warehouses. There is potential for the retailer to accelerate its plans in this area, particularly given the investments it is making in modernising its IT infrastructure.

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