Even During the Pandemic, Costco Knows What it Does Best

Even During the Pandemic, Costco Knows What it Does Best

If one image could summarize the early days of the pandemic, it would be the frenzied buying of toilet paper within the aisles of Costco. Like most supermarket chains, the wholesale retailer saw a surge of in-store spending, beating analyst expectations and causing a 27% rise in stock prices. By the end of the summer, overall sales were up 14% and the brand was able to offset COVID-related expenses through careful planning, minimizing excess merchandise, and virtually eliminating spoilage-related costs. Additionally, losses from the travel and ancillary sectors were made up for by strong sales in fresh foods and pharmaceuticals.

However, as the pandemic continues into the holiday season and causes permanent changes to consumer habits, will Costco be able to maintain momentum in the face of booming e-commerce competition?

Sector rival Target used the pandemic as a catalyst to improve shipping speeds, fast-tracking existing business plans, and using its 1,900 stores as fulfillment centers. In this way, the retailer was able to offer same-day delivery on essentials and fresh food. Costco wasn't so pushed, allowing third party Instacart to manage its equivalent grocery service and continuing to sell non-perishables through its website. While the company's e-commerce sales did increase by 90% during the summer and delivery times continued to improve, the company's focus remains long term and larger in size.

Costco is poised to build out its delivery capacity through its 2019 acquisition of Innovel. This will allow for the delivery and installation of large items such as appliances, a service not provided by other big-box chains. Costco anticipates this move will save money, allowing them to pass savings on to consumers.

But as always, Costco's true strength lies in its simplistic and holistic in-store experience. In the face of encroaching e-commerce sites like Amazon, Costco seems confident its membership perks make its stores worth visiting. 50% of customers who stop to fill their gas tank end up shopping in stores, while in 2018, the after-checkout food courts produced $1 billion in sales. Even during the early days of the pandemic, foot traffic only slightly decreased and was easily made up for by a 12.7% increase in average basket size. The company also still anticipates opening stores throughout 2020 and 2021 as part of its decade of expansion, which will see a 28% increase in locations. With its membership revenue secure due to high retention rates (88.4%) and increasing profits (5% annually), it's clear the demand for Costco stores isn't going anywhere soon.

By maintaining interest in its physical locations, Costco can continue to leverage its size and scale to ensure low prices. It's important to remember that the brand's initial popularity stemmed from its utmost dedication to affordability. The wide aisles and warehouse aesthetic allow the brand to reduce costs associated with merchandising, stocking, marketing, and energy consumption, and these savings are passed directly on to consumers. Costco averages an 11% price markup, compared to Amazon at 15% (not including private sellers who use the platform), Walmart at 24%, and Target at 25%. So while competitors battle it out to recapture lost digital sales, the wholesaler will continue to do what it does best: bring affordable products into stores.

We have adjusted our comments on Costco to reflect their reaction to the current pandemic. You can check out the new comment by clicking on the stock icon below.

Anne MarieAnne Marie

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