2019 Retail Pacesetters: Costco eases into e-commerce, maintains dominant stores

Issaquah, Wash.-based Costco Wholesale has been moving into e-commerce at a deliberate pace as it expands its capabilities for online ordering and delivery throughout the country.

The membership club operator appears to have found a balance between its compelling in-store offerings and the convenience of delivery, which it offers in partnership with Instacart and other third-party delivery firms.

The “treasure hunt” merchandising strategy and discounts on bulk groceries, health and beauty, and OTC products keep customers coming in the doors for stock-up trips.

It also offers a robust in-store pharmacy program, which includes free screenings for osteoporosis, heart health and diabetes. Home delivery of prescriptions also is available.

Costco, which operated 762 membership-warehouse stores worldwide at the end of its last fiscal year in September, is the largest of the wholesale clubs, and continues to expand at a steady pace. The company opened 21 new clubs in fiscal 2018, including 13 in the United States, and it plans about 23 new locations in 2019, with about three-quarters of those in the United States. Costco is planning to open its first location in China later this year.

Sales for fiscal year 2018 were up 9.7% to 138.4 billion, compared with fiscal 2017.

E-commerce sales at the company, which account for a little more than 4% of total sales, were up 32.2% for the year. The company said it is generating sales for two-day delivery of grocery e-commerce orders in all 50 states, including the six states where it does not operate wholesale clubs.

“We continue to improve the online merchandise and sales offerings and services offerings with ‘Hot Buys’ and ‘Buyer Picks,’ and buy online and pickup in store,” CFO Richard Galant said in a conference call discussing year-end results.

Costco’s in-store pickup service includes a limited test of lockers that allow customers to retrieve their orders themselves.

Neil Stern, senior partner at Chicago-based consulting firm McMillanDoolittle, said Costco’s formula for success has stood the test of time. “Costco remains an anomaly,” he said. “While they have Costco.com, they are a relatively small player in e-commerce. And while they have not done much to innovate from a physical standpoint, yet, they remain one of the most solid performers from a physical retail point of view. Great merchandise selection and solid execution are a winning and enduring formula.”

Burt Flickinger, managing director at New York-based consulting firm Strategic Resource Group, said Costco has generated a strong following for the value of its vitamin and supplement offerings, as well as its fresh grocery assortments. “Costco is becoming the world leader in vitamins and healthcare sales per store,” he said.

The retailer’s vitamin and supplement private label, Kirkland Signature, has a reputation for high quality and low prices, Flickinger said.

“They are attracting more consumers looking for healthcare items, in addition to being leaders in fresh, natural and organic,” he said. “It’s a combination of a one-stop shop in store, but also Costco.com and Costco delivery are really accelerating. So, you’re taking the highest volume stores, per store, per week, anywhere in the world, and then adding the additional online component and the strong focus on pharmacy, health, beauty and natural and organics — it’s an incredibly powerful food and drug combination.”