Is Amazon a Threat to Costco?

In the following video, the Fool's Austin Smith chats with Craig Jelinek, Costco's new CEO. Jelinek joined the company as a warehouse manager in 1984 and quickly rose to become a regional manager. After moving through various executive posts over the years, he became president and COO in 2010, and he took over from longtime CEO Jim Sinegal in January 2012.

Jelinek explains Costco's approach to thriving in a marketplace filled with online competitors such as Amazon.com, as well as bricks-and-mortar retailers such as Target and Whole Foods Market.

Austin Smith: When I think about your company, I think of things like high renewal rate, great customer service, low prices -- but then I also think about Amazon the very same way. I'm a happy Costco member and an Amazon Prime member.

You guys both have phenomenally low prices, you're both notoriously very customer-focused, keep Wall Street at arm's length, and focus on the products and service first.

How do you guys see Amazon? Are they a threat? Are they a complementary retailer? How do you think about them in the landscape today? Because they seem to be the retailer that has the most closely espoused your virtues of low prices and customers first.

Craig Jelinek: Well, if you look at anybody that sells anything, they're a threat. Anybody in business that sells merchandise is a threat. What we have to continue to do, we think we offer two avenues.

We have our core brick-and-mortars where you can come in and shop particularly, and buy a lot of fresh foods, a lot of wine, health and beauty aids, things like that. Then we've got the non-food assortment. In fact, if you want to buy online, you have the ability to also shop with us online, in terms of buying TVs and general merchandise.

We still think, day in and day out, we bring the best value in the marketplace, and you've got two options. You also have an easy option if you want to bring the merchandise back. You can bring what you bought online and you can bring it into the warehouses to return.

We think we can compete well with Amazon. There's always going to be, in my view, two forms of retail -- brick-and-mortars, and online. But I think it's always going to be very difficult -- although people test it -- I think buying and distributing food and sundries and fresh foods in the marketplace, overall, is going to be difficult to do, and very expensive.

Smith: Looking at your positioning, then, the retail landscape is obviously changing dramatically -- a lot of things being done online.

Do you view a bricks-and-mortar competitor like Wal-Mart, or an online-based competitor like Amazon, as maybe a bigger concern or a bigger threat to Costco's model?

Jelinek: I think, like I said before, they're both threats, as is Target a threat, as is Whole Foods a threat.

The key is being the low-cost provider. That's going to be the key for anybody winning the battle long-term. It's whoever can bring value and bring the best quality of merchandise to the marketplace at the best price. I think that's really the key.

Smith: What do you think is the most misunderstood thing about Costco today, that you just keep hearing and you're like, "Oh, that's not the case"? Is there a common misunderstanding about your business that you see?

Jelinek: I don't think there's really a misunderstanding. We're always ... you used the word, "They're a discounter." Well, when you say that we are a discounter, we bring quality merchandise to the marketplace at a very good price.

We have department store-type items that we bring to the marketplace. It's not like it's inexpensive or cheap merchandise. I think, over time, that has taken care of itself. The people know that we have quality merchandise at a very good price. They're not seconds; they're not closeouts. It's quality merchandise that you can buy at most department stores or high-end stores, at a very good price.

If you look at our jewelry, if you look at our watches, if you look at our sporting goods, if you look at our television sets, it's all quality, name-brand merchandise. If you look at our private-label merchandise, our Kirkland Signature, that's equal to or better than national brands, at a better price.