Consumers paid a membership fee to join these warehouse clubs and in exchange got access to goods at cheaper prices than in traditional stores. Costco and Sam's location were no-frills affairs where goods sat stacked high on basic metal shelves. In addition, customers generally had to buy in bulk in order to save, but if they took home toilet paper by the pallet, they paid a better price per roll.
Both chains were value-driven, places where people could save money without ever knowing before going in exactly what they might buy. It was a smart model that grew through the 1980s and '90s, while staying strong even as the internet began to hurt other traditional retailers. Now, a new report from Cowen & Co. (NASDAQ: COWN), which was first reported by Business Insider, shows that the growth of one online membership program may be bad news for Costco and Sam's.
What does the report say?
Numbers are growing for Amazon.com's (NASDAQ:AMZN) Prime service, which among other benefits gives members free two-day delivery. The Cowen note said that the percentage of households in the United States that only pay for Prime membership has gone from 7.1% in 2013 to 16.2% in 2016. During that same time period, the number of U.S. households that only use Costco has dropped from 14.9% to 9.8%, while Sam's Club has been hit even harder, falling from 16.9% to 9.7%.
In addition, the number of American households paying for both Prime and Costco or Sam's Club has dramatically increased over the last four years. The number has climbed from 4.8% to 11.3% for Prime + Costco, while it has gone from 4.8% to 8.5% for Prime + Sam's Club.
What do the numbers mean?
Sam's and Costco used to have the discount membership category to themselves and now they are sharing it with Amazon.
"The risk is that as Amazon continues to improve Prime's value proposition and add more layers to the Prime service, U.S. households could cancel subscriptions for one or both of the warehouse clubs. At a minimum, the number of consumers opting to just use Costco and/or Sam's Club 'Only' is likely to continue to decline," Cowen wrote in the note, Business Insider reported.
Costco and Sam's both earn around two-thirds of their income from membership fees, and, of course, sales are driven by members going to their stores. If people cancel in favor of Amazon Prime, then both warehouse clubs would take a double revenue hit -- losing membership fees and also any potential purchases by those members.
Is it possible to compete?
The Cowen note estimated that 44% of all U.S. households already have Prime memberships, a number it expects to grow to 50% by the end of the year, CNBC reported.
Clarus Commerce CEO Tom Caporaso, whose company is an e-commerce solutions provider that owns FreeShipping.com, finds the 50% number credible, telling The Motley Fool via email that he expects Amazon to reach that number sometime in 2017.
He did offer some hope for Costco and Sam's by noting that "Prime members also shop elsewhere." He pointed out that free two-day shipping has been a major enticement for shoppers, but he did offer a recipe for other retailers to compete. "While it would be difficult for any retailer to match Amazon's reach in the near future, a variety of them can still capture significant customer bases that will allow them to remain profitable and outperform other stores," he wrote. "Smaller and niche stores can also remain viable by optimizing their specialties and continuing to meet and exceed their customers' expectations."
Sam's and Costco certainly don't count as being smaller, but they are niche, specialty retailers in some ways. In order to hold onto members -- even if those people are also joining Prime -- they must double down not on value (though maintaining that is important), but on store experience. People shop at warehouse clubs to save money, but going to one can also be an event.
Sam's and Costco need to focus on being destinations -- places people come to for the sampling, the unexpected bargain, and services like eye exams that can't be sold online. If the two companies can do that, people may shop more on Amazon, but they may also keep their warehouse club memberships, which is as close to a win as can be expected for the two chains given current trends.
Daniel Kline has no position in any stocks mentioned. He is a Prime and a Costco member who may not renew at the warehouse club. The Motley Fool owns shares of and recommends Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.