For a long time, Costco (NASDAQ:COST) ignored its digital business.

There was a certain logic in that. The company had built its business around its warehouses. Consumers pay an annual fee to join and then they get access to the stores, which offer value-based pricing.

In addition to deals, the Costco warehouses offer an engaging shopping experience. Stores have some set merchandise but also offer a changing array of surprises, aisles packed with people handing out free samples, and la low-cost food court for pizza, hot dogs, and snacks.

The unique nature of Costco's stores made the chain more or less immune to the havoc internet retailers have caused for many of its rivals. Even as rivals close locations or even go out of business entirely, the warehouse club continues to steadily add to its membership base, the source of about 75% of its profit.

Costco didn't focus on the internet because it didn't need to. In 2017, however, that has changed. The warehouse club has started to improve and develop its digital side, and it's paying off handsomely.

The exterior of a Costco store, as seen from across a crowded parking lot.

Stores remain Costco's chief focus, but its digital products are getting more attention. Image source: Costco.

What is Costco doing?

For many years, long after the internet had become important to retailers, Costco barely had a website. Then it has one with very little for sale on it. The company has taken major steps to change that situation, which CFO Richard Galanti laid out in the company's Q2 earnings call, as transcribed by Seeking Alpha (registration required).

"In terms of improving merchandise, we continue to add new and exciting merchandise, and we continue to improve in-stocks on high velocity items," he said, noting that recent online additions include "Samsung appliances, and a variety of added apparel brands."

In addition, Galanti said the company plans to expand its non-food offerings. "These would include Kohler bath and kitchen, Reebok men's and women's activewear and footwear, and Spyder Ski and outerwear, to name a few," he said, along with various health and beauty aids.

The website improvements aren't limited to adding merchandise. Costco has also invested in improving user experience and adding functionality.

"We've improved search, we've shortened the check-out process, and we've improved our members' ability to track their orders, and we'll continue to do some more of that," Galanti said. "Just recently, we automated much of our returns process, not only providing members a much better quality of service, but also reducing by more than 20%, in just the first couple of months, our call-center volume related to returns."

Is it working?

In Q2, total online sales were up 12%, and the company expanded its digital offerings to South Korea and Taiwan, joining the United States, Canada, Mexico as areas the company serves online. Those sales gains continued in Q3, when the company added another 11% increase.

For Costco, it's not so much a question of adding sales but of keeping its members happy. Consumers have become increasingly willing to go online to buy things, and it simply makes sense for a member-driven business to offer its customers the ability to shop online.

Costco isn't taking focus away from its stores. It's instead offering its members another way to interact with the brand. That will pay off not just in sales, but also in added customer satisfaction. Having viable digital products should increase member loyalty, and that's the most important metric for the warehouse club.

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