The warehouse club has not been negatively affected by the growth of digital retailers, In fact, Costco has shown that it can co-exist with Amazon.com (NASDAQ:AMZN), with neither company hurting the other.
Research from GfK, which eMarketer first reported on, showed that the people willing to pay Amazon $99 a year for Prime's free shipping (and other perks) join warehouse clubs such as Costco in higher numbers than non-members do. In fact, 45% of Costco members are also Amazon Prime members, according to an October report from Morgan Stanley covered by The Seattle Times.
Amazon and Costco customers want deals, and they're willing to pay a membership fee to get them. That has kept Costco steadily growing, adding both members and stores every year. The chain is not a race horse. It's a plodding beast that advances in a measured way, but while Amazon devastates other retailers, it's inadvertently helping Costco.
How is Costco being helped?
The rise of Amazon has created a higher bar to get many consumers to be willing to leave their house. People won't head to the mall or visit the supermarket just because they may soon need a small item, at least not in the numbers they once did.
Costco meets that higher bar. Its warehouse clubs offer destination shopping for its members. Yes, value accounts for some of the appeal, but people also visit the chain's locations for the thrill of the hunt. You never know what Costco's shelves may contain, and you can shop them while eating free samples or buying a cheap meal from the food court.
As Amazon and other digital retailers force more stores out of business, it could make Costco even more special. As malls close, shrink, or morph into destinations based more on activities and dining than on shopping, consumers will simply have fewer places to go.
That's also true when it comes to needing an item you can't wait for delivery on. Of course there will be other choices, but as department stores such as Sears prepare to join retailers including Sports Authority, Circuit City, and many others on the dearly-departed list, Costco fills the void -- and it doesn't require frequent visits. Instead, the chain needs its members to come just often enough that they see a value in renewing their membership, because that's how the warehouse club makes most of its money.
It's all about the members
Costco makes about 75% of its revenue from selling memberships. That makes retention percentage and membership growth the most important metrics for the chain. The warehouse club steadily hovers around a 90% renewal rate worldwide and has also shown consistent growth in total members.
The chain closed the second quarter with 37.5 million Gold Star members, up from 37.2 million at the end of the first quarter. During the chain's Q2 earnings call, CFO Richard Galanti noted that the total number of accounts rose to 48.3 million from 47.9 million in the first quarter.
"Total cardholders came in at the end of the quarter 88.9 million, up from 88.1 million at the end of the second quarter," Galanti said according to a transcript of the call. "Also, at the end of the third quarter, paid Executive Memberships stood at 18.3 million, an increase during the 12 weeks of 345,000 new Executive Members or about 29,000 a week increase in the quarter."
More growth to come
As other physical retailers close stores or disappear entirely, Costco will fill the void. Members will visit more often because of the lack of alternatives, and more people will join simply to have a place to shop -- and an excuse to leave the house.
Costco has a brighter future because it remains relevant in a market where many retailers no longer have a reason to be. The warehouse club won't experience quick growth, but it should continue its steady march forward.
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