Costco (COST +1.26%) has taken the long-range approach to building its business. The warehouse club often reacts slowly to change, and while that may appear complacent, it's actually measured.
Because the chain has a loyal user base that has steadily grown while renewing at a roughly 90% rate, it does not have to react quickly. The company's core customer base liked shopping in its warehouses. They enjoy not just the low prices, but also the ever-changing merchandise, the free samples, the cheap food, and many other things about the company's brick-and-mortar stores.
That affinity for the experience offered in Costco warehouses has protected the company from the Retail Apocalypse. It also gave the company time to implement both a digital and a delivery strategy.
Costco has been slow in making changes and that has worked for it. Image source: Costco.
What is Costco doing?
After pretty much ignoring the internet, the chain began improving its website last year. That included increasing selection, but it most importantly involved the company investing heavily in infrastructure. Costco did not simply throw a bunch of merchandise online; it improved the back end of its digital operation while also making its website more user-friendly and spending heavily on improving its shipping logistics.
That investment paid off strongly as the company reported a 43.5% gain in comparable e-commerce sales in Q1 2018. It then followed that up by reporting that December e-commerce sales, the first month of Q2 2018, rose by 33.3%. That's strong evidence that waiting did not hurt the company when it came to offering its customer base a strong digital product.
The same is likely true for delivery, though the warehouse club is early in its implementation of two new plans. One, Costco Grocery, offers free two-day delivery on orders of non-perishable items over $75. The total box can weigh up to 40 pounds, and about 500 products are included in the offer.
The second offer is a same-day delivery partnership with Instacart. That deal lets Costco benefit from the delivery company's growing footprint and strong infrastructure. It essentially puts Costco in same-day delivery business with very little risk or financial outlay.
"This is currently offered at 376 of our U.S. locations, and there will be a number of additional U.S. locations planned between now and the end of calendar '18 as our partnership expands," said CFO Richard Galanti of the Instacart deal during the company's Q4 earnings call. "There are approximately 1,700 SKUs, both dry and fresh that are offered and can be fulfilled."
The best is yet to come
Every time another retailer makes a big move, it seems like a number of retail analysts predict that whatever has happened will doom Costco. The reality is that the warehouse club has remained largely apart from the fate of others retailers. Its success won't hinge on what Amazon does with Whole Foods, or whether Wal-Mart keeps lowering prices.
Instead, the company's fate will be decided by its members. Costco makes about 75% of its profits from selling memberships, and its renewal rates in Q1 came in at 90% in the U.S. and Canada and 87.2% worldwide, nearly exactly where they were at the end of the previous quarter. That consistency looks even better when you consider the retail chain raised its prices in June for the first time in about five years.
Costco doesn't respond like most retailers because it has a different business model. There are no signs that model has any weakness, and while growth will be slow (with 20 to 25 new warehouses planned in 2018), it should stay steady.
