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Can Costco Stay Relevant Through the Supermarket Wars?

By Jennifer Saibil – Updated Nov 6, 2019 at 7:26AM

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While Amazon and Walmart are trying to elbow out the bulk grocery chain, it's been managing to keep pace with and even outpace its rivals.

Slow and steady sometimes wins the race. So far Costco Wholesale (COST 1.10%), riding along steadily in its growth and making sensible choices, has been able to keep up with competition that continues to up the ante in their attempts to attain a greater share in the US grocery market.

Groceries are one category of retail that hasn't yet succumbed to the online onslaught, but online retailers are trying mightily to make that happen. Costco has joined the online revolution, but it's sticking to its core ideology, and customers are sticking to it staunchly.

Man shopping for groceries

Image source: Getty Images.

Race to the top, or the bottom?

Groceries are a key retail segment, accounting for about half of Walmart's (WMT 1.22%) total sales, so it's important for Walmart to monitor the sector carefully. However, online grocery shopping only accounts for about 2% of total grocery shopping, so at least for time being, it's a drop in the bucket -- or shopping cart.

The question of how much it will grow has been the impetus for Walmart and online rival (AMZN 1.26%) to plow millions of dollars into their respective websites to keep competitive market share. Amazon dominates the online grocery category, with about 36% of sales, and Walmart controls the storefront sphere, with 26% of the overall market in 2017 .

In an attempt that looks almost desperate, Amazon has just announced that it plans to make deliveries for Amazon Fresh, its grocery division, free for Prime members, who've been paying $14.99 a month until now. Walmart charges an annual $98 fee. A few weeks ago, Walmart teamed up with Capital One to offer a competitive membership and credit card for shoppers, while Amazon has a similar alliance with JPMorgan Chase. The stakes are getting higher, and watching it play out is as exciting as watching the U.S. Open finals.

However, while the two of them battle it out, potentially losing millions of dollars to win customers, Costco is quietly making greater headway in both its online and brick-front presence.

A strategy that keeps working

Costco's business strategy takes a very different form than the classic supermarket model as well as from Amazon and Walmart.

To begin with, Costco sells items in wholesale quantities, and its massive stores are more like warehouses, where products are displayed on wooden pallets. While it's not a traditional discount retailer, customers save because they're purchasing in bulk. Costco also sells its own cheaper company brand, Kirkland.

A second significant difference is that to shop there, you must purchase a membership. A standard membership is $60 annually, with various upgrades. This build customer loyalty on top of revenue and brings in customers who can afford the fee as well as the prices of bulk volume.

With this approach to business, Costco naturally has a smaller customer base and total business volume than Walmart and Amazon, and the company is leveraging this as an advantage. It's better able to tune into its customers' wants and needs, both in terms of product and service, and deliver effectively. While Costco maintains an online presence to meet all of its customers' needs, its main focus is its brick and mortars.

Consumer surveys show that Costco, with a score of 83 for online customer satisfaction, beats both Amazon, which has a score of 81, and Walmart, which is way back on the scale at 74. The company also beats out wholesale competitors BJs and Sam's Club, which is owned by Walmart.

What the numbers tell

Despite this, Costco comes in on the list of most valuable consumer brands at No. 62, while Amazon is No. 1 and Walmart is No. 32. 

Costco comes in the middle of the three retailers when it comes to earnings. The company's fourth-quarter report showed earnings per share (EPS) of $2.47, up from $2.36 in 2018  as opposed to Walmart's EPS of $1.26, up from a loss of $0.29 in 2018. Amazon leads the pack with Q4 EPS of $4.23, but that's down from $5.75 in 2018. Amazon's market cap is nearly seven times that of Costco and more than 2.6 times that of Walmart, making it the biggest food stock around in addition to being one of the biggest tech stocks.  

So yes, it looks like Costco's staying out of the wars. But the company is ultimately staying relevant in the supermarket industry.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale and recommends the following options: long January 2020 $115 calls on Costco Wholesale and short January 2020 $180 calls on Costco Wholesale. The Motley Fool has a disclosure policy.

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