Even though Costco Wholesale (NASDAQ:COST) has had very impressive sales growth over the past decade and continues to increase traffic to its stores, no bricks-and-mortar retailer is completely safe from the changing retail landscape toward online shopping. It's reasonable to question whether Costco can stay competitive against other companies offering the same low prices, as well as free two-day shipping, since Costco's own online presence is relatively small.
Costco has increased traffic to its physical stores by about 4% in each of the past six years and is increasing its total number of locations worldwide. Meanwhile, Costco's online sales increased 20% last year, but represent only about 3% of net sales.
How Costco online will increase profitability
Other than staying competitive in a more online and mobile world, Costco also has the ability to increase its margins by expanding its online presence. The fixed costs of rent, energy, employees, and the like at physical locations puts a strain on operating margins that are already razor thin for Costco since it seeks to keep product costs as low as possible. Costco makes its money from membership fees. Costco's operating margin is slowly improving, but it's still well below most other comparable retailers at just over 3%.
Since products purchased online have far fewer fixed costs, more of the sale goes to the company's bottom line. Increasing the percentage of Costco sales made online instead of in-store could have a meaningful impact on net income as Costco's operating margin continues to grow.
Costco's digital investments
"Multichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and new developments by our competitors," says a statement from Costco's 2014 10-K.
Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool owns and recommends 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.