Dive Brief:

• Costco’s focus on its store experience has led to better-than-expected sales of late, but its weak e-commerce offering could hurt the company in the long run, according to Bloomberg.
• Despite intense customer loyalty and a successful expansion into countries like Iceland and France, Costco faces store cannibalization problems as it continues to expand, Bloomberg writes. Half of its shoppers are Amazon Prime members, which could cause defections as the internet company begins its integration of Whole Foods. 
• Costco offers around 10,000 products online compared to the 4,000 it offers in stores, and has recently added new products and updated its search function. Analysts interviewed by Bloomberg said Costco should consider an acquisition similar to Walmart’s purchase of Jet.com. 

Dive Insight:

When it comes to Costco, the age-old saying, “If it ain’t broke, don’t fix it” certainly comes to mind. For years, the wholesaler has grown by offering a curated, frequently rotating selection of high-quality bulk products in a warehouse setting. Its customers love the treasure hunt feel of its many sampling stations, and are more than willing to schlep smoothie machines and five-pound jars of pickles with them through stores. In its recent third quarter earnings report, the club chain reported an 8% increase in net sales to $28 billion, while same-store sales rose an impressive 5%.

While other retail chains have lost customers to Amazon, Costco’s store-centric approach has earned it the “Amazon proof” title from analysts. Still, industry experts have called on the company to take online ordering and delivery more seriously. In recent years, Costco has slowly ramped up its selection of products online to around 10,000, and has partnered with Google Express, Instacart and Shipt to offer home delivery in some markets.  

Costco knows it can’t replicate its winning store experience online. Its members tend to spend less when ordering from home, despite the wider selection of products. Costco also spends a lot of money delivering bulk goods. It’s understandable, then, that the club chain’s online growth has been plodding rather than swift.

Still, its store-first approach may not pay off indefinitely as competitors continue to innovate and expand their e-commerce programs. Chief among these is Amazon, which will gain an entirely new dimension once it takes the reins at 464 Whole Foods stores starting Monday.  As part of its initial agenda, Amazon says it will lower prices and make its incredibly popular Prime service the grocer’s customer loyalty program. Up until now, the fact that a significant number of Costco members are also Prime members hasn’t hurt the company. But that’s because Costco’s grocery offerings — the main driver of store trips — have been superior in price and, with an ever-growing assortment of organic and fair trade produce, at least equal in quality, too. But lower prices and special Prime deals could draw customers away from Costco stores. Improving online ordering and delivery of Whole Foods products, which many assume will happen, could also cut deeper into Costco’s sales.

Costco shares dropped 5% Thursday following Amazon’s announcement, indicating Wall Street sees significant competitive overlap between the two. For now, Costco can continue to count on its many loyal, dues-paying members. But the company may want to consider an acquisition of a Jet.com-like company that could boost its online revenue and insulate it from a hard-charging Amazon.