Brief

Study: Costco's online prices 17% lower than those of Amazon

Dive Brief:

  • A BMO Capital Markets study found prices on Costco’s website are 17% lower than those on Amazon, according to Market Watch. BMO compared pricing between Costco in-club, Costco online and Amazon on 54 items.
  • The study found national brands were priced 19% lower on Costco’s site versus Amazon, and the club store's private label brand Kirkland Signature was 16% less expensive on the Costco site. Additionally, Costco’s online prices were lower than prices offered inside its own club stores.
  • The analysts point to some moves Costco is making to increase its online presence, including adding several fulfillment centers in the past year and testing one-to-three-day delivery from Bedford, Illinois to 17 states.

Dive Insight:

Talk about bad timing — this BMO Capital Markets study touting Costco’s lower online pricing versus Amazon was quickly overshadowed by the Amazon/Whole Foods deal announcement last Friday. Still, the study makes some valid points about Costco’s business model, which has and will continue to serve the retailer well. Keeping a lid on prices — and offering a compelling, differentiated merchandise mix by emphasizing its Kirkland Signature brand and treasure-hunt type product exclusives — will remain a key way to compete with Amazon moving forward. These features are even more important now that the online retail giant is buying Whole Foods. But in order to outpace its rivals, Costco must up its digital game.

In lieu of online investment, Costco has intentionally focused on building its physical warehouse club business by offering low-price consumables in bulk along with unique, one-of-a-kind offers, predominantly in non-foods general merchandise. The club retailer sustains an extremely loyal base of 48 million member households representing 87 million Costco cardholders worldwide who pay an annual fee to shop its stores.

But now Costco finds itself in the precarious position of lagging light years behind Amazon and even archrival Sam’s Club on the digital curve. It’s imperative that Costco move swiftly to build an online and omnichannel presence — shoppers, including Costco members, will demand it.

Along with other retailers — grocers in particular — Costco will face increasing competition from Amazon. The club retailer is the second biggest seller of natural and organic foods in the U.S. behind Whole Foods. Another concern is there's a substantial amount of overlap in the shopper bases of Costco and Amazon, according to analyst Stifel, Nicolaus & Co.

By adding Whole Foods — and its fresh and healthy product mix as well as nearly 500 future online merchandise pickup points — Amazon not only gains a brick-and-mortar presence that complements its online strategy, but an immediate position in food retailing as it pushes further to disrupt the grocery sector. Should the deal close, some analysts project Amazon will leap frog several supermarkets to become a top five player in the U.S. grocery sector.

Costco shares dropped 7% last Friday following the Amazon/Whole Foods announcement. Goldman Sachs analyst Matthew Fassler was quick to downgrade the club retailer, writing in a note to clients, “Increased expansion by Amazon and online investment by Walmart create an imperative for Costco to intensify its own investment in e-commerce.”

But don’t expect Costco to be the only retailer upended by the pending Amazon/Whole Foods deal. Reverberations will be felt across the grocery sector as Walmart, Kroger and others feel Amazon breathing down their necks. According to Fassler’s note, “With the Whole Foods acquisition, Amazon is likely capable of offering superior pricing and delivery competency versus incumbents.” The next several months and years promise to be an interesting time for an old industry and many of its long-established players.

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Filed Under: Grocery