The Digitalization of Costco: A Necessity to Compete with Amazon and Walmart - Technology and Operations Management (2024)

Introduction

Digitization is changing the way consumers shop, presenting a particularly large threat to Costco, the world’s second largest retailer. Costco’s mission is “to continually provide members with quality goods and services at the lowest possible prices.¹” Historically, Costco’s strategy has been focused on driving customers into their stories by “offering items members need or prefer to buy in person — namely, cars, gasoline, and groceries.²” Although effective in the past, digitization is changing the retail landscape and to remain competitive, Costco must increase their focus on purchasing online. Costco’s CFO, Richard Galanti, mentioned the company has been “a little late to the game on purpose,³” in an interview April 2017 interview with the Wall Street Journal. “[They] recognize there are things we can do or should be doing.⁴” A few months later, in June 2017, Amazon announced that it would be acquiring Whole Foods, presenting an imminent threat to Costco which relies on its grocery business as a key driver that gets customers into their stores. Costco must adjust their business in the immediate future to remain competitive in this era of digitalization.

Short-Term

In the short-term, Costco is combatting pressure placed on their business by digitization by investing in their own digital capabilities. In a recent move which could potentially protect Costco’s grocery business from the Amazon/Whole Foods merger, Costco strengthened its partnership with Instacart to better deliver directly from the Costco.com website.⁵ Currently, “only 7% of Americans buy groceries online. Following the Amazon-Whole Foods deal, the $850 billion grocery market’s shift to online is certain to accelerate.” During Costco’s 4Q 2017 earnings call, Richard Galanti, Chief Financial Officer, laid out Costco’s short-term strategy to win in e-commerce through “improved search, streamlined the checkout process, improved ability to track orders and automated much of the returns process. [They] also improved our online merchandising efforts by adding high end and well-known brand names.⁶” Although these actions allow Costco to remain competitive in the short-term, this alone will not be an effective enough strategy in years to come because Costco will not be able to replicate the expansive distribution and delivery capabilities of Amazon.

Medium Term

Pathways to Just Digital Future

In the medium-term, Costco should focus on leveraging the digitalization trend to align with their core business strength of delivering the lowest possible price. Their low prices are a competitive advantage and a recent study showed that “prices were 17% cheaper at Costco.com than they were at Amazon.⁷” Selling products online slightly erodes Costco’s ability to offer customer’s the lowest possible price; however, they are trying to leverage online sales as a way of increasing their membership base which they can then leverage to drive traffic back into thee stores. In order to accomplish this goal, Costco allows nonmembers buy most items it sells online, generally at a 5% upcharge⁸ in order to entice them to become members.

Recommendations for Management

Although I believe the steps which Costco is taking are certainly in the right direction, I would recommend that management move more quickly in establishing their presence in the online market. McKinsey’s Case for Digital Reinvention showed that “the biggest payouts will go to those that initiate digital disruptions. Fast-followers with operational excellence and superior organizational health won’t be far behind.⁹” Walmart has been investing more heavily on their e-commerce platform and their strategy is proving effective as their sales grew 63%¹⁰ in 1Q 2017 relative to Costco’s online growth of 10%¹¹. To have Costco most effectively harness the power of digitalization, I would advise they target their digital strategies on the part of their business where they are most vulnerable to competition from Amazon and Walmart which is their limited number of products offered. By increasing their e-commerce, they will be able to expand their product offering far beyond what they are able to keep in stock within the store.

Additional Critical Questions

A critical question that will be important for Costco to monitor as the digitize their product offering and expand their e-commerce will be whether they can do so while maintaining their low prices which have always been their competitive edge. When Costco recently announced that they were going to allow customers to place bulk orders online, their stork fell 6%¹² reflecting investors’ concern around Costco’s ability to compete online with Amazon. Furthermore, it is will be important to consider whether Costco will be able to execute on a plan to increase their online sales or if perhaps this deviates too far from their core strategy focused on delivering a great in-store experience at the lowest possible prices.