Costco Digital Transformation Strategy

Part
01
of one
Part
01

Costco Digital Transformation Strategy

Key Takeaways

  • Costco's business model, which is hinged on bulk sales, limits the retail chain's ability to meet its customers’ needs. While it provides a wide variety of products, shoppers can only choose from a limited number of brand options.
  • BJ’s, Sam’s Club, and Costco are the three major warehouse retailers in the US. Target is also recognized as one of Costco's main competitors. Just like Costco, Target provides high-quality products at a cheaper price than similar retail stores.
  • Costco is on a mission "to continually provide [its] members with quality goods and services at the lowest possible prices." The company recently announced that it would renew its focus on e-commerce by doubling the number of outlets with pickup lockers in 2022. It also announced that it would expand its Costco Next brand directory.

Introduction

This research provides the following information: corporate challenges faced by Costco; key competitors to Costco; and an analysis of the Costco company, focusing on its digital transformation strategy.

Corporate Challenges

Limited Product/Brand Selection

  • Description: Costco's business model, which is hinged on bulk sales, limits the retail chain's ability to meet its customers’ needs. While it provides a wide variety of products, shoppers can only choose from a limited number of brand options.
  • Shoppers can buy various goods in bulk, including clothing, furniture, jewelry, toys, TVs, and lots more their options are limited when it comes to selecting individual products.
  • Why it is considered a challenge: This limited product selection places Costco at a disadvantage relative to its competitors. In a typical Costco store, shoppers can only find roughly 3,700 product SKUs. However, a typical Walmart store has about 150,000 product SKUs while a Target store has 80,000 product SKUs.
  • How it impacts the company: The consequence of having such a small product selection is that any new or existing retail chain could easily compete with Costco.
  • On many occasions, Costco's decision to discontinue the sale of certain items has generated backlash from its loyal customers. In one instance, a customer launched a petition to bring back a discontinued pizza combo. Between June and August 2022, this petition generated about 12,000 signatures on Change.org.
  • Also, when consumers do not find their favorite or preferred brands in a Costco store, they are likely to patronize competitors such as Walmart instead.


Slow Omnichannel Transformation

  • Description: Today's consumers use a variety of connected devices in shopping online, researching products, and comparing prices. While Costco offers low prices to its customers, the company does not provide the kind of omnichannel experience that many shoppers expect now.
  • Why it is considered a challenge: Costco has been investing toward this goal in different ways, including trying out curbside pickup in certain locations. However, the pace is slow and there is no guarantee that these efforts would be successful. There is also no guarantee that the intended changes would "be implemented in time for the company to remain competitive."
  • How it impacts the company: Costco's slow eCommerce adoption has made it very difficult for the retail chain "to attract millennials who prefer quick shopping options."

Dependence on Memberships

  • Description: Costco’s business model is dependent on memberships. While this strategy allows the company to focus on customer loyalty, it only works effectively as long as Costco members keep returning to its stores and continue to purchase items in bulk.
  • Why it is considered a challenge: Analysts have consistently mentioned Costco's dependence on memberships as one of the company's biggest problems. Any decline in memberships or loss of member acceptance could adversely impact the company's sales.
  • Customers could also decide to move their memberships to one of Costco's competitors if they offer better perks or product variety. With 75% of Costco's operating profits being derived from membership fees, any major loss in memberships would be disastrous.
  • How it impacts the company: While the membership fees are small, many consumers are not willing to pay such fees before shopping. Consequently, this reduces the company's potential members/customers.
  • Also, in many cases, shoppers forget their membership cards, holding up lines and creating a frustrating experience for staff at Costco stores.

Major Competitors

Sam's Club

  • Sam's Club is one of the major competitors of Costco. Its website can be found here.
  • Description: This company is "the second-largest membership-only wholesale chain in the United States." It has stores in almost all US states. Customers pay $45 yearly for membership.
  • Founded in 1983, this brand was launched by Walmart to establish itself in the wholesale club market. It has almost 600 locations in the US and Puerto Rico, as well as stores in countries like China and Mexico.
  • Why it is considered a major competitor to Costco: Various publications recognize Sam’s Club as one of the most similar companies to Costco. Some experts even refer to it as Costco's biggest competitor. Just like Costco, it is a wholesaler that sells items in bulk and operates with a membership business model.

BJ’s

  • The BJ’s Wholesale Club is also one of the major competitors of Costco. Its website can be found here.
  • Description: Competitively founded just one year after Costco, BJ's is a wholesale shopping club with over 200 locations in 17 US states.
  • It has various categories of memberships. Its basic Inner Circle membership costs $55 per year, while the Perks Rewards membership costs $110 yearly, and includes 2% cash back.
  • Why it is considered a major competitor to Costco: Just like Costco, the BJ’s Wholesale club has a membership-based business model and sells a variety of products in bulk. Also, like Costco, the company offers grocery items, toys, apparel, electronics, games, and much more at very affordable prices.

Target

  • Target is recognized as one of Costco's main competitors. Its website can be found here.
  • Description: With more than 800 warehouses across the world. Founded in 1902, this company is one of the biggest retailers globally. It operates more than 1,000 stores across 50 US states.
  • Target also has a membership program. However, it does not charge shoppers annual membership fees.
  • Why it is considered a major competitor to Costco: While Target is a general merchandise retailer that does not sell in bulk, "it competes with Costco in many categories."
  • Also, just like Costco, Target provides high-quality products at a cheaper price than similar retail stores.

Costco Company Analysis

Overview

  • Costco's first location, initially known as Price Club, was opened in 1976. Originally targeted at only small businesses, this company found that it could achieve greater buying clout if it also served "a selected audience of non-business members."
  • In 1983, the company opened its first warehouse location in Seattle. This made Costco the first company to grow from zero sales to $3 billion in sales revenue within less than six years.
  • Several decades later, the company has grown to generate annual revenue of $195.93 billion in 2021.
  • Costco claims that its warehouses have "one of the largest and most exclusive product category selections to be found under a single roof." Product categories include groceries, television and media, appliances, candy, apparel, automotive supplies, toys, tires, hardware, jewelry, watches, sporting goods, books, furniture, cameras, housewares, health and beauty aids, office equipment, and office supplies.

Corporate Values and Mission

Recent and Announced Strategic Initiatives

  • In 2020, Costco started testing curbside pickup at 3 of its locations in Albuquerque, New Mexico. This increased its e-commerce sales by 75%.
  • The company recently announced that it would renew its focus on e-commerce by doubling the number of outlets with pickup lockers in 2022. It also announced that it would expand its Costco Next brand directory.
  • Other recently announced e-commerce plans and innovations for the near future include the following:

Quotes From Costco’s CEO Relating to Its Digital Strategy

  • The following quotes from Costco's CEO, Craig Jelinek, reveal their digital strategy:
    • “Our overall online business will continue to grow. Will we get tricky? No, we won’t.” “We’ll just continue to bring value on high-end goods and quality merchandise, and deliver either through the warehouses, brick-and-mortar, or through e-commerce.”
    • Noting some of Costco's technology investments, the CEO stated: “We’re going to continue to build that business.” However, Jelinek still believes that in-store shopping will remain critical. He said: "It’s still important to get people physically in the stores. I still think brick-and-mortar is not going to go away.

Marketing Tech Stack

Additional Facts

  • Costco became the third-largest US retailer in 2014. Also, Citi has partnered with the retail giant to produce its own Visa Card.
  • While Costco operates a membership model, there are certain things people can purchase even if they are not members. For instance, without memberships, people "can get eye and hearing tests at many stores or have the Costco pharmacy fill [their] prescriptions."

Research Strategy

For this research on Costco's digital transformation strategy, the research team has leveraged the most reputable sources of information in the public domain, including Insider, CNBC, Business Strategy Hub, and Yahoo Finance.
To identify Costco's major competitors, we focused on selecting companies that had an identical or exact business model as Costco, prioritizing the following offerings or qualities: wholesale/bulk sales, a membership-based business model, affordability, and a large company footprint.

Dive deeper

Only the project owner can select the next research question.
Need related research? Let's launch your next project!
Sources
Sources