Costco treads carefully in e-commerce

Costco Wholesale Corp.’s partnership with Shipt to deliver grocery products in the Tampa, Fla., market illustrates the retailer’s latest effort to find its way in the rapidly evolving world of e-commerce.

The Issaquah, Wash.-based membership club has long been a poster child for success in the bricks-and-mortar world, but it is still in the early stages of translating those results online.

“Costco is generally behind on its online development when compared with Sam’s Club or Walmart, in some ways by design,” said Tim Campbell, an analyst at Kantar Retail. “An overzealous online strategy could cannibalize its in-club sales as members would shop more on Costco.com and less in the club.”

In fact, in recent earnings calls Costco has noted that in markets where it has partnered with third-party delivery services such as Google Express and Instacart, the number of trips its loyal members make to its stores has declined.

Costco partners with Google Express in five cities and with Instacart in 26 cities. It also recently said it has been in talks with Google Express to launch nationwide delivery.

As Instacart has expanded to additional markets, Costco has generally expanded with it, Campbell noted.

The partnership with Shipt, which will not require shoppers to have a Costco membership, marks Costco’s first with that rapidly expanding third-party delivery provider. Shipt recently unveiled a partnership with Grand Rapids, Mich.-based Meijer through which it will expand in several Midwestern markets. Other retail partners in the 34 markets where Shipt offers delivery include H-E-B, Whole Foods, Publix, Harris Teeter and others.

Birmingham, Ala.-based Shipt charges a $99 annual membership, which allows users to receive unlimited grocery deliveries (free with a $35 minimum order). Orders can be scheduled for same-day delivery and within a one-hour time window.

Campbell notes that Costco does not offer a click-and-collect grocery service, which an increasing number of its traditional supermarket competitors do, and in fact its own website lacks a full grocery-ordering capability.

“Costco recognizes this is an area where rapid progress must be made lest its shoppers decide to forego the in-club trip for online shopping at a different, more capable, retailer,” he said. “Its members are already shopping online at Amazon at a higher rate than all U.S. shoppers. If Costco does not improve its online offering, other retailers will step into that gap.”

Bill Bishop, chief architect with Barrington, Ill.-based Brick Meets Click, said the fact that Costco is working with multiple delivery partners shows that it is still evaluating its options for grocery delivery.

“It is becoming increasingly evident that there is a fair amount of demand for people to have groceries delivered to home, and they sell a fair amount of groceries, so I think they don’t want to miss out on that segment,” he said.

Shipt’s agreement to expand with Meijer after a year-long test could give Shipt, which has lacked the high-profile investments that have been made in rival Instacart, a shot in the arm, Bishop said.

“There must be some pretty good talent on the part of Shipt,” he said. “Meijer seems enthusiastic, and that’s a nice feather in their cap.”

Making improvements

Costco has been taking several measures to improve its e-commerce offering, including simplifying the user interface and increasing the number of depots from which it delivers product.

In its second-quarter earnings call, which covered most of the year-end holiday shopping season, Costco said its online sales were up 12% over a year ago.

“While Costco’s online capabilities and especially online assortment may be behind the curve in some areas, Costco.com growth continues in the double-digit growth range,” said Campbell, adding that the online sales gains have “less to do with Costco’s online prowess and more to do with the larger to shift to more online shopping, combined with Costco’s general popularity.”

Campbell said in the short term, customers might find value in having both a Costco and and Amazon Prime membership.

“Costco continues to offer excellent price per unit value and a true treasure hunt experience, while Amazon offers convenience and a plethora of value-adds such as media and services,” said Campbell. “In the long term, Amazon poses a significant threat to Costco. Platforms like Amazon Pantry and Amazon Business can chip away at parts of Costco’s base as Amazon displays a ceaseless willingness to innovate new ways of increasing its share of the online wholesale pie.”