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Watch out for Costco and Target, analysts warn supermarkets

Costco is thriving, while ‘sleeping giant’ Target could up its game

Russell Redman

November 6, 2018

3 Min Read
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Costco

In the e-commerce era, the warehouse club may be a retail format primed for a growth surge — that, according to participants in SN’s 23rd annual Financial Analysts’ Roundtable. The panelists said they expect more good things from thriving Costco Wholesale Corp., which they described as among the best retailers today.

“They are absolutely the most unbelievable retailer, at least in my coverage universe, and probably the best merchants of any retailer that I’ve ever covered. It’s their unrelenting focus on maintaining their merchandise margins and never deviating from that and continuing to invest,” said Karen Short, managing director for equity research at Barclays Capital. “They keep widening the gap with conventionals [supermarkets] to the extent that they would even be considered a competitor to Costco. They keep pushing the envelope and keep pushing their vendors, and the deals and price point just keep getting better and better.”

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Analysts agreed that Target could become a larger threat in grocery if it further improves its fresh offering and out-of-stocks.

Costco’s broad mix of offerings — food, nonfood groceries, pharmacy, optical, travel and automotive services, among others — make it a strong draw for consumers, added Scott Mushkin, managing director of consumer research at Wolfe Research. “Costco, over time, has created more and more reasons to pay for that membership,” he said. “It’s an incredibly positive business model.”

More Roundtable coverage:
It’s crunch time for grocery retailers, analysts say >>
Analysts: Discounters stepping up the pressure >>
Is the industry overstored with the wrong format? >>

Now back as a public company, BJ’s Wholesale Club has a tall order to keep up with Costco and other mass retailers, despite a competitive grocery offering, analysts said.

“I don’t cover BJ’s, but my only comment would be that it goes along the whole Eastern seaboard theme: There are many really poorly run conventional competitors,” Short said. “If you have a format that can offer similar SKUs at a 25% discount, you probably don’t have to be executing that well to actually hold your own.”

Mushkin also had a negative outlook on BJ’s, which he described as a “levered-up food warehouse.”

“They are cheaper, but that value equation has been known in the Northeast for a really long time. So the question is, can the management team improve the merchandise?” he said. “If there were a Costco and a BJ’s next to each other, it doesn’t make any rational sense to actually have a membership to BJ’s because the offering is so much more extensive at Costco and the savings are better.”

Target could be a sleeping giant in grocery if it further improves its fresh offering and out-of-stocks, roundtable panelists said. “It’s purely and solely an execution issue,” according to Mushkin.

The discount chain offers strong private labels and has proved adept in omnichannel strategy and in developing innovative departments and merchandising.

“We talked about how once you get into the ecosystem of Amazon-Whole Foods, you buy everything there,” Mushkin said. “This is Target’s biggest issue, in my opinion, and we think they should buy Sprouts. We’ve said it. It was a rumor out there. I think Sprouts thinks they should be bought by Target. The only one that seems to be resisting this is Target. They need a solution. I mean, if you have Dollar General talking about a fresh solution, fresh is important and they need to be a hell of a lot better at it.”

About the Author

Russell Redman

Senior Editor
Supermarket News

Russell Redman has served as senior editor at Supermarket News since April 2018, his second tour with the publication. In his current role, he handles daily news coverage for the SN website and contributes news and features for the print magazine, as well as participates in special projects, podcasts and webinars and attends industry events. Russ joined SN from Racher Press Inc.’s Chain Drug Review and Mass Market Retailers magazines, where he served as desk/online editor for more than nine years, covering the food/drug/mass retail sector. 

Russell Redman’s more than 30 years of experience in journalism span a range of editorial manager, editor, reporter/writer and digital roles at a variety of publications and websites covering a breadth of industries, including retailing, pharmacy/health care, IT, digital home, financial technology, financial services, real estate/commercial property, pro audio/video and film. He started his career in 1989 as a local news reporter and editor, covering community news and politics in Long Island, N.Y. His background also includes an earlier stint at Supermarket News as center store editor and then financial editor in the mid-1990s. Russ holds a B.A. in journalism (minor in political science) from Hofstra University, where he also earned a certificate in digital/social media marketing in November 2016.

Russell Redman’s experience:

Supermarket News - Informa
Senior Editor 
April 2018 - present

Chain Drug Review/Mass Market Retailers - Racher Press
Desk/Online Editor 
Sept. 2008 - March 2018

CRN magazine - CMP Media
Managing Editor
May 2000 - June 2007

Bank Systems & Technology - Miller Freeman
Executive Editor/Managing Editor
Dec. 1996 - May 2000

Supermarket News - Fairchild Publications
Financial Editor/Associate Editor
April 1995 - Dec. 1996 

Shopping Centers Today Magazine - ICSC 
Desk Editor/Assistant Editor
Dec. 1992 - April 1995

Testa Communications
Assistant Editor/Contributing Editor (Music & Sound Retailer, Post, Producer, Sound & Communications and DJ Times magazines)
Jan. 1991 - Dec. 1992 

American Banker/Bond Buyer
Copy Editor
Oct. 1990 - Jan. 1991 

This Week newspaper - Chanry Communications
Reporter/Editor
May 1989 - July 1990

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