{"id":26858,"date":"2017-11-15T22:57:34","date_gmt":"2017-11-16T03:57:34","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/the-digitalization-of-costco-a-necessity-to-compete-with-amazon-and-walmart\/"},"modified":"2017-11-15T22:59:28","modified_gmt":"2017-11-16T03:59:28","slug":"the-digitalization-of-costco-a-necessity-to-compete-with-amazon-and-walmart","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-digitalization-of-costco-a-necessity-to-compete-with-amazon-and-walmart\/","title":{"rendered":"The Digitalization of Costco: A Necessity to Compete with Amazon and Walmart"},"content":{"rendered":"

Introduction<\/strong><\/p>\n

Digitization is changing the way consumers shop, presenting a particularly large threat to Costco, the world\u2019s second largest retailer.\u00a0 Costco\u2019s mission is \u201cto continually provide members with quality goods and services at the lowest possible prices.1<\/sup>\u201d\u00a0 Historically, Costco\u2019s strategy has been focused on driving customers into their stories by \u201coffering items members need or prefer to buy in person \u2014 namely, cars, gasoline, and groceries.2<\/sup>\u201d\u00a0 Although effective in the past, digitization is changing the retail landscape and to remain competitive, Costco must increase their focus on purchasing online.\u00a0 Costco\u2019s CFO, Richard Galanti, mentioned the company has been “a little late to the game on purpose,3<\/sup>” in an interview April 2017 interview with the Wall Street Journal. “[They] recognize there are things we can do or should be doing.4<\/sup>”\u00a0 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.\u00a0 Costco must adjust their business in the immediate future to remain competitive in this era of digitalization.<\/p>\n

Short-Term<\/strong><\/p>\n

In the short-term, Costco is combatting pressure placed on their business by digitization by investing in their own digital capabilities.\u00a0 In a recent move which could potentially protect Costco\u2019s grocery business from the Amazon\/Whole Foods merger, Costco strengthened its partnership with Instacart to better deliver directly from the Costco.com website.5<\/sup>\u00a0 Currently, \u201conly 7% of Americans buy groceries online.\u00a0 Following the Amazon-Whole Foods deal, the $850 billion grocery market’s shift to online is certain to accelerate.\u201d\u00a0 During Costco\u2019s 4Q 2017 earnings call, Richard Galanti, Chief Financial Officer, laid out Costco\u2019s short-term strategy to win in e-commerce through \u201cimproved search, streamlined the checkout process, improved ability to track orders and automated much of the returns process.\u00a0 [They] also improved our online merchandising efforts by adding high end and well-known brand names.6<\/sup>\u201d\u00a0 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.<\/p>\n

Medium Term<\/strong><\/p>\n

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.\u00a0 Their low prices are a competitive advantage and a recent study showed that \u201cprices were 17% cheaper at Costco.com than they were at Amazon.7<\/sup>\u201d\u00a0 Selling products online slightly erodes Costco\u2019s ability to offer customer\u2019s 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.\u00a0 In order to accomplish this goal, Costco allows nonmembers buy most items it sells online, generally at a 5% upcharge8<\/sup> in order to entice them to become members.<\/p>\n

Recommendations for Management<\/strong><\/p>\n

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.\u00a0 McKinsey\u2019s Case for Digital Reinvention <\/em>showed that \u201cthe biggest payouts will go to those that initiate digital disruptions. Fast-followers with operational excellence and superior organizational health won\u2019t be far behind.9<\/sup>\u201d\u00a0 Walmart has been investing more heavily on their e-commerce platform and their strategy is proving effective as their sales grew 63%10<\/sup> in 1Q 2017 relative to Costco\u2019s online growth of 10%11<\/sup>.\u00a0 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.\u00a0\u00a0 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.<\/p>\n

Additional Critical Questions<\/strong><\/p>\n

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.\u00a0 When Costco recently announced that they were going to allow customers to place bulk orders online, their stork fell 6%12<\/sup> reflecting investors\u2019 concern around Costco\u2019s ability to compete online with Amazon.\u00a0 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.<\/p>\n

[757 words]<\/p>\n

Bibliography<\/strong><\/p>\n

[1]<\/a> Costco Wholesale Corporation, \u201cThe Costco Story,\u201d https:\/\/www.costco.ca\/about-us.html, accessed November 2017<\/p>\n

[2]<\/a> Kate Taylor, \u201cCostco is staying \u2018Amazon-proof\u2019 as other retailers crumble,\u201d Business Insider, February 3, 2016, http:\/\/www.businessinsider.com\/how-costco-is-staying-amazon-proof-2016-2, accessed November 2017<\/p>\n

[3]<\/a> Sarah Nassauer and Laura Stevens, \u201cWhy Costco Loves Store Sales: You Try Shipping a Tub of Mayo,\u201d The Wall Street Journal Online, April 5, 2017, accessed November 2017<\/p>\n

[4]<\/a> Ibid.<\/p>\n

[5]<\/a> Biz Carson, \u201cThe Amazon-Whole Foods Deal Could Have Killed Instacart. Instead, The Startup Is Stronger Than Ever,\u201d https:\/\/www.forbes.com\/sites\/bizcarson\/2017\/11\/08\/amazon-whole-foods-deal-future-of-instacart-grocery-delivery\/#2f89814d6d5a, November 8, 2017, accessed November 2017<\/p>\n

[6]<\/a> Costco Quarterly Call, \u201cCostco Wholesale Corporation’s (COST) CFO Richard Galanti on Q4 2017 Results – Earnings Call Transcript,\u201d https:\/\/www.msn.com\/en-us\/money\/news\/costco-wholesale-corporations-cost-cfo-richard-galanti-on-q4-2017-results-earnings-call-transcript\/ar-AAsYrss, October 10, 2017, accessed November 2017<\/p>\n

[7]<\/a> Brad Tuttle, \u201cAre Prices Cheaper at Amazon, Walmart, Costco, or Jet.com?,\u201d http:\/\/time.com\/money\/4835823\/cheapest-prices-amazon-walmart-costco-aldi-jet-com\/, June 29, 2017, accessed November 2017<\/p>\n

[8]<\/a> Sarah Nassauer and Laura Stevens, \u201cWhy Costco Loves Store Sales: You Try Shipping a Tub of Mayo,\u201d The Wall Street Journal Online, April 5, 2017, accessed November 2017<\/p>\n

[9]<\/a> Jacques Bughin, Laura LaBerge, and Anette Mellbye, McKinsey & Company, Digital McKinsey Quarterly, \u201cThe case for digital reinvention,\u201d https:\/\/www.mckinsey.com\/business-functions\/digital-mckinsey\/our-insights\/the-case-for-digital-reinvention, February 2017, accessed November 2017<\/p>\n

[10]<\/a> Phil Wahba, \u201cWalmart’s U.S. Online Sales Rise 63%,\u201d http:\/\/fortune.com\/2017\/05\/18\/walmart-online\/, May 18, 2017, accessed November 2017<\/p>\n

[11]<\/a> Sarah Nassauer and Laura Stevens, \u201cWhy Costco Loves Store Sales: You Try Shipping a Tub of Mayo,\u201d The Wall Street Journal Online, April 5, 2017, accessed November 2017<\/p>\n

[12]<\/a> Emma Hinchliffe, \u201cCostco will finally deliver all those giant bulk items with its new grocery service,\u201d October 7, 2017, accessed November 2017<\/p>\n","protected":false},"excerpt":{"rendered":"

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