News Analysis: Costco Expanding E-Commerce Initiatives

Costco hit on all cylinders in the first quarter, as it revealed last week in releasing financial results, but a conference call soon after the period’s results broke produced an interesting take on just how the retailer’s e-commerce efforts have made an increasing contribution to growth.

In the conference call, Richard Galanti, Costco’s CFO, noted that e-commerce sales gained 20% in the first quarter, up 19% on a comp basis and up 21% excluding foreign exchange fluctuations. Today, e-commerce represents a little less than 3% of Costco sales, Galanti said but, while a relatively small proportion of dollars generated, web revenues are growing at a considerably faster pace than those in stores. He pointed out that, just a few years ago, e-commerce growth, heavily focused on big-ticket, hard-to-transport items such as patio furniture and large-screen televisions, was increasing at a single digit pace. But things changed, in part because Costco adjusted its online product mix to bring in more regularly purchased velocity items, Galanti said. Lately, on its website, Costco has established more products that are purchased frequently such as beauty items. At the same time it has been evolving its e-commerce capabilities.

“We have higher and higher percentages of mobile app use,” Galanti said in the conference call, “not nearly as much as some of the e-commerce entities out there, but it’s going in that direction. We’ll keep getting better. Like everything at Costco, while our site is greatly improved from the original mobile apps that we did, there’s room for improvement there and we know that.”

Costco operates e-commerce web sites in the United States, Mexico, Canada and the United Kingdom, Galanti pointed out, and it plans to open an online operation in another country in 2015.

Still, Costco isn’t going to blow out e-commerce for its own sake, Galanti noted. Rather, the website is developing in the Costco manner, with trials that identify which products members want to buy from the retailer. Then, Costco incorporates items members prefer into the product mix full time or as part of the ongoing rotation of seasonal or other occasional merchandise.

At the same time, however, Costco is partnering with online third parties who are driving sales of its products in way the retailer would have a hard time justifying on a return on investment basis.

Galanti noted that one of these, Instacart, is in 13 markets using Costco as a supplier. “They come in and buy merchandise and deliver it to the customer,” he noted.

Google Express shops target stores for delivery in several cities including New York, Los Angeles, Chicago, Washington, DC and Boston, Galanti added.

“What we don’t see ourselves as being: the entity that’s going to deliver two different boxes of kid cereals to your doorstep at seven in the morning. Now, we hope and look forward to some of these other entities, that are doing those types of quick home deliveries, for us to be their supplier, which we seem to be successful doing,” he said.

In the first quarter, Costco Wholesale Corp. generated net income of $496 million, or $1.12 per diluted share, versus $425 million, or 96 cents per diluted share, in the period last year, it announced. Comparable sales for the quarter, excluding the impact of gasoline price deflation and foreign exchange, were up 7% in domestic stores, international operations and for the company as a whole.

Average transaction was flat for the quarter company wide while, without the impact of fuel and foreign exchange, it would have gained about 2.5%, Galanti noted. Average frequency increased 4.5% in the quarter, he added.

By geographic region, the Midwest and Southeast had the strongest sale results with Northeast close behind, Galanti said. By merchandise category, Softlines gained in the mid single digits with domestics, apparel and home furnishings posting the strongest sales. Hardlines also advanced in the mid single digits for the quarter, he said. Electronics came in positive for quarter, in the high-single digit range, and better performing departments in the segment included hardware, sporting goods and tires.

In addition, Food and Sundries comps increased in the mid single digits, while Fresh Foods gained in the high single digits, Galanti said.

—By Mike Duff