Retail Champions 2020: Costco

This is the second online installment of the HomeWorld Business 2020 Retail Champions, a special report from the May 18th print edition examining six retailers that will lead the post-COVID-19 retail recovery. View a digital version of the entire May 18 edition by clicking one of these links: Flipbook or PDF.

ISSAQUAH, WA— The COVID-19 pandemic in the U.S. drove consumers to Costco as a place to stock up on food and household essentials, but images of consumers driving wagon loads of groceries, paper towels and other necessary products out of its warehouse clubs don’t provide the whole picture.

Consumers dealing with the ensuing crisis got a reminder about the value of the Costco membership and its place as a go-to community institution. Costco, though, engages people in more ways than they realize, including through its often underrated digital operation, which has been growing at a higher rate than e-commerce overall.

That being said, Costco in its entirety, has been thoroughly caught up in the coronavirus state of affairs.

Consumers began stocking up as stay-at-home guidance and regulations loomed, and Costco booked March net sales of $15.49 billion, up 11.7% year over year, with U.S. comparable store sales up 12.1% and e-commerce comps up 49.8% for the month. In a March conference call, Costco detailed traffic patterns that gained through the middle of the month then declined as it shut down some ancillary businesses and some main-floor product categories deemed non-essential, as well as limiting the number of customers allowed in stores to help ensure social distancing. Softlines, including home furnishings and housewares, took a hit, with comps down in the mid-20% range, as Costco’s food and sundries business comped up in the mid-30% range and fresh food gained in the mid-20% range. However, the big softlines declines came in the luggage, jewelry and apparel segments.

Market research firm 1010data in its COVID-19 retail impact report published in late March stated that March 12 was the single highest sales day for Costco in its dataset going back through 2010, adding that the average Costco customer had spent 20% more year over year in the first half of March.

In the conference call, CFO Richard Galanti noted that rub off sales seemed to accompany the rush to Costco clubs with patio furniture, for one, “selling extremely well.” If patio furniture sales per customer were down a bit, the volume of traffic made up for it. Patio furniture is an indication that at least some consumers purchasing in response to coronavirus concerns already are using Costco as a shopping resource in ways they didn’t intend and that is likely to continue as existing and new members interact with the store.

According to foot traffic tracker Placer.ai, Costco enjoyed a 19.1% increase in shopper visits during the first week of March and 31.7% gain in the month’s second week before falling below previous year’s numbers as restrictions to consumer movement and shopper density on sales floors began to kick in. Costco traffic also felt the effects of its relative concentration of stores on the east and west coasts, which suffered a higher than average volume of coronavirus illnesses.

Ethan Chernofsky, vp/marketing at Placer.ai, said that Costco is a retailer that can operate successful initiatives because it has a clear sense of its own identity and how to deliver a gratifying shopping experience that meets or exceeds the customer expectation.

“People have to walk out of the store glad they did,” he said. “At Costco, people always buy more than expected at tremendous value.”

The increase in store traffic has given Costco the opportunity to promote its online operation, which has enjoyed great gains of late. Costco actually has a fair assortment of grocery and household needs available online as well as other product categories that have been in high demand for consumers dealing with work and play issues at home, including patio and office furniture.

As May opened, Costco launched an online “Home Savings Event,” featuring patio but also living room, bedroom and dining furniture, promoted at the head of its online landing page right next to a banner for a sale on do-it-yourself products, another category that heated up as stay-at-home requirements expanded. Other promotions, revolving across the top of the landing page, involved kitchen basics/major appliances, which have seen success as part of what has been broadly defined as a domestic comfort category established as consumers quarantine themselves at home.

The company’s fiscal year doesn’t follow the typical calendar, but to put Costco’s e-commerce business in perspective, the company’s comparable sales in the digital operation gained 28% its second quarter ended February 12 and including the holiday season. According to the Census Bureau, calendar fourth quarter e-commerce retail sales gained 16.7% from the period a year prior.

Of course, categories such as groceries have driven engagement with e-commerce in the COVID-19 pandemic. According to a Coresight Research mid-March survey of U.S. consumers, 34.7% of respondents had purchased groceries at Costco in the preceding 12 months and 7.9% of respondents had purchased groceries online from Costco, which ranks the company online sales as fourth behind Amazon, Walmart and Target. In 2020, up until mid-March, 14.3% of Costco shoppers who had bought groceries online in the preceding 12 months had purchased most or all of their groceries online and 24.2% had purchased at least some.

Costco continues to invest in its e-commerce business, and so on March 17, the company said it completed the acquisition of Innovel Solutions, which provides third-party end-to-end logistics solutions.

With greater consumer interest and a capability to drive more online sales in the coronavirus crisis, Costco is positioned to emerge stronger as the situation settles down to something closer to normal. As the company enters what will be a recessionary economic environment, Costco has the advantage of having one of the strongest private label programs in the U.S. As Neil Stern, senior partner in consultancy McMillion Doolittle pointed out, own brands gained greater consumer appreciation in the U.S. during and after the recession of 2008/9.