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Costco Quietly Catches Up to Amazon, Walmart in One Key Area

Costco’s (COST) – Get Costco Wholesale Corporation Report business has always been about driving people to its warehouses. The membership-based chain resisted efforts to even sell things on its website, well after Amazon (AMZN) – Get Amazon.com, Inc. Report had become a major player and even long after Walmart (WMT) – Get Walmart Inc. Report and Target (TGT) – Get Target Corporation Report made digital sales a priority.

One of the warehouse club’s biggest advantages is that it doesn’t need to be cutting-edge. Customers go to Costco for low prices, not for displays or even decent customer service,

The experience has always been about what’s in the store at what price, not how it’s displayed or all the fancy ways you can get it. Costco never offered buy-online-pickup-in-store — Bopis — or any shopping method that creates an acronym.

Slowly, however, the chain has moved into the digital age, and while it’s certainly not offering the level of fulfillment that Amazon and Walmart do, it has quietly made huge steps in that area.

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Costco Has Become an Online Player

Costco has a deal with Instacart for same-day grocery delivery, but it handles its own logistics for non-perishables. It’s not offering the same delivery terms Amazon and Walmart do, but it turns out the members don’t expect it to.

“E-commerce sales in Q2 [ex-foreign exchange] increased 12.6% year over year. And that’s, of course, on top of a second quarter fiscal ’21 increase of 75% increase last year, benefiting, of course, from Covid,” Chief Financial Officer Richard Galanti said during the chain’s second-quarter earnings call

“Stronger departments in e-commerce in terms of year-over-year percentage increases were jewelry, tires, special or kiosk items, patio and garden, and home furnishings. 

“Our largest online merchandise department majors, which consists of consumer electronics, appliances, TVs, etc., was up in the high single digits on very strong sales increases a year earlier.”

Costco isn’t changing its business model. Instead, it’s adapting it to the new reality that customers expect delivery to be an option. And like Amazon and Walmart, the warehouse club has quietly built out its own infrastructure.

How Does Costco Handle Delivery?

Costco has its own delivery company that handles most of its shipping.

“In terms of an update on Costco Logistics, that continues to drive big and bulky sales for the quarter. Deliveries were up year over year, 22%. And now about 85% of our U.S. e-comm less-than-truckload shipments are from Costco Logistics,” Galanti said.

The important piece of this is that Costco has taken an approach closer to what Target has done rather than trying to enter an expensive arms race with Amazon and Walmart. Target has leaned on its Shipt delivery service while Costco has built its own bulk shipping service.

“We’re doing ourselves.” Galanti said. “Average during the quarter, we averaged more than 65,000 stops per week with Costco Logistics, which translates into a little over 3 million planned drops in Costco Logistics for the fiscal year. 

“In terms of e-comm and mobile apps, it continues to improve, much improved layout, the ability to view warehouse receipts online, the ability to reschedule e-comm deliveries in the U.S. and Canada, as well as reschedule returns pickups.”

Costco, which has built its business to keep its overhead low, has also been willing to acknowledge that it can’t compete purely on its own. It has leaned on Instacart and has worked with its suppliers.

“Later this month, we’ll have our warehouse inventory along with the Instacart inventory online and be able to see all the detail of our in-store merchandise as well. In terms of our e-commerce platform,” the CFO added.

The biggest challenge, Galanti said, has been shipping delays and supply-chain issues. That’s something the company has worked hard to keep ahead of.

“Despite all the supply chain issues, we’re staying in stock and continue to work to mitigate cost and price increases as best we can,” he said. 

“From — every day and every week, you’re going to see in — different items in different departments, certain things on allocation or short, but other things are filling its place. And again, some things are seeming to get a little better.” 

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