Costco (NASDAQ: COST) seemed to mostly ignore its online business until the start of its current fiscal year, about six months ago, when CFO Richard Galanti began devoting more time to explaining its e-commerce efforts during the company's quarterly earnings calls.
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In its 2017 first fiscal quarter, which covered the 2016 holiday season, Galanti noted that while overall digital sales had risen by 7% year-over-year, the numbers during the Black Friday period were much better. During the week of Thanksgiving and the two that followed, he said, digital sales had risen by the low-to-mid teens.
Those aren't in league with Amazon or even recent Wal-Mart growth numbers, but the holiday result showed that the company might be a viable digital player. Add in the fact that Galanti also spoke about the company investing in its digital operation, specifically by adding merchandise, as well as making it easier to check out and improving the returns process, and it started to become clear that the company no longer considers online sales an afterthought.
Traditionally, Costco has been all about its brick-and-mortar locations. Image source: Costco.
What is Costco doing?
It's important to note that the warehouse club says it has not taken any focus off its physical stores in order to grow its digital business. The chain is expanding its online efforts, but that's an additive effort to its business, not, as it has been for many chains, a response to fewer people coming to its stores. For the 12 weeks ended in mid-February, Costco same-store sales were up 3% in the United States, 2% in Canada, and 3% internationally (when you factor out the impact from changes in gasoline prices and foreign exchange). In addition, the warehouse club has been steadily adding stores at a time when many retailers are closing them.
Costco sees digital sales as a way to increase sales to members. Doing more business with the company may be most attractive to people who hold its rewards credit card, who get 2% back on all eligible purchases from the chain. People with an Executive Membership, which costs $110 per year (double the $55 regular members pay), get an additional 2% back on all purchases up to $750. An Executive Member who pays with the company's rewards credit card gets 4% cash back.
How is Costco growing online sales?
Costco built on its Q1 momentum by growing digital sales 12% in Q2 2017. The company did that, according to Galanti, by doing three things: adding more merchandise, improving the user experience for its website, and improving distribution logistics.
On the merchandise side, the company improved its stock of faster-selling items, the CFO said during the Q2 earnings call, which was transcribed by Seeking Alpha (registration required). It also added Samsung appliances, more apparel brands, and various health and beauty products. Galanti also noted that the company had particular success selling 50 long-stem roses for $49.99, which included delivery in the period leading up to Valentine's Day.
"That $49.99 price point for 50 long stem roses is $30 less than what we sold the same item for just a year ago," the CFO noted.
Costco has also invested in making its website easier to use. That sounds like a small thing, but before the changes were made, buying from the warehouse club was a cumbersome process compared to other online retailers.
"In terms of improving experience and functionality of the site, we've improved search, we've shortened the check-out process, and we've improved our member's ability to track their orders, and we'll continue to do some more of that," Galanti said. "Just recently, we automated much of our returns process, not only providing members a much better quality of service, but also reducing by more than 20%, in just the first couple of months, our call center volume related to returns."
The CFO promised more improvements to come and also detailed how the chain has improved its distribution logistics. "In the U.S. and Canada, we now fulfill online orders from 11 depot distribution points, which, of course, allows for closer and fast delivery of online orders," he said.
Why is this important?
Shopping has slowly been moving from stores to digital. Costco has largely been immune to that because its stores are destinations in themselves -- an entertainment as much as a retail experience. But as people buy more items from online retailers, it will become harder for them to justify the time and effort it takes to go to a store. By improving its digital offering, Costco can serve its members who perhaps only need an item or two and would have otherwise purchased them from another online player.
Digital sales are a defensive play for Costco, but also an additive one. Some customers may continue to value the in-store experience -- the samples, the food court, finding items you never knew you wanted -- but will also take advantage of being members when not in a store.
The company has a long way to go, but it finally seems interested in getting there, which is good news for members and shareholders.
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