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Costco Japan has announced plans to launch an online store next year.

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Following its third quarter results, we look at Costco’s ecommerce highlights.

Strengthening performance across the business

Costco’s third quarter revenue increased by 12.1% to $32.4bn, with net income up 7.1% to $750m. Comparable store sales, excluding fuel and currency impacts, increased by 10.2%. This was almost twice as strong as its performance in Q2. The retailer’s ecommerce sales were up 36.8%, accelerating from an increase of 27.3% in the previous quarter.

Grocery delivery services growing

Ecommerce continues to be a highlight for Costco. In addition to benefitting to the improvements it has made to search and checkout functionality, the retailer is seeing a strong response to improvements to its ranges and its email marketing campaigns. Personalising and tailoring offers is resonating with members. Its two-day grocery delivery service and its same-day fresh delivery partnership with Instacart also continue to grow, following their launch last October.

Benefitting from new ecommerce programs

The retailer has also started a store pickup service for high-ticket items, including jewellery, laptops and handbags. It has been pleased with this service, with around half of the customers picking up items, also shopping in the club at the same time. It has also seen a major benefit from being able to carry items online throughout the year, compared to eight to 10 weeks previously. In furniture, it has seen its incremental business grow by several hundred million dollars. Given its improved ecommerce capabilities, Costco is also putting new initiatives in place within its clubs to raise awareness of its various digital programs.

Patrick Noone, Managing Director of Costco Australia, has provided an insight into what the retailer has planned for its supply chain, online operations and future expansion.

Potential for over 60 Costco stores in Australia

Costco currently has nine stores trading in Australia, with two new stores opening in Melbourne and Brisbane by the end of the year and its first Western Australia store due to open in Perth in 2019. The current opening rate of 1-2 stores per year is expected to continue for some years to come. However, Noone did says that with 25m people between Toronto and Vancouver in Canada and 65 Costco stores, there remains significant growth potential for network expansion down under, over the next 30-40 years.

New DC to help underpin online growth

Costco will also be opening a new AU$108m distribution centre in Sydney next year, paving the way for new store expansion and also the opening of an online store. Costco has already been testing a B2B online service in Melbourne, but has yet to roll out the service more widely. With online operations in the US, UK, Taiwan and South Korea, the retailer clearly sees Australia as a future market for the service. This is likely to involve further B2B reach, home delivery services, as well as click and collect in stores. Noone commented that before any role out, it was important the business had the right infrastructure in place.

Costco has announced two new developments in its ecommerce offer.

Moving into the grocery ecommerce space with two new services

Costco has frequently been accused of lagging many of its grocery store competitors with a move into grocery ecommerce. However, two new services have been launched this month. It has launched a nationwide, two-day delivery service for non-perishable and sundry items, encompassing around 500 products in total. Free delivery is available for orders over $75. Orders are fulfilled at several of its business delivery centres, and dispatched via UPS.

Expanding same-day delivery partnership with Instacart

It has also expanded its white label, same-day grocery delivery service with Instacart. Currently live in 376 US locations, it offers 1,700 fresh and dry goods items. Under this new program, Costco members have access to promotional prices and cash back incentives, and offers more competitive pricing than previously. A key concern for Costco in moving further into grocery ecommerce is the impact on club traffic. The retailer believes that while it may lose some larger customer trips, they will be more than offset by an increased number of in-fill trips.

25 new clubs planned for the next 12 months

Costco has ended its financial year with 741 warehouses in operation, including 514 in the US, 97 in Canada and 28 in the UK. The retailer opened 12 new locations in the quarter including its first stores in Iceland and France. A total of 28 new units were opened in the year. Looking ahead, Costco plans on opening 25 new clubs, and relocating six. Around two-thirds of new clubs will be in the US, with the remainder in Canada, Australia and Asia. Opening clubs in China continues to be of interest to the business, although no planning permits have yet been secured.

Our view: success through uniformity

It's clear that during a time when other retailers are focusing on shrinking their store formats, localising their offers and driving more personalisation, Costco can deliver success through a relatively uniform global footprint and operating model. However, the retailer is tracking the moves of many of its grocery peer group with two new ecommerce initiatives. It may be late to the ecommerce party, but with both two-day and same-day delivery programs, it will be looking to drive this part of the business much harder than before, although it will be monitoring carefully any impact on club traffic.

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