Amazon is a fast-moving retailer even bad news for its competitors, Costco Wholesale.
Just a few days after the internet giant shocked Wall Street by acquiring the organic food huge Whole Foods, shares of other food retailers have remained sagging due to the fear that Amazon will go all in on grocery items.
It’s surprising, however, that it’s not the world’s largest retailer Walmart which is taking the most beating. It’s the membership-based club with a niche. Costco — which , like Amazon has its headquarters at Seattle’s Greater Seattle area — and whose stock is taking it down.
A few months back Costco was doing pretty well.
The discount wholesale club, with over 700 cavernous warehouses located mostly in both the U.S. and Canada, had a strong year, which eased the fears of similar fate to similar big-box retailers such as Macy’s and Staples. Costco was, as it appeared, was able to count on its 90 million loyal customers to be present in person to buy in large quantities despite the constant competition from online shopping convenience and prices.
Then Amazon acquired Whole Foods for $14 billion and investors rushed to the exit. Costco has fallen nearly 10% in the last week and two analysts have recently reduced the price of the stock due to fears that Amazon could use its new purchase to dominate the scattered grocery market worth $800 billion and will also dominate books and other general products.
In a report by CNBC, Deutsche Bank analysts pointed out amazon’s Whole Foods’ acquisition was “a game changer” for Costco due to the increasing competition for food sales, paired with Costco’s lack of a digital strategy has been “putting membership renewal at risk for decline.”
In addition, surveys reveal a lot that overlaps between Costco members in addition to Amazon Prime members, who benefit from expedited delivery for purchases made online. A Morgan Stanley study found that 45percent from Costco warehouse members were also Amazon Prime members, according to the Seattle Times.
There’s already speculation of Whole Foods could give Amazon Prime members a variety of benefits, like Costco memberships.
For sure, Costco isn’t dying business. The Issaquah company is based in Washington. It brought in $119 billion in revenues in 2016, just 17 billion lower than Amazon and has also added about 25 new locations every year since 2012. More than one million square feet is devoted to Costco warehouses.
The membership of Costco has increased, and now stand at almost 90 million members, and an average retention of 90. Membership fees account for nearly three-quarters of Costco’s earnings and this loyalty will be assessed following the Costco increased membership fees from $5 to $60 per each year in June.
Analysts aren’t expecting a huge reaction from its customers since as per an analysis of demographics from 2015 from the credit agency Experian are able to afford the income to pay for a modest fee hike – the average customer earns 44 percent more than an standard American household.
However, it is possible that life will be coming to Costco quickly.
Amazon’s acquisition in the acquisition of Whole Foods exposed a nagging issue : online sales. As Deutsche Bank analysts downgraded the stock, they pointed out that Costco’s online sales increased by just 11% in the last year, as compared to Wal-Mart’s 63%. which has recently added Jet.com and men’s apparel retailer Bonobos to improve delivery.
Amazon’s plans are causing concern in the direction of Whole Foods. Are they planning to let Jeff Bezos & Co. reduce the prices of organic kale, locally grown milk in order to steal market share from low-margin stores? What will other grocery stores do to this, such as German Discounters Aldi and Lidl which recently joined in the American market.
“Increased expansion by [Amazon] and online investment by [Wal-Mart] create an imperative for [Costco] to intensify its own investment in e-commerce,” stated Goldman Sachs analyst Matt Fassler.
