Costco Ups Its Game Against Amazon

Costco is upping its game in competing against Amazon by launching Costco Next (CN), a special category that includes a broad selection of curated products from some of the company's most reliable suppliers.

"Designed to complement both our inventory and quality standards, Costco Next features suppliers that have been hand-selected by our buyers for their quality of merchandise and exceptional customer service," explains Costco's website.

CN is expected to strengthen Costco's membership program, which is almost as recognized as Amazon's Prime program, according to Tom Caporaso, CEO of Clarus Commerce.

"For years, Costco has climbed the grocery ranks thanks to its annual membership program that has amassed over 47 million Gold star members," he said.

The timing of the launching of CN couldn't have been better. It would help Costco expand its product offering when inventories are tight for several products due to supply chain bottlenecks.

"This holiday season, 68% of shoppers said they would be enrolling in programs just to get more product discounts, so it's natural that Costco is finding ways to expand supplier partnerships to get shoppers what they want at lower prices, something that Amazon Prime is always doing," said Caporaso.

CN will help Costco capitalize on a new trend in retailing: the merging of online and offline sales. Shoppers can order the merchandise online and pick it up in local stores or have it shipped to them from the local stores for same-day delivery.

The new retailing trend has given conventional retailers like Costco an advantage over Amazon, according to Caporaso.

"Costco has an advantage over Amazon thanks to its large physical store footprint, with hundreds of warehouse-sized stores within a driving radius to many shoppers," he said.

Ethan Chernofsky, vice president of marketing at Placer.ai, agrees.

"Costco is one of the most consistently strong performers in all retail. In 2021, the chain has seen monthly visits up an average of 7.4% compared to the equivalent months in 2019, an especially impressive achievement considering the unique nature of the last year," he said. "The brand's unique strength centers around a powerful combination of forces including a membership model that incentivizes repeat visits and an approach to retail that drives value. A trip to Costco is rarely limited by the items one expects to purchase because of the wide range of products on offer, and the upsell only contributes to consumer satisfaction."

In 2021, Costco, Amazon and Apple made it to the top of the Verint Experience Index report, which ranks retailers in customer satisfaction.

Costco's brand popularity has helped its top and bottom lines, evidenced by a streak of solid financial reports in recent quarters. For the first quarter of 2022, Costco reported a 12.7% increase in sales to $49.5 billion, up from $42.35 billion last year. Net income for the quarter was $1.324 billion, or $2.98 per diluted share, up from $1.166 billion, or $2.62 per diluted shares, a year earlier.

Costco's shares have gained 43.85% this year compared to a 22.82% rise for the S&P500 and a 2.55% gain for Amazon.

Analysts rushed last week to up their price targets for Costco's shares. UBS raised Costco's price target to $600 from $590, while Argus raised Costco's price target to $610 from $515.

Will CN help Costco beat Amazon?

Baruch Labunski, founder of Rank Secure, doesn't think so.

"Sure, Costco can try to take a piece out of Amazon by upping their online game and continuing to expand in markets like China, but the way the two companies are structured is so fundamentally different. Costco doesn't stand a chance of winning," he said.

While Costco and other traditional retailers may not stand a chance to beat Amazon at this point, they have brought the retail giant to a place it doesn't want to be: opening brick-and-mortar stores, which it once sought to shatter.

Editor's note: Panos Mourdoukoutas owns shares of Costco.