C&B Notes

Costco Executives on Web-based Competition

Costco CEO Craig Jenelik and a few other executives were recently interviewed by Businessweek on a wide range of topics.  While their discussions about labor compensation and international expansion were informative, we found the following excerpt about online challenges to be particularly useful:

Despite its recession-defying success, Costco faces the same rapidly changing retail environment as other big-box chains.  Online retail grew at a 15.8 percent clip in 2012, according to the U.S. Census Bureau, far faster than the 5 percent rate for retail overall.  Young people in particular are doing more of their shopping on the Internet.  Costco has a decent website and logged an estimated $2.08 billion in online sales in 2012, according to the tracking firm Internet Retailer.  But as the 17th most popular retail site in the U.S., its online popularity lags the success of its physical stores.

Costco executives are concerned about the discrepancy.  “I used to get up every morning worried about Walmart,” says Costco Chairman Brotman, who still runs the company’s real estate operation, selecting new sites for warehouses around the world.  “Now I worry about them, and I worry whether we are up to the challenge of the shift in retail buying habits.”  Recently Costco moved its website from a platform hosted by Microsoft to one run by IBM.  “We won’t ever be as fancy as Amazon,” Brotman says, but he insists the site is improving.

Since much of Costco’s growth is concentrated in food, it could be particularly vulnerable if Amazon ever cracks the grocery delivery business.  (Amazon has been testing such a service, AmazonFresh, in Seattle since 2007, and is reportedly set to expand nationally in the next few months.)  Jelinek says Costco has studied online grocery delivery but can’t figure out how anyone can do it profitably.