Why Your CPG Brand Needs a Costco E-Commerce Strategy

If I asked you to name your CPG brand’s three best performing retailers, I bet you would be hard pressed not to have Costco somewhere on that list. The chain of members-only warehouse clubs, which opened its first store in 1983, was the original Seattle-based retail disruptor. Today, Costco is the world’s third largest retailer, with just under $142 billion in revenue in 2018. While most retailers are radically reshaping their strategies to contend with Amazon, the newest Seattle-based disruptor, Costco is focused on perfecting what’s been working for four decades.

Often seen as the tortoise in the famous race against the hare, Costco is well aware that e-commerce is an integral component of today’s retail environment. The market leader simply prefers to move at a more calculated pace. CPG brands should heed the lessons from how that famous race ends, because overlooking Costco’s e-commerce business might leave major opportunity on the table for competitors to grab.

Here are five reasons every CPG brand needs a dedicated Costco e-commerce strategy.

Slow and Steady Wins the Race

You might be surprised to learn that Costco started selling online in 1998, the same year as Amazon and before Target and Walmart. In recent years, these competitors have invested billions to bolster their online presence, while Costco has instead focused on enhancing its in-store shopping experience. That’s not to say that Costco didn’t feel the same pressure as other grocery retailers when Amazon acquired Whole Foods Market in 2017. Costco responded quickly to bolster its e-commerce efforts, but it isn’t exactly trying to push shoppers online. According to CFO Richard Gallanti, “We don’t want [customers] to get comfortable at just shopping at Costco online, unless there is not a Costco within 100 miles.”

Despite the slow and steady approach to e-commerce, Costco has seen extremely strong growth in online revenue. The company’s e-commerce sales jumped 23.3 percent in its last fiscal year, and it’s one of the top 10 online retailers in the United States, capturing 1.3 percent of all retail e-commerce sales. Believing there’s a lot of traction to be gained online, Costco has started turning several of its closed stores into e-commerce fulfillment centers.

Memberships Matter

In 2018, Costco had over 94 million members worldwide and a renewal rate of 90 percent. While you don’t need to be a Costco member to buy items on its website (there is a surcharge for non-members), these memberships matter a lot in the way of helping the retailer grow online. Costco gets roughly three-quarters of its total profit from membership revenue, which allows it to keep in-store pricing consistent, even with the added cost layers that come from doing business online. It also provides Costco the flexibility to get aggressive with needed digital investments. This is similar to how Amazon uses high-margin businesses like AWS, Amazon Advertising and Prime memberships to offset its added online retail costs.

CostcoGrocery

In October 2017, Costco launched CostcoGrocery, a service that provides both two-day delivery on nonperishable items from Costco warehouses and same-day online grocery delivery through Instacart. Costco has about 2,000 grocery items available for same-day delivery, including fresh produce, frozen foods, and meat. Same-day delivery is available in most metropolitan areas that have Costco locations.

One area of e-commerce that Costco hasn’t fully embraced yet is click and collect. Costco offers the service at many locations, but it is usually reserved for small, expensive items like electronics, jewelry and handbags. For grocery items, Costco currently believes the industry-accepted click and collect model does not meet its expectations for a superior shopping experience. The retailer is watching closely, but it will be patient in implementing its own version of grocery click and collect.

Customers Love Costco

Whether it’s because of its famous return policy, the cult-like admiration for its food court, or its great products and pricing, consumers love Costco. With its customer-first culture, it’s no wonder that shoppers appreciate the experience they get at Costco warehouse locations. These same principles transfer online, and it’s why Costco recently dethroned Amazon as the top online retailer in terms of customer satisfaction. While Costco’s focus on e-commerce is relatively new, it’s dedication to delivering value to consumers is clearly paying off with satisfied and loyal customers.

Redefining Impulse Digitally

If you are a Costco member, you know that a major part of the appeal of shopping in its stores is the inherent sense of exploration. The store design and merchandising strategy inspire a type of impulse purchasing that’s different than what you get in food, drug, mass and convenience retail competitors. Instead of putting candy and snacks at the checkout aisle, Costco encourages its members to wander around aisles full of palletized products, allowing them to spot an unexpected bargain or stumble across that one thing they suddenly can’t live without. This is the type of purchase behavior that Costco is trying to replicate online.

To do this, Costco is keeping its online inventory to a manageable level that is curated to the same high standards it has for its stores. While both Walmart and Amazon have digital shelves with countless products, Costco has less than 10,000 items available online. This allows shoppers to explore products without feeling completely overwhelmed with choices. The retailer is leveraging email marketing to promote “Hot Items” and suggestions for occasions like Father’s Day and Fourth of July, often including special online-only offers, which helps stimulate impulse-type purchases. It’s also purchasing seasonal items such as patio sets and selling them online year-round, which creates digitally-exclusive pricing and promotional opportunities.

Conclusion

With its steady e-commerce growth and unwavering focus on customer satisfaction, Costco has quickly become one of the most important online partners for CPG brands today. To take advantage of this opportunity, brands need to work closely with the retailer to ensure their products are available online and that their product listings are fully optimized for maximum search visibility and conversion – both on the Costco website and those of delivery partners like Instacart. For brands, e-commerce success on Costco will ultimately require a deep understanding of its customer base and a willingness to work with the retailer to provide the level of detail and service those customers expect to receive.

OneSpace Can Help

Creating high-quality product content is one of the most important strategies today’s brands can leverage to succeed at e-commerce. OneSpace’s suite of tools and services helps brands centralize, optimize and publish product content that wins top position on multiple online retailers at scale. Contact us to learn more.

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