The physical retail industry has been going through a difficult period as Amazon’s presence widens across the globe. But the width expansion isn’t what brick and mortar giants like Walmart and Costco are afraid of – it’s the depth of reach within the United States.
As Amazon piles on the benefits for Prime members, other retailers are seeing that shift towards online shopping, and even Costco’s strong membership model appears to be entering uncertain territory.
The recent price increase for Costco memberships is being questioned for its timing more than anything else, especially considering the fact that revenue growth from memberships has slipped from 7 percent to about 5.5 percent. The 9 percent price increase is expected to offset that, but the risk of lower renewal rates could effectively negate that.
Why is Costco not moving aggressively on the e-commerce front? Walmart has made significant gains against Amazon after it acquired Jet.com and beefed up its e-commerce capabilities, but Costco doesn’t even have the features Walmart’s online portals do – like the order-online-and-pick-up-in-store option.
Costco CFO, Richard Galanti, said last year that “everybody in the world never wanting to leave their house and only typing stuff to order and get it at the front door” was the thing that kept him awake at night, but we haven’t seen a measurable improvement in their e-tailing capability thus far.
What’s more, Costco now faces a two-pronged problem: Amazon is one of them, of course, but, now, even the online initiatives of Walmart are cutting into the Costco pie. Walmart introduced its free two-day shipping with no membership required so it could compete in some way with Amazon Prime, and that could yield considerable results. But it’s not good news for Costco, which now has yet another challenge dead ahead.
How will Costco deal with these new challenges that are piling up on top of existing ones? The only way forward that we can envision is a stepping up of online initiatives, and tighter monitoring of the effects of the price increase.
Unless Costco can communicate effectively that the price increase also comes with significant savings potential, it might not go down well for membership renewal rates. And, unless it can offer a significant value proposition for its e-commerce offering, it’s not going to help Costco stop customer erosion to platforms like Amazon and Walmart online.
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