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Costco's Adaptation Strategies for Sustained Growth

September 24, 2024

Note: We reveal investment insights through the quotes of top business leaders.

Key Takeaways

  • Costco's growth is fueled by operational efficiencies, including expanded product offerings and enhanced member services, driving increased value for members.
  • The company prioritizes customer engagement through competitive pricing and technology, aiming to reduce friction and improve the overall shopping experience.
  • E-commerce expansion remains a key focus, with efforts to improve margins and delivery costs while maintaining low prices on a limited selection of quality products.
  • Strong supply chain management and long-term supplier partnerships ensure stability and sustainability in product availability.
  • Future growth strategies emphasize unit expansion in the U.S. and reinvestment in member engagement to navigate competitive challenges.

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Operational efficiencies driving Costco's growth

Costco's growth is driven by operational efficiencies such as expanding product offerings and enhancing member value through services like delivery and installation. Their logistics improvements, including a 28% increase in deliveries, further support sustained growth and profitability.

"I mean, we really do indeed see that. I think especially with our limited SKU count in the warehouse, how can we expand the offering to the members, bring value to their membership card beyond what's within our four walls or what's on costco.com and we see this as a great growth driver for us in the future and a way to bring expanded value to the members as we look forward." --- (COST, earning call, 2024/Q1)

"Taking a closer look at margins, as we continue to work closely with our suppliers to lower cost, we're managing our Walmart U.S. pricing aligned to competitive price gaps, and customers are responding favorably, resulting in sustained sales growth and higher gross margins." --- (WMT, earning call, 2025/Q1)

"Deliveries through Costco logistics were up 28% in the quarter. Costco Next, our curated marketplace also continues to grow nicely and we added eight new vendors in Q3, bringing the total to 75." --- (COST, earning call, 2024/Q1)

"Next to sales, gross profit growth was the key driver of upside in Q1. Consolidated gross margin expanded 42 basis points, led by Walmart U.S. Across segments, we benefited from lower markdowns as a result of disciplined inventory management and favorable business mix, enabling strong margin flow through from sales." --- (WMT, earning call, 2025/Q1)

"Appliances were almost 30% growth for us in the period. And again, to Gary's point, it's that member value of the all in, what you see is what you pay price for delivery, installation, haul-away, everything you need done at one time that has really resonated with our members and has been a great driver of sales force." --- (COST, earning call, 2024/Q1)

Customer engagement strategies for retention

Costco's customer engagement strategies focus on delivering value through competitive pricing and enhancing the member experience both in-store and online. By leveraging technology and reducing friction, they aim to strengthen relationships with members, ensuring retention and satisfaction amidst inflationary pressures.

"And so if you think about the three main categories in core between foods and sundries, fresh and non-foods, fresh would have continued to have been slightly lower year-over-year, and that's a very deliberate strategy for us to make sure we're delivering more value for the member, and we think that's a really important place for us to drive member engagement and support, especially as we're still seeing some commodities that are a little bit inflationary right now." --- (COST, earning call, 2024/Q2)

"And we spent a lot of time making sure that as a team and as individual teams, the majority of our energy, the vast majority of our energy and attention goes towards trying to provide the best possible customer experience that we can deliver for customers." --- (AMZN, event transcript, 2024/05/22)

"They're taking a lot of friction out. They meet every day. They meet at 5 o'clock in an office just down from me to talk about where they are in terms of improving customer friction and making the experience better, with a lot of great data and metrics, all trying to ensure that the customer is able to find whatever they want. And then when they order, we get them what they want when they need it." --- (WMT, event transcript, 2024/06/07)

"Technology is going to be one of our key priorities moving forward. How do we improve that member engagement and the relationship we have with them in our brick-and-mortar warehouses as well as online and through other aspects such as travel and so forth." --- (COST, earning call, 2024/Q1)

"And what we continue to learn are the best ways that we can connect sellers, suppliers and customer groups.A lot of this will be driven by what Suresh talked about with dynamic technology that can help sellers and suppliers have the very best tools in the process to be able to reach people who are interested in buying." --- (WMT, event transcript, 2024/06/07)

E-commerce expansion initiatives

Costco's e-commerce strategy focuses on offering low prices on a limited selection of quality products, which drives high sales volumes. Despite lower gross margins compared to warehouse operations, improvements in e-commerce margins and delivery costs are encouraging for future growth.

"As we expand that, you'll see a larger penetration come towards e commerce and marketplace and we'll see more revenue mix happen through our sellers." --- (WMT, conference, 2024/09/04)

"Our e-commerce business, domestically and internationally, has a lower gross-margin percentage than our warehouse operations." --- (COST, sec filing, 2024/Q1)

"While improved business mix is helping, we're also encouraged by the progress in core e-commerce margins, due largely to another quarter of nearly 40% reduction in U.S. Net delivery cost per order." --- (WMT, earning call, 2025/Q2)

"We operate membership warehouses and e-commerce sites based on the concept that offering members low prices on a limited selection of quality nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover." --- (COST, sec filing, 2024/Q1)

"defined as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales related to e-commerce sites operating for more than one year." --- (COST, sec filing, 2024/Q1)

Supply chain management innovations

Costco's supply chain management innovations focus on fostering long-term partnerships with suppliers to ensure a stable food supply and sustainability. Additionally, leveraging real-time data for optimization reflects a commitment to integrating advanced logistics strategies, similar to trends seen in other major retailers like Walmart and Amazon.

"It's equally -- we have great partners out there that supply our goods for us and they're long-term suppliers." --- (COST, earning call, 2024/Q1)

"I'm working on a number of initiatives, Doug, things like long term agreements with our suppliers to make sure that they can make the investments they need to secure future food supply, working diligently in things like sustainability across the key stakeholder groups to equip farmers to make sure that our food supply is steady for years to come." --- (WMT, event transcript, 2024/06/05)

"And then I would say that supply chain with Amazon is really an abstraction on top of those individual building block services I just mentioned that makes it easier for customers to have the whole end-to-end supply chain integrated." --- (AMZN, earning call, 2024/Q1)

"In Supply Chain Solutions, revenue declines in the first quarter were largely offset by revenue growth during the second quarter, driven primarily by growth in our logistics businesses." --- (UPS, sec filing, 2024/Q2)

"But most importantly, we were able to then let our customers know how best to optimize their supply chains given the latest in weather, traffic conditions and so on." --- (FDX, conference, 2024/05/29)

Enhancements in customer experience

Costco recognizes the need for improvements to enhance member experience, focusing on high-quality, damage-free products as essential to customer satisfaction. Additionally, expanding product assortment and flexible delivery options are crucial strategies for adapting to customer needs and preferences.

"But we do know that there's definitely some improvements we could have that would enhance the member experience." --- (COST, earning call, 2024/Q2)

"Now, they are continuing to enhance the retail experience for both employees and customers." --- (WMT, press release, 2024/09/17)

""Amazon Bedrock, Amazon Personalize, and Amazon SageMaker help businesses like Zeta Global significantly enhance customer experiences by delivering hyper-personalized marketing and advertising messages that feel like one-on-one human relationships so brands can foster long-lasting customer loyalty," said Jon Williams, global head of agency business development at AWS." --- (AMZN, press release, 2024/07/29)

""Maintaining high-quality damage-free product is a key component of delivery on the customer experience."" --- (HD, earning call, 2024/Q1)

""The second part of marketplace is the broader assortment, the more customers can access without having to go somewhere else, having options that are flexible for delivery is great and the team has done a nice job of building for the customer transparency when the order is coming."" --- (WMT, conference, 2024/06/11)

Competitive positioning and market differentiation

Costco's competitive positioning relies on active price management, with buyers monitoring pricing daily to ensure competitiveness. Additionally, the company sees significant growth potential in new markets like China, emphasizing its strategy for market differentiation and sustained growth.

"The increases were primarily driven by managing prices aligned to our competitive price gaps and growth in higher margin businesses, partially offset by mix shifts into lower margin merchandise categories." --- (WMT, sec filing, 2025/Q2)

""With a clear strategy, a differentiated shopping experience and a brand that consumers love, Target's competitive advantages are a strong foundation for long-term growth."" --- (TGT, press release, 2024/09/19)

"And then obviously, we have markets like China where we're really just sort of starting that journey, but there's tremendous growth opportunity as we identify the right path forward in that market." --- (COST, earning call, 2024/Q1)

"The increase was primarily driven by managing prices aligned to our competitive price gaps and lower markdowns as a result of disciplined inventory management, partially offset by mix shifts into lower margin merchandise categories." --- (WMT, sec filing, 2025/Q1)

"I mean, we are competitive on a daily basis. Our buyers are on top of pricing daily, weekly and we all review them each month." --- (COST, earning call, 2024/Q1)

Future growth opportunities and challenges

Costco is focusing on accelerating unit growth in the U.S. to stay competitive, emphasizing reinvestment in member engagement and consumables as key strategies. With increased trips and stable basket sizes, these adaptations are crucial for navigating future growth opportunities and challenges.

"Just want to get a sense of the opportunities to potentially accelerate that unit growth, especially in the U.S. just given some of your competitors are planning to accelerate growth from here." --- (COST, earning call, 2024/Q3)

"And as I mentioned earlier, though, I would definitely think of it as something that we'll look at to as we do with everything, reinvest in the member to really accelerate the growth of the company overall." --- (COST, earning call, 2024/Q3)

"Gary Millerchip: I think maybe just to add on that, Ron too. I mean, the nice thing about the opportunity there for us is with trips up by 5%, that's really why the average basket size has been more flat recently and that's because we've been growing member engagement in consumables, as Ron mentioned, with food and fresh." --- (COST, earning call, 2024/Q3)

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