Booming Costco courts millennials with online and delivery, but stores still rule
Traffic to its stores, an important indicator of the health of the business, grew 5.9 percent in the last quarter, the fastest clip in at least a decade.
SEATTLE — By most measures, 35-year-old Costco Wholesale is thriving.
Its sales and profits are surging. Traffic to its stores, an important indicator of the health of the business, grew 5.9 percent in the last quarter, the fastest clip in at least a decade. Costco members — whose annual fees make the company profitable — remain fiercely loyal, renewing at a rate of 87 percent even after fees were raised.
But will a new generation of shoppers accustomed to online buying and home delivery join its parents in the cavernous aisles?
The Issaquah-based company continues to build. It remains on pace to open from 20 to 25 new stores a year, and is establishing toeholds in new international markets, including its first store in China, under construction in Shanghai and scheduled to open in April 2019.
Meanwhile, Sam's Club — Walmart's wholesale club, once viewed as Costco's principal rival — announced last month it is closing 63 stores, including three in New Jersey but none in Philadelphia.
Costco's stock remains near its all-time high of $199.88, closing on Friday at $190.99.
After hearing about Costco's performance and prospects from CEO Craig Jelinek at the company's annual shareholders' meeting in Bellevue this week, at least a few people in the decidedly gray-haired crowd had big questions about the future.
How will the world's second-largest retailer adapt to changing shopping habits and appeal to a younger generation, and what is the company doing to contend with online sellers, such as Amazon, now viewed by some as Costco's chief competition?
Jelinek — who also took questions from an octogenarian who struggled to find his car in Costco's vast lots, and others having trouble lifting large quantities of bottled water and kitty litter — addressed them head on.
Reports that millennials are not joining Costco are "not accurate," Jelinek said, noting that the generation represents over 40 percent of its new-member sign-ups. (Company representatives declined to say how many of its current 90.3 million cardholders are in the millennial demographic.)
That said, they've yet to become Costco's best customers.
"They don't spend the money like the boomers do," Jelinek said. "But they are signing up, and we're hopeful that as long as boy meets girl, buys house, that will continue to go through their life cycle."
Costco’s online strategy
The company is making moves to better cater to shoppers whose expectations about retail were formed in the time of Amazon. But in doing so, Costco wants to preserve the "treasure hunt" aspect of its main cash-and-carry business that has been fundamental to its success.
"We want to sell stuff online, but we also want to bring people into our Costcos," Jelinek said. "When people say, 'I hate you guys, I came in to buy four things and I spent $400,' that's what we like."
Costco is using its stores to drive online purchasing. Showcase areas in the stores let shoppers see and touch the online wares. They can purchase them on the spot for later home delivery from salespeople outfitted with iPads.
Costco operates e-commerce sites in six markets, and Jelinek said the company plans to expand in the coming two to three years to Australia, Japan, and China. That would put it in competition with Chinese e-commerce giant Alibaba Group. (Costco first dipped a toe in China in 2014 with an online storefront on Alibaba's Tmall platform.)
While the physical stores remain the company's focus, Costco is expanding its home-delivery options. In doing so, it's leveraging its 17 Business Centers — stores geared toward small-business owners, with merchandise in even larger lots than the consumer-focused warehouse stores — as fulfillment centers for two-day home delivery of nonperishable items.
"This has started out much stronger than we anticipated, and we're going to continue to grow this business," Jelinek said.
Through a partnership with Instacart, people can order Costco goods, including fresh items, for same-day delivery.
Even as it expands delivery options, Costco is experimenting with ways to drive its online buyers back into stores.
In November, Costco began testing a system to allow customers to pick up high-value items ordered online, such as jewelry and laptops, in the warehouses. This eliminates the risk of front-porch theft, and generates another trip to Costco, where the treasure hunt can continue.
"There's a method to this madness," Jelinek said.
Costco's e-commerce business grew 40 percent during the holidays, he said, but also noted that those figures represent "only 5 percent of our business."