Costco could be making a fatal mistake about Amazon

costco

Costco is known for its no-frills approach — concrete floors, fluorescent lighting, and product stacked high in its warehouse-like stores.

But Costco's no-frills approach could backfire when it comes to online, reports Matthew Boyle at Bloomberg Businessweek.

Costco has largely enjoyed growing sales and customer loyalty in recent years.

But as Amazon becomes a looming threat to the grocery industry, some are concerned about Costco's failure to adopt e-commerce.

Amazon just acquired Whole Foods for $13.7 billion, cementing its status as a growing threat in the grocery world. The organic grocer's private label products will also be available on Amazon, and will likely bolster the network for grocery delivery service AmazonFresh.

Though Costco offers products on some online platforms like the newly-revamped Google Express and Instacart, its online presence is lackluster.

Costco only offers 10,000 products online, according to Bloomberg, which pales in comparison to the millions that Amazon and other competitors offer.

Coscto's online business has only been growing 11% a year, which is slower than most big competitors and the wider market rate of 15%. Ecommerce is growing up to three times more than the rest of retail, according to Business Insider Intelligence, and it seems like Costco is leaving money on the table by not embracing online sales.

The dramatic rise of Amazon Prime is also a threat to the business. Over half of Costco members also have a Prime account, which mirrors the percent of US households that will have prime by the year's end.

costco employee sample shopping

One reason why Costco may be slow to adapt is the difficulty in transitioning the low-cost, high-ounce wholesale model.

Bulk items are expensive to ship, and now that online customers are used to free two-day shipping, getting them to pay for it is a tough proposition.

“The way their business is set up, there’s no easy way to step into e-commerce,” Kirthi Kalyanam, a retail expert at Santa Clara University, told Businessweek. “The economics are not viable.”

The company's CFO, Richard Galanti, told Businessweek that it's "a little stubborn" when it comes to e-commerce, adding that he would prefer customers to come to stores.

“I think we have been moving faster in the last few years,” Galanti said.

If they don't start to move faster, analysts say Amazon, Walmart, Target, and others will swoop in.

E-commerce is a hard game to catch up on, and as Amazon builds its Prime paradise, customers may balk at the price of its $60 membership when they can get so much more from Amazon's service.

"If Costco waits too long, they might find themselves too far behind," Robin Sherk, an analyst at consultant Kantar Retail, told Businessweek.

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