Has Amazon declared war on Costco?
Updated: Oct 18, 2017
My delayed response to the question of why Amazon acquired Whole Foods, was a bid to get past the media predictions of the apocalypse of traditional retail in America and dig deeper to what strategies might be driving the recent acquisitions in the retail space. At first glance, the acquisition of Whole Foods seems to be solely a strategy to get a bigger share of the grocery food market and a battle field move to take on the retail Goliath: Walmart. While that sounds like a perfectly crafted plan, I wondered if there where other unknown targets in this war. It is true that all retailers should be worried about Amazon’s insatiable desire to dominate but one retailer doesn’t seem that troubled by the hoopla of all the scheming. That retailer is Costco.
The likes of Walmart have taken the change mantra to new heights by significantly investing in online retail to combat the surge of other online retailers taking vital market share and affecting revenue numbers. An example will be its acquisition of Jet.com last year for $3.3 billion. This followed recent strategies of in-store pickups and free delivery over a certain price. Despite this Costco has outperformed Walmart over the years and its comparable store sales are one of the best in the industry. That said should we worry about the future of Costco? In 2016, analysts labelled Costco as “Amazon-proof” and its CFO, Richard Galanti’s responded with a “We don’t buy that for a minute”* retort. While aware of the potential threat of Amazon to impact revenues, Costco has been slow to make aggressive investments in e-commerce. Can we attribute this to Galanti's statement that “at the end of the day, we will expect that the internet in general is going to take its percentage of different categories”. This begs the question: Is there a limited percentage online retailers can ever take of any market? Perhaps there might be a play by Costco to acquire boxed.com?
Jeff Bezos and James Sinegal founders of Amazon and Costco respectively are undoubtedly visionary founders with the ability to shape the future. I am a fan of Jeff Bezos’s annual letters to the shareholders, I have read every single one since 1997. They give you a front row seat to the mind of Jeff Bezos, as he always says; “It is Day 1” and has been day one for the two decades. His customer centric model is the core foundation to Amazon’s success.
James Sinegal, a student of Sol Price, perfected one of the best retail business models through membership based stores. How many businesses get paid billions in revenue before having to sell a single product (ok ok... granted not all memberships are paid at the same time but you get the point). A subscription model so brilliant that Amazon could not resist to adopt it; hence “Amazon Prime”. This model has been so successful for Amazon that it continuously invests in growing its number of Amazon prime members. Lest we forget that Amazon has had a successful B2B platform for businesses now called “Amazon Business”. These factors might be the reason Costco’s stock price took a dive after the acquisition of Whole foods. Analysts predict this will increase the value proposition of the Amazon Prime membership and become a potential threat to the existing Costco business model.
One might be fooled to believe that Amazon’s customer centricity applies to our regular understanding of customer service. However in this case perhaps Amazon is not solely focused on delivering #1 customer service. Perhaps, Amazon’s plans go beyond this. Like Bezos once said: “The single most important thing is to obsessively focus on the customer”** My question is: Who is the customer? And how is this customer defined?
I view Jeff Bezos’s ‘customer obsession’ more broadly, as an obsession to build a business around the elements which are most important to the customer. While retail might be the foundation I think Amazon is building a business around the individual. Amazon is already in our homes and businesses creating an ecosystem around what’s important to us, including household items, business needs, entertainment needs etc. Sooner or later it might also provide for our health care needs. Would you buy insurance from Amazon? Gym membership? Travel tickets? The real question is does ‘customer obsession’ = ‘Amazon ecosystem’?
So while Richard Galanti might be right to take a cautious approach towards online retail, Costco can’t afford to ignore the elephant in the room that has a smile on its face saying “I want everything” and frankly neither should any other industry or company.
First published on LinkedIn