Costco - an e-commerce tortoise takes on the omni-channel hares

Profile picture for user slauchlan By Stuart Lauchlan March 7, 2017
Summary:
Will slow-but-steady win the race for Costco? CFO Richard Galanti doesn't appear to be planning on upping the firm's digital investment any time soon.

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Sometimes we're viewed as the tortoise, not the hare.

That’s the reflection from Richard Galanti, Chief Finance Officer at Costco, when quizzed about the wholesaler’s seeming lack of enthusiasm for digital investment and lack of clear omni-channel enthusiasm.

It’s an interesting observation on his part, acknowledging as it does that the wholesale, ‘come and wander around a warehouse’ business model might be resistant to the supposedly inevitable omni-channel disruption that can be seen in the B2C retail market.

There’s a degree of truth in this. The joy of a visit to Costco lies in large part to the sense of exploration, wandering around the aisles full of piled-up stock, spotting an unexpected bargain or stumbling across that one thing that you didn’t go into the store to get but suddenly realise you can’t live without.

That’s not to say that there aren’t signs of digital life at Costco - for its latest quarter, digital sales were up 12% year-on-year, up from the previous quarter, which took in Black Friday and Cyber Monday, when digital sales rose 7% year-on-year.

But at 4% of the total, it’s still a very small part of the overall revenue mix at the firm - and that’s the way it’s going to stay, according to Galanti.

So, not from Costco will there be proud boasts about new-found Buy Online, Pick-Up in Store capabilities. Galanti affirms:

Ask me next quarter, but I think the answer will be no for a while. You want to go see it in some of the other places, by the way. It ain't all that good. And we don't have the room for it anyway. We are doing some unique things with business delivery, and we now have 15 or 16 business delivery sites around the US [and we are] just opening our first one in Canada.

Getting goods to buyers is one area for potential digital investment, he adds:

Probably the single biggest thing is what items we're offering online and how quickly we can get them to you.. you'll see more things coming this calendar year…it started off years ago as limited big ticket items, hard to carry, hard to deliver, hard to install items, and we've added to that. We feel again, fine with where we are.

One of the things we all know, we have the best prices on great quality items. We've never been too good about worrying about how to get it to that end customer a day earlier. It's the 80/20 with us. We've done just in the last six or eight months, a lot of improvement online in that customer experience, with the smallest amount of effort, the low hanging fruit.

We’ve got good things [that we are] working on, but we're doing these things, honestly, from our offensive standpoint not a defensive standpoint. And I'm not trying to be cute. Clearly we want to do it for competitive reasons, too, but it's not like we looked at this and we lost. We see our renewal rates, ex-some of that auto bill stuff that we believe. We see our traffic going up still, and we see online, we see our page views and the like going up as well.

Get in-store

But Galanti remains unashamedly out-and-proud as a bricks-and-mortar business, but concedes that some online investment is appropriate to avoid losing some sales to the e-commerce giants:

We still are a bricks-and-mortar entity and we want to get you into the store because you're going to buy more in the warehouse. You're going to buy more when that happens, and we've got a lot of reasons for you to do that. We also recognize we don't want to lose the sale to somebody else because they only buy online.

All that said, there is tech investment going on at Costco, if mostly behind the scenes. That’s a change of stance in its own right, according to Galanti:

You know, about three-and-a-half years ago, when we embarked on this dark journey, [we recognised that] we probably had the lowest-cost IT out there. I always joke we were in the greatest MASH unit. It was always up and running, but band-aided to death. We made a big investment. We also, during the process, found out what we don't know, and what we need to do and again [IT spend has] gone up.

It has gotten a little more outsized this year, because some of the big programs have now been installed, notably, the beginning of this first fiscal year as an example, our major accounting platform, which is the crux of a lot of things we'll do on it now. I think you'll still have incremental costs and the definition of modernization will evolve also, and we keep adding new things to it, rewriting the pharmacy system.

It’s perhaps indicative of Costco’s attitude to tech though that IT spend is still defined as “a drag” on profits and growth, an unfashionable point-of-view in an omni-channel age, but one that Galanti appears content to hold:

Certainly, over time we're viewed as being stubborn. I think in my view, we're a lot less stubborn and - but we're still a little bit of a tortoise sometimes. We [have] got a lot of good things going on. We'll see, but stay tuned.

My take

Galanti’s words are not of the same kind that we’re used to hearing from the B2C retail cognoscenti, but it’s important to remember that this is a different business model. The pile-em-high, ship-em-out wholesales operation is very different to the fashion retailers and even to the Walmarts and Targets of the world. The ‘slow, but steady’ mantra may yet be proved to be wrong, but it’s one that’s clearly articulated and carries personal conviction. And the tortoise won the race, remember.