The majority of people who hold a membership card at Costco also make use of Amazon’s Prime service. According to Lindsay Rittenhouse of The Street, this could prove to be Costco’s Achilles heel.
On Monday, June 19, financial services firm Cowen & Co. wrote in a research note that the overlap of Costco and Amazon Prime members grew from 28% in 2013 to 64% in the second half of 2017. The percentage of people who only carry Costco memberships, however, dropped from 14% to 8% in 2013.
Additionally, those who hold both Costco and Amazon Prime memberships have reportedly been visiting Costco stores less often over the past several quarters. Cowen & Co. also noted that for the first time in three quarters, the number of households holding a Costco membership dropped from the previous year. Analysts at Cowen & Co. expect this drop to continue.
While it remains to be seen how Amazon will change Whole Foods (there have already been reports that the giant online retailer is considering cutting jobs and prices at the supermarket chain to compete with stores like Walmart), Fortune suspects that the Amazon-Whole Foods merger “could very well be the birth of a power player in the grocery space.”
If the nearly $14 billion proposed merger is approved, it could deliver a fatal blow to Costco. Deutsche Bank analysts downgraded its rating of the company from “buy” to “hold”; and in trading Monday, its shares fell 1.7% to $164.30. In a note to clients, Deutsche Bank analyst Paul Trussell wrote, “The Whole Foods Market acquisition represents a game changer with Costco’s competitive moat in grocery under greater threat…The pipeline of positive catalysts has played out and the competitive backdrop is intensifying with Amazon & Wal-Mart accelerating in-store and online efforts and innovation.” Trussell fears Costco members will now switch to Amazon because Costco’s digital platform lags behind peers, which puts membership renewal at risk for decline.
Of course, this is all speculation. Because most corporate mergers fail and because Whole Foods caters to a different consumer market (i.e. affluent people who don’t mind spending a fortune for organic food vs. people and businesses who like to buy staple products in bulk), Costco may not suffer as much as is being surmised. Citing the retailer’s unique private-label products and its “treasure hunt atmosphere” as benefits, Cowen & Co. are confident Costco will survive Amazon’s onslaught.
Per analyst Oliver Chen, Cowen & Co. believes “COST’s vertical integration capabilities, low price leadership given a fixed low merchandise margin model, & gas and organic food penetration are factors which will drive continued consistency in the generation of positive physical store traffic.”
Danita White for TechFunnel.com