Can Costco's Two New Delivery Options Help It Compete with Amazon?

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Can Costco's Two New Delivery Options Help It Compete with Amazon?

By Jamie Grill-Goodman - 10/09/2017

Costco Wholesale Corporation recently rolled out two new delivery options: one-day delivery that includes dry and fresh goods, and two-day delivery on nonperishable foods and sundries.

Amazon has been shaking up grocery retailers since its recent acquisition of Whole Foods. The move from Costco comes on the heels of news that Lowes Foods, Walmart, and Target are tackling same-day delivery.

Costco CFO Richard Galanti said one of the many questions Costco gets every day relating to concerns is: "With the increasing overlap of people having both a Costco membership and an Amazon Prime account, and the fact that more and more people are having groceries delivered by everyone, is this the beginning of something that will impact Costco?"

Galanti said the new delivery options are one part of the answer to this question. Costco's total e-commerce sales in fiscal 2017 came in at 4.6 billion, up 15% from fiscal ‘16. For its fourth quarter 2017, e-commerce sales were up 27% (but this includes an extra week). Over the past year Costco has improved its search capabilities on its website, streamlined the checkout process, improved members' ability to track their orders and automated much of the returns process.

So how do the new delivery options work? Here we break it down:

CostcoGrocery

CostcoGrocery is a two-day delivery option that includes nonperishable food and sundries items, but not fresh foods. The delivery time is 2 business days from the day of order if ordered before 12:00 noon local time and there are no weekend deliveries. They also don't deliver to Alaska, Hawaii or Puerto Rico.

Delivery is free on orders over $75. CostcoGrocery has a special tracking feature, which shows current order totals at the top of the page. The tracker is continuously updating, so shoppers know how much more is needed to reach $75.

Currently there are just under 500 dry grocery SKUs available for two-day delivery, according to Galanti, but are expected to expand. The boxes are up to 40 pounds shipment through UPS and orders are fulfilled at several of Costco's business delivery centers.

"These offer very competitive pricing and value proposition, in fact significantly better price than even we had at costco.com on many of these items," he said.

Costco Wholesale Powered by Instacart

The new same-day grocery delivery option is through Costco's partnership with Instacart and includes both dry and fresh grocery.

The option is available at 376 US locations and there are additional US locations planned, which are expected to be added between now and the end of calendar ’18.

There are approximately 1700 SKUs available for one-day delivery. Orders arrive the same-day, next day, or day of choice, utilizing a one-hour delivery window in as little as two hours.

Prices are generally 15% to 17% higher than warehouse walk-in price. In addition a 10% service fee will be added to orders at checkout and orders must total more than $35 for free shipping. However, Costco notes on its site that the separate 10% service fee is used to compensate in-store shoppers as well as delivery drivers and "you may elect not to pay the service fee."

 

Galanti said what Costco has found so far is "it's more fill-in than replacement of a shop," but he continues, "we have very little time and data to feel comfortable about where it will go."

Costco has also been continuing to build e-commerce awareness through warehouse signage, special offers and targeted emails.

"We feel that all these efforts, which are ongoing, have resulted in increased traffic in sales, both online and in-store during the past couple of quarters in particular," he said. "Looking forward, we’ll continue to expand these types of activities to drive our businesses. You'll hear more from us in the coming quarters about driving online sales with ongoing site improvements, improved online marketing activities and of course along with great products and services at fantastic prices."