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June 12, 2024
Is Costco Ready for a Technological Transformation Under New Leadership?
Costco is set to undergo significant changes as new leadership takes the reins, signaling a shift in the company’s operational strategies. Known for its conservative approach to adopting new technology, Costco has historically lagged behind competitors like Walmart and Target in building a robust digital presence. This cautious stance was rooted in the belief that members preferred to see investments in maintaining low prices rather than technological advancements.
However, with the appointment of Ron Vachris as CEO and Gary Millerchip as CFO, Costco is poised to evolve. Both Vachris, a long-time Costco veteran, and Millerchip are keen on enhancing the company’s technological infrastructure and fulfillment offerings. This new direction was evident during Costco’s third-quarter earnings call, where Vachris actively participated — a notable departure from his predecessor Craig Jelinek’s less visible approach.
One of the key areas of focus under Vachris’s leadership is expanding Costco’s e-commerce capabilities. Historically, Costco has been slow to adopt features such as guaranteed one-day and same-day delivery, opting instead to partner with third-party services like Instacart. Now, Vachris has emphasized a commitment to improving the buy online, pick up in-store model, albeit with limitations based on warehouse volume. This initiative will initially focus on electronics, such as televisions, with plans to broaden the range of products available for this service.
Additionally, Vachris has highlighted the importance of leveraging technology to enhance member engagement both online and in-store. With over 90% of its global members renewing their memberships, Costco aims to deepen these relationships through technological innovations. This includes potential enhancements in travel services and other membership benefits. Vachris sees technology as a crucial tool for driving business growth and strengthening member loyalty.
Despite these forward-looking plans, Vachris reassured that the changes would be evolutionary rather than revolutionary. He emphasized that Costco’s proven strategy will remain intact, with ongoing innovations tailored to meet members’ needs. This balanced approach aims to maintain the company’s core values while adapting to the evolving retail landscape.
“With the management changes, I wouldn’t expect major changes as we have a proven strategy now,” he said during the call. “But as we’ve done for the past 41 years, we continue to innovate to the needs of our members.”
The CEO also underscored the strategic use of data to capitalize on retail media opportunities. By expanding its data analytics team, Costco plans to better utilize the vast amounts of information it collects to enhance member experiences and drive sales. This data-centric approach is expected to unlock significant potential for the company.
One of the most reassuring announcements for Costco loyalists is that the iconic $1.50 hot dog and soda combo will not increase in price. Moreover, despite widespread discontinuation among major retailers, Costco will continue to issue monthly sales reports. Additionally, while an increase in membership fees is anticipated, there are no immediate plans to raise them.
Millerchip’s arrival from Kroger, where he spent about 15 years focusing on e-commerce profitability, suggests that Costco’s digital business might see significant growth. Despite Costco’s historical reluctance to fully embrace digital retail, Millerchip sees substantial potential in this area. The company reported a more than 20% increase in digital sales in the quarter ending May 12, 2024, compared to the previous year, with online sales of high-value items like gold bars and major appliances growing faster than total sales.
To capitalize on this momentum, Costco is piloting a buy online, pick up in-store program for certain items. This initiative is complemented by the acquisition of Innovel Solutions four years ago, which has enhanced Costco’s capabilities to deliver and install large online purchases, such as televisions and appliances. Furthermore, a recent expansion of a partnership with Uber Technologies now allows for delivery of Costco goods in 17 U.S. states and Canada, with plans to extend this service internationally.
Despite these advances, digital sales still represent less than 10% of Costco’s overall revenue, which exceeded $57 billion in the latest quarter, according to the new CFO. While Millerchip does not have specific targets for digital growth, there is a clear intent to expand product offerings available online and improve the digital shopping experience. This may involve increasing the number of vendors on Costco’s online marketplace, ensuring that any expansion aligns with Costco’s reputation for quality and value.
Millerchip also sees potential in alternative revenue sources, particularly through the marketplace. By leveraging technology to enhance data analytics, Costco can tailor vendor and brand advertising more effectively, creating a revenue cycle that supports low prices and drives customer traffic.
Analysts believe Millerchip’s experience at Kroger, a company with a vast inventory compared to Costco’s streamlined selection, will be beneficial as Costco explores new revenue streams and product categories. While significant strategic overhauls are not anticipated, the initial changes, such as Vachris’s involvement in earnings calls and the pre-release of detailed financial figures, have been positively received by analysts.
Discussion Questions
How might integrating advanced digital technologies reshape the traditional warehouse retail model, and what challenges and opportunities could this present for maintaining customer loyalty and competitive pricing?
How can Costco balance the need for operational efficiency with its historically conservative approach to technological adoption and infrastructure investment?
Given Gary Millerchip’s experience from Kroger and his plans for expanding Costco’s digital footprint, what challenges and opportunities might arise in maintaining Costco’s values of simplicity and cost-efficiency while enhancing its e-commerce strategy?
Poll
Loading …BrainTrust
Shelley E. Kohan
Associate Professor, Fashion Institute of Technology
Brad Halverson
Principal, Clearbrand CX
John Lietsch
CEO/Founder, Align Business Consulting
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I don’t see this as a radical reinvention of Costco, it’s simply that the new CEO thinks there is an opportunity to use technology better. In my view, he is correct in his assessment. Costco can improve in areas like collect from store, checking what’s in stock at the warehouse, and making the ecommerce process easier. But this will all be selective: Costco isn’t going to offer every item for collection because some of its bulky products just don’t lend themselves to that kind of service and most customers love visiting the warehouse. So, I’d say this is all more of a gentle technology evolution than a massive transformation.
I think this goes back to the retail model and leverage. When you could compete and win at the scale of a Costco or Walmart by focusing on treasure hunt, range, and price, then it made sense to keep tech to a minimum. But when you need tech to enable whole new business models – like marketplace, retail media networks, and home delivery – there’s no way to continue to win by just focusing on the in-store experience. You see Target struggling with this shift as well. Costco especially doubled down on the treasure hunt side of club stores – what you love today may be gone tomorrow (I miss you, Meyer lemon cake bits). That’s the one part of their strategy and differentiation that they may have to give up to embrace more leverage. It will be very interesting to see if that trade-off works out in the end
Investing in technology doesn’t need to mean that you’re expecting tons of growth via digital channels- investing in technology can also/instead mean improving backend systems for a better in-store and/or omnichannel experience. It’s important that Costco evolve with the times, and investing in technology is synonymous with that.
Yours would have been my observation had you not gotten-up much earlier than I I did…
I am reluctant to call ecommerce “Technology.” True technology involves the implementation of tools that will improve internal communications, the streamlining in-store activities that take place in the background. Subtle improvements in enabling the in-store customer to find specific products, ask a question and get an answer without having to search for an otherwise very-busy associate, that would be an application of technology that will enhance customer loyalty and, therefore, increase sales and profitability.
There are certainly ways Costco can evolve with technology while staying true to its core values. A big element to Costco is the lack of frills, however reducing friction for the consumer and simplifying the experience is related. How Sam’s Club introduced AI image tracking to reduce the long lines when leaving the store is just one example.
Fore more than 40 years, Costco has enjoyed a terrific business model that works almost perfectly, and sustains itself through any type of economy. But it’s critical to understand that the business model has just one major competitor in the U.S., which keeps it unique, and its important that nothing, including new technologies, will jeopardize what makes Costco unique to consumers.
Executives will work day and night to protect the basics, including its viability and efficiencies. Since the start, and still today, Costco operates with minimal expenses, and makes money from its membership fees to bulk purchases. These are the basics that provide steady growth and income. Costco’s customers expect emphasis on quality at very low cost.
I believe that more than 90% of the company’s income stems from the sale of in-store sku’s. By keeping under 4,000 units in its warehouse at any given point, Costco has been able to generate more than $150 billion in annual income. Executives know that they cannot jeopardize this.
Costco is accused by critics of being slow to adapt change, including certain technologies, but that’s part of what sustains the workable business model. Certain new technologies will not hurt the business model, and those are the ones that Costco will embrace, especially if efficiencies are improved even more so than they already are. -Db
41 years, 57 billion, 90% renewal rate and $1.50 hotdog-soda combo. What’s the problem?
Actually, I’m not a fan of deploying tech for tech’s sake but I’m not a fan of resting on one’s laurels either. There are numerous examples of companies that failed to modernize and adapt and it didn’t end well for any of them. I think Mr. Vachris’ strategy, if well executed and respectful of the existing customer, has a lot of upside potential with little downside risk. There’s a reason why Costco is so successful with such a high renewal rate so the trick will be to walk that very fine line.
Ironically, I’m a 100% in-person Costco Customer but a dedicated, Amazon Prime user. In fact, I’ve never shopped online for anything at Costco except for photos (back when they offered prints). I believe that the following line from the article says it best: “Vachris reassured that the changes would be evolutionary rather than revolutionary.” That doesn’t sound like a CEO launching tech for tech’s sake but seizing an ignored opportunity without disrespecting Costco’s core strengths.
Costco is playing a bit of catch-up game here but better late than never. Stubborn store-centricity won’t keep Costco competitive as rivals fortify their convenience arsenals and attack profitable solutions and services. Millerchip’s experience from tech-forward Kroger should help light a fire for Costco’s future.
Costco can and should add technological and digital tweaks. But they must watch each move closely to ensure it doesn’t mess with their magical warehouse club formula, in the customer experience value of exploring, finding deals and discovering products.
They will want to consider the implementation strategy for digital platforms and the impact of who gets rewarded, by determining what offers make sense for online shoppers vs the many who made the trek to the store. The in-store customers are the ones who fill large carts and take part in the much larger journey. They’ll want to move carefully and not mess with the goose laying golden eggs.
CEO changes are strategic opportunities for boards of public companies to effect change. In the case of Costco, selecting a long-term executive suggests no significant future changes to the core business. Rather, the new leadership is about identifying and expanding new opportunities that build on the core, not replace or cannibalize it.
In Costco’s world, technology must bring tangible value to customers while helping to expand sales comps and protect margins. Strategy under Ron Vachris will be more evolutionary than bold and brash, more measured than swinging for the fences. Mr. Vachris has a successful model in play; he just has to squeeze more out of it. Digital opportunities and e-commerce nicely fit such a strategy.
The biggest challenge with Costco’s dive into advanced technologies is the inconsistent assortments similar to what has held back off-price in this same arena. However, Costco has the financial stability and resources to take a more technological approach to the business model. It is what the consumers expect; if they fail to do this, they will fall behind. Costo defined operational efficiency and continues to be the stalwart in this factor, looking through a unified commerce lens will make the company a stronger market player (although already #3 in the U.S. market). Building a bridge to the geographic gaps throughout the U.S. by offering delivery would make a tremendous impact on customer accessibility and company performance
There is no need to try and leapfrog Sam’s, Bj”s and the super centers. However, there is a need, at a minimum, to come close on some of the foundational expectations. The existing model works, However, to avoid attrition, remember in the club world Membership Fees are almost the entire profit margin, there needs to be a plan to evolve with the consumer. There is no need to go head to head with an Amazon site. However, they need to maintain a technology foot print that keeps the customer experience comparable with expectations and the occasional Wow would be great.
As has been said by everyone, Costco seems to be avoiding the common trap of new CEOs…the need to remake an organization in their own image. Hard not to see a political example of that reality. Costco’s unrivaled success has been built on a few simple factors; among them the chickens, the hotdogs and so on. Like life – it’s all based on ‘to love and be loved’. Everything else is merely the cherry on top.
Tech is a tool. Too often, companies adopt tech for tech’s sake. It leads to a waste of money and resources and often ends up being trashed. Costco is a successful company and understands its own business model. Their adoption of tech will be on a need basis with understandable ROI.
They will use it to evolve their online business, as that is where the future is for all retailers. While Costco seems to move slowly, it also has a long horizon in looking at the future.
After reading the headline, I was immediately nervous. Until I read, “Vachris reassured that the changes would be evolutionary rather than revolutionary.” Evolutionary…perfect. Costco has what might be the clearest and most trusted brand promise in the business. VALUE, in one word. QUALITY, if you want to stretch to two words. And probably the most productive real estate in retail. So there is a lot that is not broken. Do they need to get up to speed in managing their technology relationship with their customers? Of course. But I vote for slowly and carefully.
Costco already derives the bulk of its profits from membership fees. So the extra costs that usually come from ecommerce businesses will be difficult to manage. Forget free delivery…store pick-up please. Processing returns? Gulp. There are ways to be more expansive in shopping and discovery tasks, but there’s no reason Costco needs to open the flood gates on a broad ecommerce initiative.
Sometimes a retailer needs revolutionary improvement, sometimes not. A bit of incremental evolution goes a long way. On a scale of 1 to 5, any given retailer doesn’t need to be a 5 in all areas – sometimes a 3 is good enough. As long as they maintain what they already do well, and focus on retaining loyal customers, some positive changes will be appreciated. Maybe a drive-thru line for hot dogs?!
Integrating advanced digital technologies at Costco can improve eCommerce capabilities and delivery options, however, the main challenge will be enhancing digital services without compromising on price and efficiency. Gary Millerchip’s experience from Kroger will help, but maintaining Costco’s simplicity and cost-efficiency while expanding its digital footprint will be tough. So, the opportunities include leveraging data analytics for personalizing the shopping experience to keep members satisfied and improving inventory management to maintain low prices.