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.