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Barbara Farfan

Costco Domestic Earnings Prove Good Retailing Beats a Bad Economy, But Old School Costco Is Threatened By a Mobile Based Competitor Courting Disloyal Customers (COST, WMT)

By September 15, 2013

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Costco (COST) continues to be one of those exemplary retail companies proving that a relevant retail offer combined with a compelling retail store experience is not at the mercy of fluctuations in the economy. The most impressive part of Costco's impressive sales report for August was the healthy portion of its monthly and quarterly sales increases that came from its U.S. based stores. Unlike many of the largest U.S. retail chains, Costco is not relying on international expansion to balance out domestic declines. Instead Costco is using good retailing to beat a bad economy.

It was twenty-six years ago today that James Sinegal and Jeffrey Brotman opened the first Costco warehouse store in Seattle Washington on September 15, 1987. Twnety-six years later, customers around the world are part of the Costco craze, and Costco's dominance in the retail warehouse niche is obvious. But just because Costco has a winning formula doesn't mean it's not facing serious threats from warehouse wannabe competitors.

A new mobile-based service has been launched recently which offers consumers the ability to make warehouse-style bulk purchases on their phone and have those big bulk boxes delivered to their doorstep. This service is particularly relevant in places like New York and Chicago where shoppers who don't own a car can't justify the expense to rent one just to save money at a warehouse store like Costco.

This new online warehouse upstart, Boxed.com, is making its positioning crystal clear to potential customers by referring to itself as "Costco in your pocket." Except for perishable foods and big screen TVs, the oversized merchandise offerings of Boxed are similar to or the same as the merchandise offerings at warehouse chains like Costco and Sam's.

The competitive difference that Boxed offers is home delivery (sometimes free), and free membership. In other words, there's no fee charged to download the app which immediately gives you access to the Boxed bulk-packaged merchandise sold at "wholesale" prices. That's a big "ouch" for Costco because those healthy quarterly returns it just reported included more than $500 million in membership fee revenue.

Costco justifies its membership fee with low prices and exclusive product offerings available only to Costco members. No matter what the benefits, though, some consumers are just fee-averse and won't pony up a membership fee on the general principle that they shouldn't be charged money for the privilege of spending money. As long as these same consumers are not also mobile checkout averse, they are the perfect target market for Boxed. That's not much of a threat to Costco, though, because they can't lose the membership-averse consumers that they never had.

Beyond product pricing, the biggest challenge that Boxed faces comes from Costco cool. Whether they're aware of it or not, there is a significant segment of consumers who derive a portion of their identity from where they shop and what they buy. Costco is cool right now, and therefore the people who shop there are part of the "in" consuming crowd. The average American likes the feeling of belonging to something that is viewed favorably by the rest of the world.

For the Costco crazy who love the Costco exclusive and limited-time rotating merchandise offerings, Boxed isn't even an option - unless the weather is bad, the car's in the shop, or the weekend is busy. Actually, there's a whole lot of unlesses which could easily motivate a membership-free Boxed purchase, and one less trip to Costco.

The real threat to Costco, though, lies with the hard-core value shoppers. These are the Costco members who just want bulk prices, and don't care much for food sample stations, product exclusivity, rotating seasonal limited-time offerings, $1.50 snack bar lunches or crowds. Bargain motivated shoppers go wherever the best deal is, and if Boxed can offer similar prices with no membership fees and free delivery, then their defection from Costco will be nothing more than a math equation.

Price-sensitive customers are fickle, transitory, and predictably disloyal. There's no emotional attachment for them when there's a better deal to be found. Undoubtedly Costco is going to find out how much of its customer base falls into the better-bargain-buy-bye category when Boxed rolls into town.

Apparently there is a healthy number of unattached bulk-buying consumers up for grabs because Boxed is already operating in 13 states. Reportedly Boxed just raised $1.1 million in funding, which seems like a tiny pile of really small pebbles to be shooting at its goliath competitors. More than $25 billion changes hands in the club-shopping segment of U.S. retailing each year and it's going to take more than $1.1 million for Boxed to gain a credible foothold there.

The $1.1 million is more of a fiscal vote of confidence than a financial foundation for the four Boxed co-founders, who are all former executives at gaming company Zynga. One of the co-founders, Chieh Huang, was the CEO of Astro Ape when it was acquired by Zynga, reportedly for "tens of millions of dollars," according to the New York Daily News.

This means that Huang probably has some spare pocket change to invest into his new company himself. But more importantly, it means that Huang has experience with building a solidly valuable company with a small budget, and then selling it off to a competitor which has the marketing budget to make it really big. Time will tell if that's part of the business plan at Boxed.

Even though founder James Sinegal and current CEO Craig Jelinek have a reputation for being old-school retailers, you have to believe that Costco execs have at least talked about mobile app, home delivery, and membership-free possibilities for Costco. Costco enthusiasts can only hope that there's no old school too-big-to-fail arrogance going on in the Costco boardroom during those future trend discussions, and that Costco's leadership team is smart enough not to dismiss Boxed as a credible competitor. We all know how well that kind of thinking worked out for Blockbuster when Netflix rolled into cyber retail town. I doubt if even the most hardcore of the bargain basement fanatics would be happy to see Costco follow Blockbuster into oblivion.

On the 30th anniversary of its birth, Costco fans are making wishes that Costco's leaders will do whatever it takes to stay retail relevant and fiscally fit for many more shopping decades to come.

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