Online Growth Impresses
Costco generated a total of $3 billion in e-commerce revenues in fiscal 2014, which represents less than 3% of the company’s net sales. While the segment isn’t strong enough to have a material impact on Costco’s results, its strong and steady growth should not be ignored. Although the channel itself may not turn into a significant value contributor in the future, it will lay a strong foundation for Costco’s omni-channel platform.
Comparable sales for the retailer’s fourth quarter e-commerce sales increased 19%, driven by key factors including: 1) an industry-wide customer shift towards online shopping; 2) Costco’s website re-platforming; 3) the introduction of new apps; 4) the addition of new categories such as apparel, health, beauty sundries, etc.; and, finally, 5) an improvement in delivery times. Over the past year, the retailer has been testing Google Shopping Express, a Google initiative that provides consumers a platform to shop online from local retailers and get products delivered on the same day. Through this, Costco is mainly looking to expand its e-commerce reach, but it is still in test phase in three markets – the San Francisco Bay Area, Los Angeles and New York. In the years to come, the warehouse giant might look to roll this out on a larger scale, one that can have a noticeable impact on its e-commerce revenues.
Apart from contributing marginally to sales growth, Costco’s e-commerce business also helped its gross margins. The company’s chief financial officer, Richard Galanti, said during the earnings call that gross profit margins in e-commerce business are better than they are in the store business. Hence, online segment’s share in Costco’s overall profits is higher that its share in overall revenues (~3%). During the quarter, the retailer’s gross margins ticked up 15 basis points year over year to 10.7%, driven by higher margins in food and sundries, as well as rise in e-commerce profits. This looks quite promising considering that margins have declined steadily for most retailers in the U.S. over the last couple of years.