US Insights

Costco rides out the Coronavirus wave

Tim Campbell

Senior Analyst

Retail 03.11.2020 / 09:00

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COVID-19 and its effects on retail dominate discussion of Costco’s future.

Aside from the impact of COVID-19, Costco had a fairly standard quarter. Comps excluding gas and FX rose 7.9%. Sales rose 10.5%. The retailer continues to invest in lower margins and lower prices, especially in fresh; and its Ecommerce and fuel growth are still outpacing the rest of its business. Its state-of-the-art poultry processing plant in Nebraska is ramping up on schedule after opening last September. As planned, Costco has rolled out Ecommerce sites in Japan and Australia while being content with the fast growth of both its same day and two day delivery platforms. With Thanksgiving occurring a week later year over year, Costco saw a particularly robust holiday season. Yet COVID-19 and its effects on retail tend to dominate the discussion of Costco’s near term future. The virus affected Costco’s Q2 and will affect its prospects in Q3 in a few distinct ways.

Boosting demand

Even before the panic buying set in during the last week of Q2, Costco had already been having a good quarter with growth in the high single digits. Yet Costco estimates that shoppers’ reactions to news over the spread of the virus further boosted February comps by 3 percentage points. According to Costco, worried shoppers are stocking up on shelf-stable dry grocery items, cleaning supplies, Clorox and bleach, water, paper goods, hand sanitizers, sanitizing wipes, disinfectants, health and beauty aids, water filtration, and food storage items. In addition, some of these shoppers are also purchasing big ticket items during these trips like patio furniture. This boost from COVID-19 is ongoing and will lift Q3 results as well. Eventually shoppers are expected to return to their baseline level of shopping, but much of that depends on the still uncertain trajectory of the virus. Along with the boost in sales, some expenses like labor and air freight for rapid resupplying operations have risen, yet that does little to offset the increase in revenue Costco is experiencing.

Disrupting the supply chain

Costco has seen some disruption from its operations abroad. Factories in China that produce goods destined for Costco’s global operations were completely shut down for a total of two to three weeks due initially to the Lunar New Year holiday and then the virus. Even after production restarted, many factories took at least three weeks to gradually ramp up to 80% production levels. There’s a backlog of processes to get items on trucks and out of ports as well, though Costco is now seeing some of these supply lines at last return to normal. Electronics like laptops and phones were particularly hard hit. For the US supply chain, Costco is able to handle much of the increased demand with daily deliveries though initially the retailer was caught off guard. Some items like bottled water, sanitizing items, and others are still not yet fully in stock. Throughout this process, Costco’s buyers have worked long hours with existing and even some new suppliers to fulfil demand.

Affecting the club buildings

Costco is also taking efforts to prevent the spread of disease in its clubs. The club has temporarily discontinued its free sample program while also regularly sanitizing heavily touched surfaces such as cart handles, food court tables, and counters. Costco now offers sanitizing wipes at its entrances. Limits have been placed on most affected items though there is some regional discretion as to how this is applied. As for Costco’s single club in China, it continues to outperform even as the local government-imposed limits on how many people can be in the club at one time.

Costco is positioned better than most to adjust to supply chain disruptions. Costco’s small 3,700 SKU assortment can more easily pivot to altogether new items and brands when supply chains fail for some items. The retailer’s scale and volume per SKU is also likely to give it priority as manufacturers deal with increased demand at other retailers like Walmart and Target. Moving into Q3, Costco’s struggle could be in ensuring that any ongoing or new supply chain disruptions don’t outweigh increased demand.

Source: Kantar

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