Can Costco Continue to Dominate the Retail Industry?

costco

2019 has been a breakout year for the retail giant.

Shares of Costco are on fire this year. The stock is up 43% year to date thanks to its strong membership loyalty and rock-bottom prices. The company has outperformed both analyst expectations and the S&P 500 this year. 

In fact, one analyst thinks the stock may be performing a bit too well. Oppenheimer analyst Rupesh Parikh downgraded Costco from outperform to perform, citing the company’s high valuation as the reason…

Parikh said that the stock has likely reached its peak and that he sees “less upside” going forward. This caused Costco shares to fall roughly 1.5% on Wednesday.

3 Reasons Costco Will Continue to Dominate in Retail

Some people speculate that the brick-and-mortar retail industry is dying. That’s due to a big shift to e-commerce. But the reality may be a bit different … It seems a handful of specific retailers are capturing the majority of the market share. Meanwhile, the rest are left behind. 

Here are three reasons why Costco is one of these reigning retailers. 

Strong Customer Loyalty

Costco recently made headlines when it opened a new store in China. The store even had to close early because of the massive customer turnout. Traffic jams, overcrowding, and safety were cited as big concerns for the epic store debut. This underscores one of the biggest things working in Costco’s favor — the retail giant has an incredibly loyal base of customers.  

Part of Costco’s revenue comes from its yearly membership renewals. So this is a key factor that investors look for during earnings reports. Fortunately for Costco, customer loyalty is high. Nearly every Costco member renews their yearly membership. The company’s membership renewal rate is 90% in the U.S. and Canada. Globally, that rate is 87%. 

Costco Is Less Dependent on E-commerce

Retailers like Walmart and Target are working hard to expand their online presence. They’re scrambling to match Amazon’s one-day shipping guarantee. Costco is also working to improve its e-commerce presence, but it’s still much more limited than the other two stores.

But Costco doesn’t necessarily need to go to the same lengths as Target and Walmart. 

Why? Because for a lot of consumers, half the fun of shopping at Costco is wandering up and down the aisles. It’s about the experience of seeing what kind of deals you can find in the store. Online ordering or easy in-store pickup isn’t necessarily what Costco members want. Members go there because they want the in-store experience.

There’s Still Room to Grow

On a final note, not everyone is easily buying into the idea that Costco has hit its ceiling in terms of growth. The company still has a lot more room to grow both in the U.S. and around the globe. 

Costco memberships continue to steadily grow quarter after quarter. And the company’s fundamentals are solid. If these trends continue, the company could be well-positioned to compete with larger retailers like Amazon and Walmart in the coming years.

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