March 7, 2017

Unpacking Costco’s Q2 Earnings Miss

In the age of Amazon, Costco exists as something of a counter-oasis. The large warehouse stores filled with quirky big boxes of curated goods lure Americans from their homes to spend real money in physical locations. But the existential challenge Costco faces is not unlike one grappled with by the English monarchy, rightly fretting that one day people might wake up and decide not to honor it any longer. Similarly, Americans could roll out of bed and elect to abandon Costco by spending all their money online at Amazon, or driving somewhere else like Sam's Club or Target.

So the challenge for Costco is two-pronged. The first is to keep the in-store experience extremely interesting and fruitful – so people keep showing up. The second is to improve its e-commerce business on a parallel track just in case they do not.

The good news is that customers are happy with the prices at Costco. Amazon hasn't cornered the market on discounts.

Customer: Price Perception for Costco

The main red line across the chart above shows that Costco customer conversations around price perception are on the rise. The sentiment analysis on the bottom of the chart shows that people are applauding the prices much more than complaining about them. This is especially good news since Costco also announced that it’s raising the annual fee for “Goldstar” individual members from $55 to $60 while the dues for executive members will increase from $110 to $120.

SIGNUM for Retail’s data around Costco's website, however, tells a more concerning story for those at corporate headquarters in Issaquah, Washington.

Even discounting the big spike in customer conversations around the website experience during the 2016 holiday season, the line is generally trending upward. In other words, an increasing percentage of Costco customers are talking about the website experience. But a look at the sentiment of those conversations shows that feelings clearly skew negative. And if we look at the spike we see that during Christmas week – starting December 20th – it's clear that Costco customer's website experience is overwhelmingly negative, to the tune of 6x; that's the red shaded area on the chart.

Business: Website Experience for Costco

SIGNUM for Retail does provide some clear insights for Costco to bolster its e-commerce earnings. While the assumption has always been that Costco has done well with Red State America, it's extremely interesting to note its rate of growth within the different subsets of this large group. Note the growth 2 years over 2 years within several different Interest Groups that trend red, including 24% growth with Republicans themselves.

Interest Groups for Costco

Instead of subtly packaging itself as a friend to Republicans through its branding and products, Costco could instead optimize its marketing activation with specific campaigns targeted directly to, say, fans of law enforcement. Its marketing team could also launch an entirely separate campaign on Facebook to NASCAR fans – and then another for football fans, and so on. These sports tend to appeal to folks on the right side of the aisle according to interesting research in the National Journal, and make up some of the biggest growth sectors within Costco.

Through this sort of reverse engineering of its audience of customers, Costco can get the best ROI on its marketing spend by targeting the exact right people with the exact right message.

This last quarter showed difficulties ahead for Costco. Amazon is the online elephant in the room, while Sam's Club and Target are the noisy neighbors down the street. To succeed Costco must keep its stores enticing while dramatically improving its website experience. A great place to start on both fronts is to target subsets of the red state / blue state divide with marketing activation geared toward getting exactly the right folks into the store and onto the site.