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Is Costco's Business Model Outdated?

Costco Wholesale Corporation (NASDAQ:COST) released disappointing Q2 2017 results last week, missing on both revenues and EPS. As part of the release, Costco announced that membership prices would increase from $55 to $60 for a primary membership and from $110 to $120 for its executive memberships in the U.S. and Canada. 75% of Costco's operating income comes from membership fees so this move is expected to boost the bottom line over a 23-month period without unduly impacting the number of shoppers.

After reviewing the earnings conference call transcript, I realized how Costco's business model, as successful as it has been, is limiting the company's growth and future potential. The model is based on getting customers into the warehouse, then selling them items that they weren't originally intending to buy. For this reason, the management has been dragging their feet with online retail as it runs counter to their business model. The point was made during the earnings conference, that Costco is only interested in picking the lowest-hanging fruit from the tree (in reference to their online efforts). They have hired one Big Data analyst, which provides a good indication that they are not serious about competing with Amazon, Walmart, and smaller online retail companies.

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by Steve Auger