Costco Gobbles Discretionary Market Share Thanks To Its Value Proposition

Last week, Costco Wholesale Corporation COST reported its fiscal third quarter earnings that surpassed estimates. Last Thursday, Costco management emphasized its membership pricing, digital sales growth, along with its recently expanded partnership with Uber Technologies Inc UBER.

Fiscal Third Quarter Highlights

For the quarter ended on May 12, Costco recorded revenue grew 9% YoY to $58.52 billion, earning $3.78 per share. Excluding gasoline and foreign exchange impact, comparable sales, rose 6.5%. E-commerce sales surged 20.7%powered by gold and silver bullion, gift cards and appliances. Membership fees brought about $1.23 billion to the revenue table, rising 7.6% YoY.

Lowering Prices Bodes Well For Costco

Like its peers, Target TGT, Walgreens Boots Alliance WBA and Walmart WMT Costco has lowered prices over the quarter to boost discretionary spending. Walgreens Boots Alliance even slashed its full-year earnings outlook in response to a challenging retail environment in the US. Target is also expecting another slow year after reporting its 2023 sales fell for the first time since 2016. Over the past few weeks, even the mighty e-commerce titan Amazon.com Inc AMZN joined Walmart and Target in slashing prices on thousands of household goods. Back in May, Target announced it is slashing prices on 5,000 items, after already lowering prices on 1,500 items in an effort to boost consumer spending. As the lower average cost per item is key to Costco’s value proposition when it comes to buying in bulk, lowering prices even further could further fuel sales and unsurprisingly, Costco plans to continue doing so. In their recent earnings report, both Target and Walmart noted a pullback in discretionary spending, while Costco's value and unique deals have given way to more discretionary spending and a larger market share.

Costco is waiting for the right time to raise membership prices.

Throughout most of its history, Costco has been raising its membership prices every five years on average, but it's now been nearly seven years since its last price hike and Costco is still keeping them steady. At the end of the third quarter, Costco had 74.5 million members, up from 73.4 million last quarter and 69.1 million from last year’s comparable quarter, reporting about a million more memberships than analysts had expected. Costco is not willing to risk these figures.

Costco is determined to catch up on the digital front.

Costco has been working for a while to catch up digitally after historically being slow to adapt to new trends, such as online shopping. With its latest quarter, its efforts have started to pay off with e-commerce sales growing 20.7%YoY. Along with Uber, Costco also has a yearslong partnership with Instacart CART. Through Instacart, Costco is offering same-day grocery delivery to customers. Uber also recently partnered with Instacart in an effort to take down DoorDash DASH and its higher-income suburban shoppers.

Previously, Uber Eats delivered Costco products in test markets across Texas, but the partnership recently expanded to 17 states in the U.S. as well as all of its Canadian locations. Uber and Costco aim to expand their alliance across the U.S. as well as other international markets where Costco is present. Being considered as the king of suburbia, Costco is the perfect ally to Uber on its quest to conquer the suburbs. Excluding food court items, Costco members and non-members will be able to purchase products, while members will enjoy 15% to 20% lower pricing. Costco members will also gain a 20% discount on an Uber One membership that includes free deliveries, discounts on certain purchases, as well as member pricing on rides.

Costo continues to expand its store footprint across the U.S. and the globe.

During the reported quarter, Costco opened a pair of new locations in the U.S. In the current, fourth quarter, it plans to open a total of 12, having already opened two since the reported third quarter ended, with nine new locations planned in the U.S. two in Japan and one in South Korea, which would imply 29 new locations during the fiscal year.

The warehouse retailer is doing business as usual, while it continues to grow across the U.S . and beyond, gobbling market share, with plenty of more room for growth ahead as Americans look for ways to save when buying home goods and discretionary items.

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