What should warehouse clubs like Costco do to stay competitive as online shopping increases?

The retail landscape has changed significantly in recent years. Instead of browsing physical stores in person, many consumers are shopping online. New Concordia study published in the journal International Journal of Physical Distribution and Logistics Management considers how warehouse clubs like Costco are adapting their long-standing business model to stay afloat in the face of changing consumer behavior.

Traditionally, stores like Costco have focused on selling wholesale products and gas at discounted prices to customers in suburban locations. The idea was to justify membership fees and travel by encouraging large purchases. However, online shopping offers products at the same price with the added benefit of home delivery.

To understand what warehouse clubs need to do to attract consumers, the Concordia researcher and her co-authors analyzed data from 516 Costco locations across the U.S. from January 2019 to October 2020. They included customer foot traffic, local e-commerce activity and geographic information.

They also looked at two types of retail competitors. The first group included general merchandise retailers such as other warehouse clubs (Sam’s Club), supercenters (Walmart), department stores (Macy’s), and online retailers (Amazon) that sell a wide range of products. The second type included narrowly focused or specialty stores such as hardware stores (Home Depot), office supplies (Staples), electronics (Best Buy), and grocery stores (Kroger).

The findings highlight the importance of developing strategies that address both types of retail competitors.

Online shopping through large retailers like Amazon and Walmart poses the biggest foot traffic threat to Costco, according to researchers. In contrast, online shopping at specialty stores did not reduce foot traffic at Costo.

Density of options

One of the key conclusions from the study is the role of retail clusters in increasing customer traffic. Proximity to other general merchandise retailers can significantly increase customer visits to Costco.

On the other hand, the warehouse club’s distance from narrow-assortment retailers produces mixed results: While grocery stores may increase foot traffic at Costco, other specialty stores such as electronics stores do not have the same impact.

“Our observations highlight the importance of supermarkets and grocery stores as key control points in commercial areas,” says Xiaodan Pan, associate professor in the Department of Supply Chain and Business Technology Management at the John Molson School of Business. “They attract repeat customers and can drive traffic to other types of retailers, such as warehouse clubs.”

He notes that by shifting to a supercenter model, stores like Target and Walmart have successfully used grocery sales to drive foot traffic to their retail locations, even as online shopping increases.

Navigating the online-in-person divide

Researchers noted that despite Costco’s established presence, it has been slow to expand online sales. These sales now account for about seven percent of the company’s total revenue – far behind competitors like Walmart and Target.

Given their dependence on foot traffic to physical retail locations, Pan and her co-authors have some key suggestions for Costco and other warehouse clubs:

• Grow your customer base and increase membership value by expanding on-site services. This strategy improves the overall customer experience while fostering deeper engagement, promoting long-term customer loyalty and driving sustainable growth.
• Adapt to changing consumer behavior by introducing urban micro-format stores, similar to IKEA locations in city centers. These smaller, strategically placed stores can provide greater accessibility and convenience for urban consumers, especially those who do not own a vehicle.
• Connect urban locations with online services such as click and collect to attract urban customers, while enabling warehouse clubs to maintain a smaller physical footprint. Customers can shop online and pick up their orders in store, minimizing the need to make long trips while still enjoying member benefits.
• Add features like drive-thru lanes and curbside pickup to accommodate the fast-paced lifestyle of urban shoppers, increasing convenience and appeal.

“As the retail landscape evolves, the resilience of warehouse clubs will depend on their ability to adapt,” says Pan.

“By expanding service offerings, strategically locating stores in retail clusters, and integrating digital and physical shopping experiences, warehouse clubs can better navigate the changing environment and meet the needs of today’s consumers.”

Adapting to changing retail shopping patterns, especially the rise of online sales, can have a profound impact not only on retailers but on the communities they serve. Pan and her co-authors point to the economic impact of brick-and-mortar store failures around the world, such as massive job losses and reduced tax revenues, which in turn weighs on the local economy. In summary, understanding how retail clusters promote consumer purchases is essential to maintaining the vitality of shopping districts around the world.

The project was partially supported by Social Sciences and Humanities Research Council of Canada (SSHRC). The co-authors of the article are Guang Li, Martin Dresner and Benny Mantin.

Read the cited publication, “Investigating the impact of e-commerce activities on the spatial resilience of warehouse clubs: the role of retail agglomeration.”