My 2¢ About Costco’s Recent Earnings and a Possible Problem with Millennials

March 20th, 2014 · 3 Comments

On Tuesday, I published a guest post in response to an article on Time about how “Costco Is Facing a Looming, Bulk-Sized Problem“.  I really agree with Mike’s (the guest poster) take on the situation, as well as that of most all of the commenters, that Costco doesn’t really have a problem with this young generation of shoppers.  So, today I thought I would give my thoughts on this alleged problem with the Millennial generation and Costco’s latest dip in earnings.

I know that this whole story of the dangers of not courting the Millennials came about because of Costco’s most recent quarterly results announcement.  They weren’t as spectacular as analysts were expecting, though they did still exhibit growth which seems to get lost in all of the dour media reports.  So, first off, is it really as bad as all that?  Here are the facts from the earnings announcement:

  • Net sales for the quarter increased six percent, to $25.76 billion, from $24.34 billion last year.
  • Net sales for the first half increased six percent, to $50.22 billion, from $47.55 billion last year.
  • Net income for the quarter was $463 million, or $1.05 per diluted share, compared to $547 million, or $1.24 per diluted share, last year.
  • Net income for the first half was $888 million, or $2.01 per diluted share, compared to $963 million, or $2.19 per diluted share, last year.
  • Last year’s net income was positively impacted by a $62 million ($0.14 per diluted share) tax benefit in connection with the portion of the special cash dividend paid by the Company in December 2012 to the Company 401(k) plan participants.

Here’s a bit of explanation and clarification from Richard Galanti, Costco Chief Financial Officer:

Despite satisfactory sales results during the second fiscal quarter, several other factors led to lower earnings. These factors included: weaker sales and gross margin results in certain non-foods merchandise categories, particularly during the four-week holiday selling season; weaker gross margins in our fresh foods business; and lower reported international profits, resulting from the significant weakening of foreign exchange rates. The first four-week period of the quarter represented the majority of earnings underperformance in the quarter.

My take is that there were several factors working against Costco in this latest quarter that have led to a less than stellar earnings report.  Currency fluctuations that were mostly not in favour of the dollar, didn’t do them any favours.  I would love to know how they hedge against these fluctuations since a good portion of their growth in sales comes from their international locations.  Maybe they need to think about tweaking that process in the future, especially as their presence abroad increases.  I also imagine that the CRAZY weather in the US this winter was tough on all retailers.  It’s hard to get shoppers to spend more money at your store if they can’t even get there because they are snowed in at home.  Overall, Costco’s growth, while not spectacular, hardly means that the end is nigh.  One bad quarter does not make for a trend or even indicate that Costco has reached the end of their growth.  I mean, they are, in fact, still showing growth.

I have a feeling that there are probably more than a few Wall Street analysts that have been eagerly waiting for even a tiny chink in the Costco armour so that they could point out how they should increase their profit margins and the cost of memberships and start selling different things, etc.  They just want to be able to say “see I told you that this crazy low profit margin thing would never work” and now looks like the perfect time to do it and point out all the ways that they are dooming themselves with their crazy business model of customer service and low profit margins.  But that’s because they are all about the return for share holders, and not necessarily what is in the best interest of the company for longevity, and certainly not what is best for the consumer or member (in the case of Costco).  And hey, it doesn’t hurt that Craig Jelinek, the CEO, is fairly new and maybe not as inured to the pressures of Wall Street as Jim Sinegal was after his years and years as CEO.  And I will point out that Costco is still far outpacing its competition and has been good for investors too with dividends that have risen 12.7% per year since 2004.

But enough about that, what about this ominous, lurking Millennial problem?  Well, I don’t really give that much credence.  For those of you that are unaware, Millennials are the generation of consumers that were born between 1980 and 2000; making them between 34 and 14.   When I first read this article I thought, about this and about the shopping habits of friends and family that I know in that age range, as well as people that send me emails asking for information or with questions about Costco.  I came to the conclusion that the author of that article might be a little clueless as to how people in that generation actually shop and interact with retailers.   I especially got a laugh out of his saying that urban dwellers and people without cars would never shop at Costco.  First, Costco does a cracking business in some of the most congested metropolitan areas in the world in Japan and South Korea.  Clearly, not all of those shoppers have cars (that they own) and huge homes.  In Osaka, Tokyo, and Seoul the locations I visited were shockingly busy and I’m pretty sure that the majority of those shoppers came from the surrounding urban areas.

Here’s another reason I think this whole urban living thing is hilarious: I live in London and don’t have a car but I still shop at Costco and so do a lot of other people in the city.  My flat is tiny, like it could fit in a quarter of my house in Austin (actually less but I don’t want to sound too pity party).  And my kitchen is quite small with a fridge that is similar in size to that found in several dorm rooms in the US, not to mention my freezer only has three small drawers.  But I still stock up at Costco on food and non-food staples and have no trouble storing bulk purchases like toilet paper even.  Plus, I don’t have a car.  I do what a lot of Millennials do, I am in a car sharing club, Zipcar.  I Zip to Costco and find it just as convenient as if I had my own car.  Well, probably more so actually because it has a dedicated parking space so I don’t have to worry about that hassle after my shopping trip.  Have I curtailed what I buy at Costco as a result of space restrictions?  Maybe a teeny tiny bit, but I think from my blog you can tell that I buy plenty of stuff there because it represents such a good value.  Costco is still my main shopping outlet.  We still go to Costco far more frequently than we go to regular supermarkets or order from Ocado.  While we may buy less food items at Costco now, we more than make up for it by purchasing other non-food items, like clothes, electronics, housewares, and things like that.  So, this whole line of thinking about urban, car-free living and Costco not working together seems to be decidedly untrue and just a theory that this author is trying to put forward without any proof.

I think there are plenty of Millennials shopping at Costco, I see them pretty much every time I am in any Costco location around the world.  Are they the super young end of that generation? Of course not.  How many high school kids need paper towels and pork chops anyway?  The shoppers that I see are in their late 20s or early 30s and have started to settle down and are no longer considering themselves “young adults” with that type of lifestyle.  And that’s okay, because young and single, was never the Costco sweet spot anyway.  People like that are not the Costco target demographic and probably never will be either.  However, I do know that I have a lot of people write me that are in college or graduate school and shop at Costco and love it.  Some of them are still on their parents’ membership and some of them have purchased their own membership.  But not surprisingly, they seem to love it for the same reasons everyone else does: you can get excellent value for your shopping budget, have great customer service, and make use of the solid Costco return policy if a purchase isn’t up to snuff.  When it comes down to it most shoppers aren’t that different, no matter their age, it seems.

And it isn’t just me postulating that Millennials don’t really shop all that differently from Baby Boomers or Generation Xers, there’s research to back me up.  While doing a little research to write this blog post, I ran across an excellent piece of research from Accenture, “Who are the Millennial Shoppers? And what do they really want?“.  So, from the research, it turns out that Millennials aren’t the shoppers that we all might have thought they were and the myths that they are only focused on online shopping and social media are not at all accurate.  The research article is quite good, and worth a read if this is a topic that at all interests you (it isn’t at all long, drawn out and boring and should only take about 10 minutes or so to read through).  Here are some of the things that they point out:

Although Millennials have earned a reputation for viewing the world through a uniquely digital lens, our results found some remarkable similarities between them and their predecessors: the Baby Boomers (born from 1946 to 1964) and Generation X (1965 to 1979).

  • More than half (55 percent) of the survey respondents, in all three demographics, said that they seek out “the cheapest return option.”
  • Forty-one percent of all three groups said they practice “showrooming”—examining merchandise at a nearby retail store and then shopping for it online to find the lowest price—more often than they did a year ago. This shift is due, in part, to the current high penetration levels of smartphones, which can enable customers to search for an item easily, even while in a store.
  • Thirty-six percent of those surveyed from all three generations said they will go online to buy from a retailer’s website if they want a product when the company’s stores are closed.
  • On average, 89 percent said having access to real-time product availability information would influence their shopping choices in terms of which stores they would frequent.

Since the research doesn’t really fall into the thinking about how Millennials shop, Accenture took a deeper look at three big myths about this generation to see how true they actually are.  The first myth is that it is all about online shopping with Millennials.  It turns out that this is not at all the case, they use online resources to find out about products or brands but many still prefer to shop in actual stores to actually see the merchandise.  One thing they did point out is that coupons that you have to print or physically have is not of interest to this generation.  They want something on their smartphone that they can use just like a “real” coupon.  Personally, I couldn’t agree more with this sentiment.  I think physical coupons are pointless and if you are going to have a discount or a sale, have it for everyone and end the need to mess around with coupons completely.

The second myth dispelled by this research is that Millennials aren’t loyal.  I think I remember hearing this same type of thing about Generation X (my generation) too.  Now, as then, it isn’t really the case.  Turns out people, of all ages, will be incredibly loyal to a brand or company if they feel like there is a mutual respect and appreciation.  But it has to go both ways.  A good customer service interaction can turn around even the most dire shopping experience.  And of course, we all know that Costco has always put a very heavy emphasis on the importance of customer service.  They know that is the key to making loyal customers.  It is true for Baby Boomers and it is still true for Millennials.  Everyone wants to feel like a valued customer, it is important psychologically and it is what keeps shoppers returning or renewing their membership.  I think the 90% membership renewal rate speaks volumes about Costco’s ability to maintain that positive customer relationship and is also a good indication that their future is secure with a generation that respects that relationship as well.

The third myth that Millennials treat retailers and brands the same as people on social networks, also turns out to not really be as true as marketers and Time authors might have thought.  While no one will deny that the Millennial generation is totally digitally savvy, that does not mean that all interaction types are the same.  They don’t follow a company on Twitter or Facebook because they can’t wait to see what they’re up to, they view it as an extension of the transactional nature of the retailer-consumer relationship.  They want more deals, offers, or shopping incentives, not to know what the store did last night or had for breakfast.  Accenture points out that the value for retailers in social media is to become part of the conversations that are happening elsewhere in the social network.  But of course, you want the buzz to be positive, about how great the company is or what a great deal you got at such and such a store.  It’s what used to be called word of mouth, in the olden days. LOL  A recommendation from a friend or a mention by someone in your social network, is much more valuable than any kind of marketing a company can do on their own.

Costco is clearly moving in the right direction for the future of shopping.  Over the last few years, Costco has really improved their online shopping experience, not only in the US and Canada, but they have started to roll out online shopping in other locations such as the UK and Mexico.  I think by expanding and improving their online offerings they will continue to see very strong growth in that portion of their business, which has grown at more than 20% per quarter for fiscal year 2014.  I also think they could make some improvements on the seamlessness of online and in-store transactions by allowing you to pick up your order at a local store in an expedited timeframe (as in quicker than the amount of time it would take them to ship to your house).  The ultimate improvement here would be if they would allow you to see local stock online and order something for pickup at your local Costco in just a few hours.  This melding between online and bricks and mortar shopping would be a huge improvement and push Costco to the forefront of retailers embracing changing shopping habits.  And in the UK, they could at least start by coming into line with every other retailer by allowing you to return online purchases at a brick and mortar location.

As far as social media goes, this isn’t really the Costco way, but I do know that they have people working on their social media efforts and I am sure that they will be able to continue to take advantage of those marketing avenues.  However, from the research you can see that this isn’t as important to shoppers and Millennials as it might seem from a cursory look at online interactions.  A store isn’t your friend, so how “social” do you want to be with them?  Not very, it turns out.  However, providing news and additional information about your business via social media is a great way to reach out to customers, especially if you are like Costco and aren’t running commercials or ads all the time to draw in new customers.

So, all in all, I think Costco is doing pretty well in preparing for the changes that are coming in how we all shop and interact with stores.  I think they are continuing to grow their customer base by opening new locations, which is a key part of their business strategy at this point.  However, they are also making progress on opening other shopping avenues through their online sites.  Of course, there are going to be other ways that they can grow and change their business in the future, it would be unlikely that they would be able to keep growing and maintaing a competitive edge if they just stood still.   Sure, they might not change over night but that’s probably better for the business as a whole because it means that they won’t be making snap judgements and decisions that aren’t right for their members.  I don’t see Costco becoming less relevant to future shoppers or Millennials, at least not while they still need toilet paper, diapers, steaks, and new electronics gadgets.

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3 Responses so far ↓

  1. 1 Leah // 2014.03.31 at 6:54 pm

    I’m a millenial, and I love Costco. All of my friends with young families shop there, too. I’ve even convinced some single friends to get memberships, because the deals are definitely worth it, and not everything is a huge quantity (even if it is, you can just buy a few items, make a large batch of a meal, and eat it all week…cheap & easy).
    I totally agree that those three myths are untrue. Personally, technology tends to make me more inclined to buy at Costco, because I can easily price compare, and Costco generally comes up cheapest. I am very loyal to Costco because they listen to consumers, and are always getting in new, requested products. I LOVE finding treasures like Coconut oil, coconut flour, etc. that pop up on the shelves, and always at so much better a price than the local health food store. I feel like a walking advertisement, because they offer such great prices, the service is always great, and I know they treat their employees well, which is important to me. As far as coupons, I don’t really care either way. I will use paper, but I’m more inclined to use electronic. Services like Ibotta offer cash back for Costco (you can download an app), and I love Costco’s instant coupons.

  2. 2 Kim // 2014.03.27 at 3:17 pm

    Costco could fix the millennial problem and increase their earning right away with this simple fix. Our oldest daughter, a young working adult, was raised in a Costco household. She can’t stomach the expense of her own Costco card, but would readily shop there if she could have a card on our membership. We sometimes buy a Costco cash card for her, but often times it runs out and she forgets to tell us that she needs a re-up. She foregoes purchasing items at Costco and instead purchases them elsewhere.

    Also, while she was in high school and I was working full time with a baby in diapers,I really could have used her assistance at times to do some grocery shopping for me. Costco wouldn’t allow her to use my card at the register. How many 16 year olds are buying a two pack of milk, 4 lbs of butter, 18 eggs, two quarts of half and half, coffee, 4-5 boxes of cereal, meat, tons of fruits and veggies, diapers, baby wipes, cleaning and laundry items, light bulbs, etc? Considering that our family’s weekly expenditure for a Costco trip usually fell into the $200-$250 range, the times that I had to hand her my debit card and send her with a list to another market were a loss for us and for Costco. Driving age children and young adults should be included in a family’s membership. They’re not purchasing their own apparently, but they would be in there contributing to Costco’s bottom line if they had access. Even if Costco imposed an age cut-off of 26 (like insurance) or a little later (when they start having babies of their own and need diapers and formula), Costco’s overall earnings would increase.

  3. 3 Mike // 2014.03.20 at 2:21 pm

    Stupid Wall Street. $463 Million in profit, and they whine.

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