On June 16th, AMZN announced their purchase of WFM for $14BN and COST stock fell immediately. It went from~$180 to a low of ~$150 a month later. Analysts are claiming this is the beginning of the end for COST and that AMZN is going to eat their lunch.
What analysts (and tech people) fail to understand is how different the two companies are. I love shopping at Costco, and I love ordering things with Amazon Prime. The two serve very different purposes for me.
Products on AMZN are generally expensive, but I’m sometimes willing to pay this premium to save time. I also like how good AMZN’s product discovery is across an incredibly long tail of products. If a product has 1,000 verified five-star reviews, I know it’s good. For example, last month I bought a $15 ethernet switch on AMZN with 1,600+ reviews (4.7 of 5 stars). Without knowing the product well, I’m confident it’s high quality and will serve me well for years to come. The customer experience here at AMZN was perfect.
Products at COST are an incredible value, and I’m willing to go to the store and physically load them into my cart for the enormous savings. I like to buy bulk items that have a long shelf life. Their deals on food and alcohol are fantastic. COST is also great for one-off purchases like a kitchen knife set, home safe, or bed. Their intentionally limited selection to only the best quality products at low prices makes for a fun customer experience with great product discovery for most products (they don’t have 300 MM SKUs like AMZN does). I prefer to buy my more expensive purchases here.
I place roughly one order per week on AMZN and my median order size is ~$22 (it’s nice being able to access years of order history). I go to COST much less frequently, and my median order size is ~$300.
But are the savings that good? To answer that question, I took note of some of the prices I found at a Costco in Lawrence Township (New Jersey) last weekend and compared them to those same products at AMZN. The result was that median savings on products at COST was 26% vs AMZN! In an era of razor thin margins in retail, 26% is huge savings!
Here is my spreadsheet so you can see how I calculated these numbers yourself. This sample is far from statistically accurate, but it matches closely with my experience shopping at COST and comparing their prices to what I find at other stores. You can argue endlessly about a biased product sample (these were just items I snapped pictures of their prices on as I walked through the store), mismatch between products numbers (sometimes COST and AMZN have different product numbers for the same things), or even shipping calculation (would you choose the AMZN prime option if it’s 2% more expensive?), so you’ll have to trust that my math is fair. I didn’t include any food or alcohol on here, which is where COST really outperforms. If you don’t like my numbers, go to your local COST, gather some prices and publish them. I’m confident they’ll tell the same story.
As a software engineer, I love technology. That said, I believe that even in the digital age, the majority of purchases (by dollars spent) will be at stores that deliver the best products for the lowest price. This is what COST does better than anyone on the planet.
My biggest concern is that COST’s US market penetration is so high that there isn’t a ton of room to grow domestically. It also trades at a high multiple for a brick and mortar store. Berkshire Hathaway owns ~1% of COST and Charlie Munger is on the board. I admire how frugal Charlie Munger is, I don’t think he’d be holding COST if he thought it were overvalued.
I’ve been shopping at Costco since I was a child, and I’m embarrassed I only recently became a shareholder. What I love about the company is that they have tremendous economies of scale, they do an excellent job in selecting (few) excellent products to carry, and their business model is dead simple. I also like that they’ve historically done well in recessions.
I’m not worried about competition from AMZN, so last week I went long on COST. Any company that sustainably creates tons of value for their customers will continue to make money for a long time. This is the first individual (non-ETF) stock I’ve purchased outside of my retirement account, and that’s because I intend to hold it for a very long time.