In a world where price has become an increasingly important factor for consumers, big-box retailers remain challenged to compete against that retailer in the sky named Amazon.com, Inc. (NASDAQ:AMZN). Amazon.com, Inc. (NASDAQ:AMZN) lacks fancy retail locations and all the other added costs with running a retail store, which has largely contributed to success of its business model over the traditional retail model.
Breaking down the numbers
Last quarter, Costco Wholesale Corporation (NASDAQ:COST)’s net revenues increased 8% year over year to $24.3 billion, which brought home $547 million in net income, a 39% increase from the previous year. During the period, same-store sales increased by 5% year over year, and membership fees accounted for more than 71% of Costco’s $738 million operating income. Membership revenues remain critical to Costco’s overall profitability, because without them, Costco’s business would operate with about a 10% gross profit margin, which doesn’t leave much room for margin of error.
Like Costco Wholesale Corporation (NASDAQ:COST), Amazon also operates with a similar gross profit margin, which could be a motivating force behind increasing its Amazon Prime membership base. Although Amazon.com, Inc. (NASDAQ:AMZN) itself doesn’t release exact numbers as to how many Prime members exist, Morningstar (NASDAQ:MORN) analyst R.J. Hottovy believes Amazon has lured in more than 10 million Prime members, which currently contributes to about one-third of Amazon’s operating income. Although this number is dwarfed by the 37 million households that have a Costco membership, Prime members are estimated to outspend non-Prime members by a factor of 2. In other words, when a consumer pays for a membership, it compels that person to use it more, and that’s a very powerful preposition for Amazon.
Price wars
In an all-out price war between Costco and Amazon.com, Inc. (NASDAQ:AMZN), Costco comes out on top because the wholesaler leverages its economy of scale more effectively by selling fewer products. You aren’t going to find countless brands for sale at a Costco, but the ones you do will probably be offered for a better price than anywhere else.
In exchange for an added discount, Amazon offers “Subscribe & Save” to anyone who’s willing to receive automatic scheduled deliveries of consumer-staple products. To top it off, Subscribe & Save now offers an additional 15% off your total order when five or more Subscribe & Save items are delivered within the same month. Clearly, Amazon.com, Inc. (NASDAQ:AMZN) is appealing to consumers who value convenience more than getting the absolute best price. Since there are only 448 Costcos located in 42 states and Puerto Rico, chances are you’ll have to take an outing to receive the absolute best price, or you may simply live too far away from a Costco Wholesale Corporation (NASDAQ:COST) to partake. Amazon’s success against Costco largely boils down to whether a consumer values his or her time more than getting the absolute best deal.
