Can Costco Avoid Cloud Cover?

I’ve always been one of Costco’s biggest fans. It’s my favorite store. I love their low prices, their no-questions-asked return policy, and the high quality of their merchandise. I sometimes drop into Costco with nothing in mind. It’s a great store for treasure hunting, and Costco consistently surprises me by featuring new and interesting merchandise that I want—and buy.

As it happens, I’m also a big fan of Amazon—for many of the same reasons I like Costco. The discounts are great, returns are gladly accepted, and the quality is high. And, as with Costco, I love browsing at Amazon with nothing in mind, looking for surprises. In addition, Amazon has a good track record, with me, of personalized customer recommendations; they know what I want—sometimes before I do.

I’m quite loyal to both businesses, and in my mind they’ve always been very different entities—separated by a forklift. True, there’s some product overlap in areas such as books and DVDs. But like most people, I’ve never calculated—or wanted to know—what the Amazon shipping charges would be for a giant pack of toilet paper and several large bottles of laundry detergent. That’s a Costco buy, right? And if I want, say, fresh produce? No, I don’t think of Amazon.

But Amazon wants us to.

Since 2007, the company has been testing, initially by invitation only, a local delivery service in the Seattle area called AmazonFresh. Now the service is open to the general public in Seattle and a few suburbs. AmazonFresh offers same-day or next-day home delivery of a vast assortment of goods—ranging from fresh fish from Seattle’s famous Pike Place Market, to fine wines, to ordinary kitchen and household supplies, to electronics, and even to home improvement and garden products. The delivery costs are reasonable, and AmazonFresh offers many specials with free delivery. It also has a frequent-buyer program. If you purchase enough from AmazonFresh, you can earn the title of “Big Radish.” For Big Radishes, delivery is free.

It’s an ambitious experiment. Large-scale local delivery is a tricky business, and many prominent and well-funded ventures into “online groceries” have failed. But the entire history of Amazon has been one of ambitious experiments. Those experiments are usually successful.

The Amazon formula has always been to establish online outlets that look and perform like conventional stores—e.g. bookstores—only with better prices and ease of service. Once Amazon gets a foothold in a market, the roles reverse; the conventional store ends up frantically trying to look like Amazon, and fails. Borders Books was a recent casualty. Amazon was able, from the cloud, to look like Borders—only better. And it began to build a loyal fan base. By the time Borders attempted to reinvent itself to look like Amazon, it was too late.

Because of Amazon, online shopping became a way of life. And with the development of new mobile applications, online shopping itself is in a constant state of evolution and growth. A year ago, e-commerce accounted for 14 percent of non-food sales in the US. It’s projected that by 2014, that figure will be 20 percent. And forecasts say that by 2016, 50 percent of consumer purchases will have an online or mobile component.

These numbers aren’t really surprising; we’ve all watched and taken part in the e-commerce revolution. What is surprising, and awe-inspiring, is how often Amazon makes the first move—usually leaving competitors befuddled and trying to play catch-up.

Costco is a company that knows heavy freight. Costco started offering local delivery, focused on businesses, years ago. But Amazon has not been idle. For five years it’s been testing AmazonFresh right in Costco’s home region, the Seattle area, and has now decided to move ahead with the service. Amazon has decided to look more like Costco.

Costco (and, for that matter, SUV dealers) should be worried. If AmazonFresh catches on in Seattle, and expands, Amazon could build a bridge between the online shopper and those discount warehouse goods for which we normally drive to Costco or its conventional competitors. And Amazon matches Costco in its zeal for the best possible customer experience.

Amazon could indeed change yet another discussion about where and how to shop. With its sexier marketing and almost limitless potential for inventory, Amazon—if it masters mass local delivery—could be the competitor that gives Costco a run for its money

Costco has not been idle either. It’s working to improve its online experience and just offered its first mobile app. But unless Costco moves fast, Amazon’s trucks will be everywhere—dropping off those big orders of toilet paper and detergent. Costco will have to look and perform more like Amazon online. It’s going to be fascinating to watch.

I must admit that if AmazonFresh succeeds, it will put me in an uncomfortable position. You see, I also love customer rewards programs. Over the years, I’ve grown used to telling representatives of various companies that “I’m Platinum,” “I’m Diamond,” or something similar. I’m not sure I can ever bring myself to say, “I’m a Big Radish.”

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About Steven Salta

Steven Salta is co-founder and CEO of Ascentium, a digital media and interactive marketing agency. Steven has overall responsibility for the agency's revenue, profitability, customer loyalty, and corporate culture.

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