Costco Could Be One of the Few Survivors in Amazon’s Retail Takeover

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To take on Amazon.com (NASDAQ:$AMZN) seems like a bold move for any company these days. The online-retail company, with its recent plans to acquire Whole Foods Market, Inc. (NASDAQ:$WFM), expects to take up more than half of the U.S.’s online retail sales by 2021, according to investment firm Needham & Co (traded privately). Despite this projection, however, some big retail chains are still doing quite well — one of them being Costco Wholesale (NASDAQ:$COST).

Costco has an upper-hand in a sector that Amazon has yet to completely take over: groceries. Although the large retail company sells a wide range of things — from jewelry to appliances — the majority of its members shop at Costco specifically for its groceries, according to financial company Barclays (LON:$BARC). Costco’s bulk goods at cheap prices that even online retailers can’t beat puts the company at a great position to go against Amazon, Barclay stated. The grocery-retailer also sell fresh meat, produce, and baked goods.

But the ability to get cheap and abundant groceries is just the bait for customers. Many of those who shop at Costco wind up purchasing other products from the retail store while shopping for their groceries. Dave Marcus, manager of Evermore Global Value Fund, illustrates the experience, “You go in for tires and wind up buying a generator.” Additionally, Costco members enjoy a discount on gasoline if they fuel up their car at one of its stations.

Taking account all these things, Marcus believes that Costco will be one of the very few retailers who will be able to fend off rising competitors like Amazon.

Amazon’s new expansion plans focuses aggressively on selling food. Besides purchasing Whole Foods, Amazon also has a grocery delivery service called Fresh. Fresh currently offers up to 500, 000 grocery items for sale, and Amazon is now testing robots to do work in order to lower labor costs, Barclays said. An estimated 15% of U.S. households could be using Fresh as their sole grocery retailer 10 years from now.

Even with Fresh and Whole Foods, however, Costco still have a lot of advantages over Amazon. According to Barclays, Costco members only shop on Amazon for electronics, books, and clothing. Groceries only accounted about 25% of their purchases. In addition, as previously mentioned, Costco’s prices could still beat and/or match that of Amazon’s as they sell their products in bulk. Costco also offer a grocery delivery service through Instacart.com (traded privately), which is available in 24 states as well as Washington, D.C. The retail company is also currently expanding its grocery delivery service to Florida through Shipt (traded privately). Membership is also cheaper at Costco — Gold Star and Business Memberships cost only $60 annually while an Amazon Prime membership costs $99 annually, with an extra $15 if you wish to sign up for Fresh. Another strong advantage Costco has over Amazon is that it sells other products that you can’t find online, which includes, but are not limited to: prescription drugs, vacation packages, and car rental services.

Costco members are also known to be quite loyal — annual memberships are renewed at about a 90% rate. This is extremely profitable for Costco as its membership fees accounts for about 72% of the company’s pretax profits. As well, Costco has recently increased its fees, which helped increase the company’s profits. This added about 42 cents to earnings per share for the next two years, or a 7% rise, said UBS (NYSE:$UBS). Besides customer loyalty and raising its membership fees, Costco is also expanding worldwide. This year, the company plans to open a number of new locations in Taiwan, Korea, and other local areas within the United States.

When it comes to stocks, however, investors tend to stay away from Costco because its stock is a bit more expensive. The company’s shares trade at 30-times the estimated year-ahead earnings — a lot higher than its 10-year median price-earning ratio of 22 as well as the market’s overall price-earning ration of 18.

Still, it could be extremely beneficial to add Costco to your portfolio, analysts said. A lot of professionals believe that Costco is one of the few retailers that could survive under Amazon’s takeover. Another appeal of Costco’s stocks is the company’s recent efforts to keep shareholders happy by increasing cash payouts. On May 26, Costco paid a “special dividend” of $7 per share in addition to its regular quarterly dividend.

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About the author: Grace is currently studying at UBC to achieve her BA in Computer Science. She is due to graduate in 2020. As a content creator, Grace has written financial analysis, stock market news, and informational investing articles. She also worked as an editor with her university publication 'UBC Undergraduate Journal of Art History'.