Costco has quietly invested heavily in its digital business over the past few years.
Chief Executive Ron Vachris said during the Warehouse Club’s fourth-quarter earnings call that those efforts have paid off.
“Digital sales, including third-party delivery, exceeded $33 billion, an increase of more than 20%,” he said.
Instead of building all digital capabilities in-house, Costco is increasingly leveraging partnerships to expand what members can do online.
“Over the past few weeks, we have further expanded the ways our members can interact with us online, announcing the expansion of our Uber Eats partnership from 17 states to include the entire U.S., as well as the expansion of our partnership with DoorDash to include the U.S.. These partnerships will complement our successful, long-term partnership with Instacart in the U.S. and Canada,” he added.
However, in addition to these increased deals, Costco quietly closed its Amazon-style marketplace, Costco Next, in September without comment.
Now, the company has finally explained the decision and shared what steps it’s taking to replace service for members.
What’s next for Costco?
Costco Next is an online marketplace that allows members to purchase items that are not in stock at the warehouse club. This is not a new service; Technically, it’s been around since 2017. But Costco doesn’t promote the product, and many members may not realize it.
However, for those who did use it, the shutdown was abrupt.
On the day it closed in September, members who visited the page received a brief message.
“Costco Next stores are no longer available. Please see the list below for contact information for vendors with valid return policies. For eligible returns and warranty inquiries, please contact the vendor directly,” the company shared.
Next is a long list of company names and their contact information.
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Prior to its sudden closure, Costco Next was offering members up to 40% off on select products not available in the chain’s warehouses. The program showcases items from select vendor partner lists, ranging from homewares and luggage to electronics.
Unlike Amazon Marketplace, Costco sells these items, but they are shipped by participating companies that also handle returns.
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Costco finally explains why Costco will close next time
Costco Chief Financial Officer Gary Millerchip addressed the store closures during the Warehouse Club’s fourth-quarter earnings call.
“Some of you may have noticed that we recently decided to discontinue Costco Next, our extended marketplace product. As our digital capabilities mature, we believe that more seamless integration of Costco Next’s most popular items and brands into the Costco app and website will provide a better member experience and will increase sales,” he said.
“This change was not important to our results,” he added.
The decision represents a significant change from how Costco described its plans for 2024.
At the time, Millerchip said Costco Next was growing well and described it as a “huge upside opportunity.”
“Costco Next, our curated marketplace, also continues to see good growth. We added eight new suppliers in the third quarter, bringing the total number of suppliers to 75,” he said during the chain’s third-quarter 2024 earnings call.
Millerchip also made it clear that Next is different from other products on the market.
“I think for us, of course, the difference is that we work with Costco Next. It’s curated for members. So, we’re not like a traditional market, which might just be pure volume. For us, it’s about making sure members get something that’s really unique, valuable, and true to who we are,” he added.
At the time, the Treasurer expressed strong support for the plan.
“It’s a huge opportunity for advancement in this area,” he said.
Costco did not respond to TheStreet’s request for comment at the time of the shutdown.
This is Costco’s next step in digitalization
Costco’s website and app traffic increased 30% in the fourth quarter, according to remarks made during the earnings call.
“This quarter, we continued to accelerate personalization, including enhanced product placement and email communications,” Millerchip said. “Our approach is resonating well with members, with triple-digit sales growth driven by our personalization initiatives in the fourth quarter, and 10% of all orders at Costco.com now include personalized items.”
He also talked about the company’s growing digital applications of artificial intelligence (AI).
“Although starting from a low base relative to other channels, AI’s impact on the way our members search for products continues to grow. Traffic to our website through AI searches increased by triple digits for the second consecutive quarter and continues to show the highest conversion rates of all website traffic,” he added.
Dominick Miserandino, CEO of RTM Nexus, told TheStreet that Costco’s motivation for investing in technology is very simple.
“Costco is not going digital to create buzz. Its digital and in-store technology is directly translating into faster service and stronger member engagement,” he shared.
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