Last week, the investing world was rocked when it was announced that Amazon was buying Whole Foods. While the market in general wasn’t fazed by this news, many grocers and other retailers were. One of the companies that took a beating was Costco (NASDAQ: COST).
The question is, should Costco be worried about this merger and should investors stay away from the stock? In my opinion, I think the hype is overblown.
3 Reasons Why Costco Isn’t Going Away
Costco customers are loyal. Recent reports show that 90% of members renew their annual memberships, and this is even after the warehouse giant announced it was raising membership fees.
This shows when looking at the numbers. Earnings per share recently came in at $1.40, beating estimates by $0.09. And revenues hit $28.86 billion, beating estimates by $320 million. This was an increase of close to 8% compared to the previous year.
And analysts expect the increased membership fee to add 7% to annual profits.
Finally, Costco shoppers tend to be middle and upper middle class customers, which means they are not only looking for a good price, but also a place that offers them a lot of options. The warehouse giant fits this perfectly.
While 80% of shoppers at Costco do so to buy groceries, investors need not be worried. First, even with the potential of Whole Foods lowering prices, it is going to be hard for Amazon to beat the bulk pricing that Costco offers. At best they might be able to match it, which wouldn’t cause a flood of members to leave.
Also, while Amazon has a grocery delivery service it has been trying to get off the ground, Costco already has one. It is operating in 24 states already. And you can have your groceries delivered at no additional cost. It is included is your annual membership.
With Amazon, their grocery delivery service costs $15 a month, and this is on top of the annual Prime membership fee you have to pay.
In addition to the groceries, clothing and other items you can buy at Costco, there are many other services that Costco offers that will keep its customers coming back again and again. Here are just a few of these services:
- Tire installation
- Vacation packages
- Hearing aids
- Car rental services
- Prescription drugs
- Car buying partnerships
- Discounted gas
As customers continue to look for the best pricing in order to save money, Costco will always be an option. Simply adding a grocery store such as Whole Foods isn’t going to deter most shoppers from the warehouse giant.
One Potential Issue With The Merger
Finally, I want to take a minute to put things into perspective. I feel that the selloff of Costco stock was overreaction. People heard this news, it surprised them, and they reacted emotionally. They thought that Amazon is now going to dominate the grocery industry like it does the retail industry.
But it is going to take time for Amazon to make major head way in the grocery space. For starters, Whole Foods has a lot of issues. Amazon needs to fix these issues before it can start working on a long term strategy.
Then there is synergy. The culture and mission of Amazon is very different than that of Whole Foods. Whole Foods is all about the environment and paying workers a fair wage and offering generous benefits.
Amazon on the other hand is primarily focused on driving down prices. This results in low pay for workers, the use of automation and robots to perform many tasks, and not the best company culture.
As these clash, there could be issues that many analysts have not considered.
Overall, I feel the worry over Costco and other groceries going away because Amazon is buying Whole Foods is overblown. It is more than likely that Costco and Amazon can co-exist and be healthy, profitable companies for the long term.
As for the stock price for Costco, the pullback could be a nice entry point for many investors. However, some still feel the stock is overvalued. I don’t see the stock dropping much further than this, so if you want to get in, now might be the best time.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.