Costco’s business model of membership fees, low prices, and high degree of vertical integration will help it defend against the e-commerce giant that’s now buying Whole Foods, but the competitive pressure will increase.
Wall Street is feeling gloomy about Costco’s prospects following last Friday’s bombshell announcement that Amazon was buying Whole Foods, but can the warehouse giant’s $4.99 rotisserie chicken and $1.50 hot dog meal save it?
Costco’s shares have declined nearly 9 percent since news of Amazon’s deal broke. And at least two major Wall Street firms have downgraded Costco’s shares.
Deutsche Bank on Monday lowered its rating from “buy” to “hold,” saying “the pipeline of positive catalysts has played out and the competitive backdrop is intensifying” as both Amazon and Wal-Mart press their online and in-store efforts.
Amazon’s Whole Foods acquisition “represents a game changer with [Costco’s] competitive moat in grocery under greater threat while its digital platform lags peers, putting membership renewal at risk for decline,” a group of Deutsche Bank analysts led by Paul Trussell said in a research note.
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The concerns echoed those of Goldman Sachs, which on Friday downgraded Costco from “buy” to “neutral,” saying Costco’s business model was “under pressure from multiple factors.”
“COST’s competitive edges have related to natural and organic and its membership model, which despite significant overlap with AMZN Prime offered an option focused on consumables not easily available via AMZN,” Goldman Sachs analysts led by Matthew Fassler wrote in a research note Friday. “AMZN is likely capable of offering superior pricing and delivery competency vs. incumbents.”
Fassler did say “we still believe COST and the warehouse club space offers unique value not accessible through other channels, and do not…