Costco May Face Increasing Competition, Decreasing Memberships

Article published in The Motley Fool, Sept. 6, 2016:

How Risky is Costco Wholesale Corporation?

Warehouse clubs exist because in exchange for a membership fee they offer low prices, albeit sometimes in inconvenient quantities.

Costco has thrived by serving an audience of members looking for deals. The retailer courts bargain-hunters by cleverly curating its selection of merchandise. The chain always has certain staples such as milk, coffee, and healthcare supplies, while shifting up the rest of its mix.

That makes its stores a bit of a scavenger hunt. You might enter knowing you need K-cups, cereal, or washing machine detergent pods, only to happen upon a great deal for a snowboard. Not every item is actually a deal, but generally the prices are good, and the merchandise mix, heavy use of sampling, and low-cost snack options keep people coming back.

For 10 years that basic formula has produced a near-steady rise in the company’s stock price. Until recently there was no reason to believe that might change anytime soon, but there are signs that after an impressive run, Costco stock does face risks from digital competitors, specifically Amazon.com and Wal-Mart which generally have the warehouse club beaten when it comes to price selection. As these rivals improve delivery — something both have invested heavily in — Costco may have something to fear.

What should Costco worry about?

Costco offers two things to its customers — good prices and a shopping experience. Amazon and Wal-Mart, to a lesser extent, already have the warehouse club beaten when it comes to price plus convenience. In most cases, the online sites offer comparable if not better pricing on most items Costco sells without requiring the bulk purchases the warehouse chain forces for many items…

Amazon and Wal-Mart have offered those advantages for years, but they haven’t been able to match the immediacy of shopping in a store. That gave Costco (and physical Wal-Marts) a reason for being that digital players could not match.

In recent years, however, Amazon has bridged that gap, with Wal-Mart working hard and spending big to catch up. The online leader now offers Sunday delivery, same-day delivery in some markets, and even nearly immediate service in limited areas. Amazon has also made two-day delivery a standard, with incredible reliability to the point that if a consumer doesn’t need something immediately, why not order it from the online giant and not have to leave the house?

Going forward, Amazon — and eventually Wal-Mart — could have drone deliveries, trucks with 3-D printers roaming the country, and advanced predictive software that brings items from warehouse to customer even faster. When that happens, Costco, which has mostly ignored its digital operations to keep the focus on its stores, has something to worry about.

Should Costco shareholders worry?

For the Costco customer who visits the store because it’s entertaining, faster online shipping and better prices or selection at Amazon.com or Wal-Mart.com shouldn’t matter. The shopper perusing the warehouse club based on getting a good deal, however, may eventually be swayed to drop his or her membership.

For now, Costco has an immediacy advantage over its rivals. Going forward that may not be the case, as Amazon and Wal-Mart’s digital arm — which now includes Jet.com — both shorten the delivery window. That represents a risk for all retailers, but Costco could ultimately feel a pinch it has so far avoided.

As Amazon ups the delivery bar and Wal-Mart scurries along behind it, Costco members may decide that visiting a store — especially one that charges an annual fee for the privilege — isn’t worth it. When that happens, and the day isn’t that far off, Costco memberships, sales, and ultimately share price may suffer.

Mayor Probed Over Ties to Costco on Eve of Vote on Big-Box Ban

Story appearing in the East Bay Times, 10/28/16, written by Angela Ruggiero

Just days before the election, a former Pleasanton councilman filed a complaint against Mayor Jerry Thorne, launching a state commission to investigate potential political malpractice.

The state Fair Political Practices Commission said it was investigating a complaint against Thorne for allegations that he had a conflict of interest with Costco because he owns shares in the company. With Measure MM, Pleasanton voters will decide on Election Day if they want to ban big-box stores such as Costco on a development area on Johnson Drive near the highway.

A probe is launched after it’s determined that a filed complaint has merit, according to the FPPC. It could take up to a year to complete the investigation, which would determine if there was a violation and reach a resolution. Some violations, for example, result in fines for the elected official.

Thorne recused himself from discussions about Costco in July the when the City Council decided to put the measure on big-box stores before voters after Citizens for Planned Growth gathered enough signatures. Sullivan, in his complaint, states that there were several instances where Thorne advocated on behalf of Costco before he had to recuse himself.

Thorne said he reported his Costco stocks in his statement of economic interest or Form 700, a document that lists elected officials’ assets to spot any potential conflicts of interest. The stocks were in a mutual fund-like account, where a manager moves them in and out. Although Thorne has listed the Costco stocks since 2014 in his economic interest forms, he said he didn’t realize there might be a conflict until July.

“I don’t commit them to memory,” he said.

He said when he was filing out his Form 700 to run for mayor this year he checked with the city attorney, who suggested Thorne recuse himself. Thorne said he has since sold the Costco stocks, about 27 shares.

In addition to Measure MM, Pleasanton voters next week will choose City Council representatives. Incumbents Jerry Pentin and Karla Brown are looking to keep their seats, but are being challenged by newcomer Herb Ritter. Ritter has indicated he wants to unseat Brown. In the mayor’s race, Julie Testa is challenging Thorne’s seat.

Local Business People Support YES on MM

A group of local business people issued a letter in support of YES on MM, which was distributed today in Pleasanton.

business-owners-letter

Expect dramatically longer commutes home to Tri-Valley if Costco is built

Posted on Town Square, Pleasanton Weekly, Oct. 26, 2016, by Brian Moore:
trafficPleasantonians,

I want to first go on record that I am not trying to be demeaning to anybody’s opinion here. I only hope to give you some things to think about. Ultimately your vote is a choice between the pros and cons as you see them.

FULL DISCLOSURE

  • I am a 13 year Pleasanton resident, a single dad of two young boys (7 and 9) in Vintage hills. I am a busy dad.
  • Bill Wheeler is a friend of mine and was a great partner in the RidePal business (see below). Also irrelevant in my analysis.
  • I love Costco, and selfishly would love one closer. I am there weekly and time is my biggest life challenge. I was at Livermore Costco twice this week already.Irrelevant in my analysis.
  • Costco is also a great employer. No argument.
  • I have not looked into whether the deal cut by the city is good or bad as my decision-making framework does not let me even get to that stage.
  • I am intentionally omitting all discussion on autonomous vehicles.

MY BACKGROUND HAS AFFORDED ME SOME UNIQUE INSIGHTS AND ACCESS TO DATA AND EXPERTS
For the last 3 years, as former CEO of RidePal, a shared-corporate commuting platform, I have helped companies leverage and share corporate commuter buses aided by the RidePal technology to get their employees to work in other than a single-occupancy vehicle (SOV). We helped avoid hundreds of thousands of SOV trips over the last 4 years.

Our company mission was SOV trip-reduction to help reduce congestion, improve the quality of life of our commuters, and help employers with recruitment, retention, and productivity. I am proud of what we accomplished despite being just a drop in the bucket as to the traffic problem. The job loss, productivity loss, and impact on families as a result of this traffic pandemic is astronomical. Jobs are already leaving the Bay Area due to this problem. In this role, I have been in many think-tank sessions about traffic mitigation, affordable housing shortages, the housing-job dislocation, and the impact of traffic on different socioeconomic classes. I have been privy to a lot of data including MTC data on what 2020 will look like unabated. It is scary.

MY RECENT COMMUTE LIFE
In my recent role running RidePal, I rarely drove. I dropped my kids off at Vintage Hills school at 8a, drove to a residential area just south of Stoneridge, as Bart parking does not exist after 8a, usually went back one station to East Pleasanton to get a seat so I could work on the way in to make up lost time, took Bart to Civic Center, and finally took a RidePal enabled bus to 8th and Townsend, or walked 7 blocks if I just missed it. I left the house at 7:55a and got to work on avg. at 10:30a. To pick up the boys by 6p at after-school care, I had to leave on the 1st RidePal bus to bart at 3:50p and was often late for the 6p pickup. It was the RidePal way to not drive in a SOV but occasionally I had a meeting I could not get to without a car. I used the casual carpool pickups when possible on the way in but could not on the way home due to the race to get the boys. In the last 3 months, I have had one-way evening commutes from SOMA (8th and Townsend) to Pleasanton between 2 and 3 hours. I have similar stories from friends, neighbors or prospective RidePalers who commute to SF, Silicon Valley or the mid-peninsula.

MY DECISION-MAKING FRAMEWORK
I will get to my conclusion first. I am voting yes on MM and have to put aside my selfish interests for a local Costco and don’t really care whether the decision is good or bad for BlackTie Transportation (Sorry Bill).

  • 580/680 is a major interchange for commuters to SF, mid-pensinsula, Silicon Valley or even the East Bay (along the 880). These commuters come down the 680 from Walnut Creek, Danville, San Ramon and farther, and in on the 580 from places as distant as Modesto, Stockton, Brentwood and Lathrop. They come west to east to Bishop Ranch, Hacienda Business Park, and Eastern Dublin. Thus our decision impacts the greater region and not just Pleasanton.
  • In my thousands of discussions with commuters, employers, government officials (state, county and city), transit agencies, and the Bay Area Council, we are in deep trouble. We can’t build our way out of this mess and it is going to get much worse. Bart and Caltrain are at capacity and have parking shortages causing SOV trips for commuters that could otherwise have taken Bart or Caltrain. We need to solve the 1st mile problem to Bart as well and not everyone can bike or take uber/lyft everyday. In less than 5 years, expect LA-like traffic from 5a to 9p with no midday lulls unless we act.
  • I believe we have to have a zero-tolerance for policies or decisions that worsen regional congestion.
  • We absolutely need to leverage technology to promote alternative trips and make them easier and more accessible.
  • We need public private partnerships to help fund alternative commute solutions.
  • We also need better carrots AND sticks for more employers to fund alternative commute solutions. SB 1339 just does not have enough teeth.
  • I was recently at governor day and I can assure you that no near-term solutions are coming from Sacramento. Reduced gas taxes due to lower oil prices have infrastructure projects being cut that were previously approved.
  • At that same event, major Bay Area employers along with the Bay Area Council were pleading for help from Sacramento as these employers can’t adequately staff their positions due to our traffic problem and these vital employers are now looking to place these jobs in other states.
  • In other words, our highway efficiency is vital to our economic interests.
  • Now let me put my social-mission hat on. The pain of our traffic congestion problem disproportionately impacts lesser income families in Modesto that commute to the Bay Area more so than those in Pleasanton. Those in the trades, health assistants at Kaiser/UCSF/CPMC, or those making beds/cooking meals in SF hotels/restaurants are now suffering 5+ hours on the roads each day. The wealthier just move closer driving up the cost of urban housing further preventing lesser income families from living close to where they work. Shall we just say “It’s not our problem?”
  • In a recent meeting with the Golden Gate Restaurant Workers Association, SF restaurants are having serious challenges filling jobs. Housing prices have pushed many of their employees and prospective employees out of SF and the commutes to SF are so horrendous, these displaced workers won’t commute to the city to work for restaurant wages. Remember that transbay transit virtually stops at midnight so the car is often the only choice. What is this going to do to SF as a destination/entertainment city and to your enjoyment of this fine city?
  • A quick note about traffic flow. 10% more cars does not equate to 10% less flow. It is NOT linear. Once saturated, including the city on-ramp/off-ramp streets, flow reduction is exponential. Exiting and entering freeways creates even more flow reduction than just more cars. If you are in Palo Alto, check out the Arastradero exit on 280 and the extremely long lines to exit in the morning.
  • I am also worried about the impact on Pleasanton’s city streets as Costco shoppers try to avoid the congested highways. I never take the freeway to the Livermore Costco. What will Stoneridge and Hopyard become? I might be better off going to Lowes in Dublin than Home Depot in Pleasanton. Even today, I take Foothill Road from 580 and come down to Bernal to get home if I drive.
  • For those that make decisions with data, I would encourage you to look at Vital Signs data on the MTC website and PeMS on the Caltrans website (need to register to access). They are not the most user-friendly sites but the data is good.
  • I believe Tri-Valley needs to learn from cities like Mountain View, Sunnyvale, Palo Alto and counties like Santa Clara. These cities/counties have mandated stringent SOV trip-reduction targets on their employers and in some cases zero incremental trip mandates. So for every car added they have to reduce one. Inability to agree to these trip targets precludes obtaining building permits. Failure to meet trip-reduction targets for already approved facilities can yield $1m+ fines for these employers. These cities/counties are serious. We should be too before 680/580 become as bad as 101/280/237/85.
  • Are you happily married? According to one study, you are 40% more likely to get divorced if your commute is over 45 mins long. Try 2 hours.
  • Lastly, on a financial note. Our property in SF has doubled in value since 2005. My house in Pleasanton is flat to maybe a slight increase in the same period. In my opinion, if the 2020 MTC traffic models come true, suburban housing prices will decline or at least not rise as much as urban housing or housing next to key job centers (e.g. Mountain View). The youth is going carless and urbanizing.

So I distill this down to choice between the pro of slightly more convenience with a closer Costco and the con of exacerbating regional congestion due to negatively impacting a major interchange that Northern Californians of all income levels depend on for their livelihoods. I think we should accept less convenience for the greater good.

The Independent Endorses YES on MM

Endorsement in the Oct. 20 edition of The Independent:

There are many reasons to support the “yes” position on Pleasanton’s Measure MM, dubbed the “Costco Initiative.” If approved, the measure would limit new buildings within the Johnson Drive Economic Development Zone (EDZ) to 50,000 square feet.

A “yes” vote would mean a vote against locating a Costco on the 40-acre site. The city has stopped processing the EDZ, pending the outcome of the vote on November 8.

Issues include traffic, air pollution, jobs, economic impacts and financing of transportation infrastructure.

The city hired a consultant to compare what would happen if Costco were or were not approved. The report, issued in August, concluded that if MM were approved and Costco did move forward, there would be less traffic, less pollution, 500 more jobs, comparable sales tax, and infrastructure would be built without subsidies or a loan.

On the other hand, opponents of the measure note that the site offers prime freeway visibility that would bring in more tax revenues to finance city services and projects.

However, additional concerns about the Costco project focus on city staff negotiations that offer Costco a subsidy. The project’s mitigations are estimated to include $16 million in infrastructure improvements. Questions have been raised over how those improvements would be financed. Loan amounts to the city from Costco range from $6 million to $7.5 million; the loan would be paid back to the developer plus interest using tax revenue generated by the project. Rebating tax funds to Costco would limit the amount of tax revenue that could be available to the city for projects such as a new library.

To avoid controversy, the city should have been more forthright telling the public it was negotiating terms of the financing of infrastructure.

We support the environmental and job benefits to the city. We recommend a yes vote on MM.