Recent reports suggest that retailers like Wal-Mart (
) and Amazon (
) are taking some of Best Buy's (
) consumer electronics market share with the help of their
promotional discounts and offers as well as effective online sales
strategies. For additional details you can see our recently
Can Best Buy Correct Product Missteps?
Here we take one step further and examine whether warehouse
clubs like Costco (
) could also ride this bandwagon and grab market share in consumer
Costco traditionally competes with warehouse club operators
including BJ's Wholesale Club (
) and Sam's Club, in addition to large retailers.
We maintain a price estimate of $49.76 for
, well below current market value.
Costco Can Leverage Discounting Power
Costco offers bulk purchase of a variety of heavily discounted
merchandise as well as a limited selections of branded goods. The
retailer is able to provide deep discounts due to higher product
turn-over from bulk buyers and business customers. Similar to
Wal-Mart and Amazon, Costco could also leverage its discounting
power to lure potential electronics customers that might otherwise
go to specialty retailers like Best Buy.
Best Buy gains its edge by providing trusted service support and
frequently being the first to display the latest electronics and
gadgets. However, recent reports indicate that consumers might be
tentative to adopt some of the latest technologies, instead opting
for more established products. For example, consumers are commonly
choosing established flat panel TV's over the new 3D-TV technology.
This trend could open a window of opportunity for Cotsco, as the
company is able to utilize its personalized discount scheme to
drive sales (particularly during holiday shopping). (
See our previous article on Sam's Club
Stock Impact from Improved Revenue per Square
Costco's revenue per square foot (RPSF) stands much higher than
that of Wal-Mart, despite selling similar merchandise. However,
Costco still lags slightly behind Best Buy on this metric. We
estimate that average revenue per square foot for Costco stood at
around $814 for 2009 compared to $908 for Best Buy's US stores.
If Costco is able to gain electronics share from Best Buy,
sparking RPSF upside closer to the retailer's levels, what impact
might it have on Costco's stock? We estimate that this scenario
could generate 6% upside to our Costco price estimate, which at
$49.76 remains well below market value.
Drag the trend-line in the chart below to see the impact of
various US revenue per square foot trends on Costco's stock
value. We estimate that Costco generates roughly 43% of its stock
value from merchandise sales in the US, with another 19% added by
But Costco Faces an Uphill Battle for Market
However, this potential upside is mitigated by the nature of
Costco's customer base, as well as its limited brand selection.
Customers that are not currently Costco members might choose
Wal-Mart when looking for a one-time discount, rather than bear
membership fees. Additionally, many of Costco's customers are small
business owners that might not be inclined to purchase new gadgets.
Hence the possibility exists that the electronics market share
opportunity could quickly be gobbled up by Wal-Mart and Amazon, who
maintain a clear head start over Costco. In order to successfully
grab market share, Costco must entice both its existing customer
base as well as customers who might initially be looking for a deep
discount on a one-time purchase.
You can see
the complete $49.76 Trefis price estimate for
Costco's stock here.