Costco Korea started early morning delivery. It was accompanied by a proviso that “orders by 5 pm and purchases of 50,000 won or more are possible”. Even in the flood of e-commerce, attention is focused on the background of change as much as Costcoin, which has been sticking to ‘offline distribution’.
In the retail industry, Costco’s move is interpreted as a measure to respond to Korea’s e-commerce war, which is fiercer than anywhere else in the world. Some analysts say that Costco’s ’24-year kingdom’, which entered Korea in 1998, is shaking.
○ Unexpected ‘change of mind’
According to the distribution and logistics industry on the 3rd, Costco Korea started the early morning delivery service at the end of last month in partnership with CJ Korea Express. If you place an order by 5pm every day, it will be delivered by 7am the next day.
Compared to SSG.com, Market Kurly, and Coupang, where orders close at 11:59 p.m., it is difficult to call it a full-fledged early morning delivery. However, considering that Costco has insisted on ‘zero delivery’ in 13 countries including Korea, it is considered a epoch-making measure.
Compared to Traders of Shinsegae Group, a competitor in the warehouse-type discount store sector, the ‘order hurdle’ is also low. In order to receive Traders’ products from SSG.com at dawn, you need to place an order of 120,000 won or more. This is the reason why the retail industry evaluates Costco Korea’s measures as unconventional.
Global Costco (Costco Wholesale) is also expanding its online territory. There are 112 stores across the United States (as of the end of the first quarter) designed so that customers can order online and then take them home.
A service called ‘Costco Next’ is expanding. It is a service that selects a small number of carefully selected brands from among Costco suppliers and allows members to purchase items from the brand’s website at a 20% discount.
Early morning delivery is the first in Korea. A similar example is the first joint venture with Uber in Texas this year to launch a same-day grocery delivery service.
○ Intense competition in the Korean commerce market
Costco Korea’s greatest competitiveness is global outsourcing and efficient SG&A policy. It is the ‘essence of distribution’ that Costco emphasizes that it sells products without making a profit, but that Costco takes the share of its members’ annual fee. A distribution industry official said, “If we accept Costco’s catchphrase at face value, it means that Costco will cover shipping costs from membership fees.”
The key factor that made Costco Korea ‘friendly’ is the rapid growth of the domestic e-commerce industry. According to Euromonitor, the total size of Korea’s commerce industry reached $483 billion (regarding 603 trillion won) last year. Among them, e-commerce accounted for regarding 40% of the total amount of $19 billion (regarding 245 trillion won).
Even Coupang is launching an offensive that is different from the existing e-commerce. According to the distribution industry, Coupang is reportedly targeting warehouse-type discount stores such as Costco and Traders, such as Costco and Traders, for dynamic pricing while strengthening the fresh (fresh food) sector with its strong capital. Considering that Coupang members can receive same-day or next-day delivery regardless of the order amount through the rocket delivery service, Costco Korea is in a position to be concerned regarding invasion of territory.
○ Profitability deterioration trend
The rapid pursuit of traders is also a burden on Costco Korea. Traders’ sales increased 41.8% from 2.33 trillion won in 2019 to 3.315 trillion won last year.
Costco Korea recorded 5,352.2 billion won in sales and 177.5 billion won in operating profit in fiscal year 2020 (September 1, 2020 – August 31, 2021). With 16 stores alone, sales of more than 5 trillion won are the largest in the retail industry.
The problem is profitability. Although the top-line is steadily growing, the operating profit margin has fallen from 4.5% in fiscal 2015 to 3.3% in five years. In fiscal 2020 alone, sales and administrative expenses increased by regarding 100 billion won. The main factors were the increase in labor cost, promotion cost, and transportation cost. In the midst of this, the industry view is that if early morning deliveries are made throughout Seoul and Gyeonggi-do, the sales and administrative expenses are likely to increase further.
By Park Dong-hwi, staff reporter donghuip@hankyung.com
