Costco starts offering same-day grocery delivery

Costco Wholesale Corp., the warehouse chain known for its huge store format, food sample stations and cheap hot dogs and pizza, is now offering same-day grocery delivery through Instacart as the company looks to expand its customer base.

The Issaquah, Wash., company announced two new delivery options Thursday: two-day delivery for dry goods and same-day delivery powered by grocery delivery firm Instacart for orders that include fresh foods.

The two-day option guarantees deliveries in two business days and is available only in the continental United States. For orders of less than $75, there is a delivery fee. Costco said the goods sold for delivery will be priced higher than the same goods sold at its stores; it did not specify how much higher.

The same-day delivery option, available in “most metropolitan areas,” lets customers choose a one-hour window during which their order will arrive. For orders of less than $35, there is a delivery fee. Prices on the goods will be about 15% to 17% higher than in stores. Costco said an additional 10% service fee will be added at checkout, though shoppers “may elect not to pay the service fee.”

In an earnings call Thursday, Richard Galanti, Costco’s executive vice president and chief financial officer, said the delivery options are more “fill-in, than replacement of a shop.” He said the company has driven sales for years with value, which he defined as “quality and low price.”

But he acknowledged that shopping habits were changing and that customers may not always feel the need to pick out their own fresh produce.

“Over time, the percentage of delivery of fresh will change,” he said on the call. “How much so, we’ll all have to wait and see.”

Grocery delivery is becoming increasingly important as customers look to save time and add convenience, said David J. Livingston, supermarket analyst and founder of DJL Research. But Costco’s strength is still its warehouse store format, meaning the delivery options will be just another addition, not necessarily a pivot toward solely e-commerce, he said.

Offering grocery delivery is “pretty much what everybody else is doing,” Livingston said. “Just another ‘me too’ program.”

The new delivery options could enable Costco to expand its reach beyond customers who are close to the mega warehouse stores. The inclusion of the one-hour window for same-day deliveries is another added bonus, said Bill Dreher, senior retail analyst at Susquehanna Financial Group.

“It’s really the fresh product that excels,” he said. “We’re really seeing the emergence of a company that can go toe to toe with Amazon when it comes to grocery.”

The potential threat from e-commerce giant Amazon.com Inc., which recently acquired Whole Foods Market Inc., came up several times during Thursday’s earnings call.

Costco executives said on the call that they get many questions “literally every day” about issues such as whether new member sign-ups were slowing and what the growing number of households that pay for both an Amazon Prime account and a Costco membership will mean for the warehouse chain.

Costco also said its membership renewal rate ticked down slightly, which the company attributed to the changeover from American Express to Visa credit cards.

Costco had long relied on American Express as its exclusive credit card supplier, but chose to switch to Visa and Citigroup for its Costco-branded cards in 2015 after AmEx and Costco could not agree on terms of a new partnership.

Shares of Costco slumped 6% to $157.09 on Friday.

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UPDATES:

2:20 p.m.: This article was updated with Costco shares’ closing price.

This article was originally published at 11:45 a.m.