No, Millennials Won't Kill Costco Since Both Are Changing

Wholesale Trade
Rick Bowmer/AP
A recent article argues that Costco (COST) -- the $50 billion membership-only warehouse company -- is in danger of stumbling as it ages because millennials (also known as Generation Y, or those born between the '80s and 2000s) don't seem interested in shopping at the company's stores. The proof?
  • Millennials don't have cars -- and you have to own a car to shop at Costco.
  • Millennials live in the city -- and most Costco stores are in the suburbs.
  • Millennials prefer renting -- and you need a home for Costco's bulk deals.
It's true that Costco is lagging based on a favorite millennial metric: Costco's Facebook page only has 1.1 million likes to Target's (TGT) 22.7 million and Wal-Mart's (WMT) 34.5 million. And even Costco acknowledges that it needs to do a better job of attracting younger customers. But it's far too premature to write off the retail giant's future with millennials just yet.

Does This Really Spell the Beginning of Costco's Demise?

Costco is a huge company. It boasts a $50 billion market cap and brought in more than $107 billion in annual sales over the past year. It has 71.2 million cardholders in 39 million households. And it's profitable. Because it discounts products, most of its profit is tied to its annual membership fees. Meaning Costco makes money whether or not its members regularly visit its stores or not.

The company is experimenting with ways to appeal to future customers who may not shop the same way their parents do. It is partnering with Google (GOOG) Express in San Francisco to experiment with same-day delivery, sort of like Amazon (AMZN) Prime. The company has begun offering more organic products, luring the Whole Foods (WFM) crowd to purchase vegetables and grass-fed meat at discounted prices.

%VIRTUAL-article-sponsoredlinks%Even if we assume for argument's sake that Costco is unattractive to the urban, car-less, renting millennials right now. It doesn't take gobs of market research to predict that the shopping needs and living arrangements of the upcoming generation will change.

What happens when this cohort begins to marry, have children and seek out a quieter pace of life in the suburbs? They may not become carbon copies of today's Costco shoppers. But Costco may not necessarily be the same store in the future, either, as evidenced by the testing taking place. As CFO Richard Galanti said in a Q&A with analysts, "We're not going to do anything rash, but we're also not going to have our head in the sand here."

And it is more appealing to millennials than its club/membership store peers. In a recent survey from Advertising Age found that it was Costco that was the brand that already resonated more with millennials. Sam's Club, on the other hand, was more popular with non-millennials.

Millennials haven't yet written off the Costco. Investors shouldn't, either.

Motley Fool contributor Adam Wiederman has no position in any stocks mentioned. John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. The Motley Fool recommends, Costco Wholesale, Google (A shares) and Whole Foods Market. The Motley Fool owns shares of, Costco Wholesale, Google (A shares) and Whole Foods Market. Try any of our newsletter services free for 30 days.
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