And just like that, the future of grocery shopping was forever changed. On Monday, August 29, Amazon.com, Inc. (NASDAQ:AMZN) officially sealed the deal to acquire Whole Foods Market, Inc. (NASDAQ:WFM).
The internet giant got busy on its first day as a grocery store operator. Prices got cut across the board at WFM. Banana prices fell 30-40%, as did apple prices. Salmon prices fell 30%. So did ground beef and chicken prices.
Even avocado prices got cut by 30% amid spiking avocado prices elsewhere (an unusually warm summer caused a huge production shortfall in California).
And the savings aren’t just for Amazon Prime members. They are for everyone.
It shouldn’t be surprising, then, to see grocery stocks getting hammered. After all, the biggest barrier to shopping at Whole Foods was price. Now that’s gone, so naturally, consumer dollars will shift from other grocers to Whole Foods.
No shock there.
But it should be shocking to see that even Costco Wholesale Corporation (NASDAQ:COST) is selling off as a result of lower Whole Foods prices. After all, COST is a fundamentally different concept than KR, SFM and SVU, right?
Right. And recent weakness in COST stock should be looked at as a buying opportunity.
Costco Is Much More Than Just Groceries
Amazon is going to change the grocery space like it changed the brick-and-mortar retail space. Through Whole Foods Market, Amazon will cut prices substantially. Grocers will lose sales en masse. Margins will erode. Labor pressures will build. Earnings will start trending down.
But it’s important to note that not all brick-and-mortar retailers have been killed by Amazon. Off-price retailers that can compete on price have been doing well. Just look at TJX Companies Inc (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST). One-stop shops that can compete on convenience have also been doing well. See Wal-Mart Stores Inc (NYSE:WMT).
And the one retailer that has really stood out from the pack as being un-Amazonable?
Why? Because COST is a one-stop shop with extremely low prices. It combines the best of two Amazon-proof traits.
Like Amazon, Costco operates on razor thin retail margins. They make all their money from memberships, so COST almost guarantees some of the lowest prices on the market.
Costco is also a one-stop shop where you can grab this week’s groceries, buy new cosmetics products, get some new clothes, eat dinner for tonight and fuel up your car all in one spot. And consumers really love this feature of Costco. You’d be lucky to go to the store and spend under $100, whereas average tickets at grocery stores are around $50.
Clearly, Costco members buy a lot more than just groceries at Costco.
All in all, WFM lowering prices doesn’t really erode the COST value proposition. Costco’s value prop is all-in-one convenience and everyday affordability. Those two go hand-in-hand. Costco offers everyday affordability on everything from toothpaste to salmon and shoes.
Lower prices at a premium organic grocer doesn’t really mean much to a company like Costco with such a robust and unique value prop.
Bottom Line on COST Stock
COST stock has been unfairly beaten up by Mr. Market.
Maybe the market is pricing in concerns that Amazon can make further acquisitions and turn into a Costco-like retailer, but I think that is pretty unlikely. The Federal Trade Commission has said recently that they are essentially keeping a close eye on Amazon. The FTC didn’t have to say anything, but the fact that they did implies that further Amazon retail consolidation is unlikely.
With further Amazon retail consolidation unlikely, the only fear that should be priced into COST stock is lower prices at WFM. And because Costco is much, much more than a grocery destination, lower prices at a premium organic grocer is essentially meaningless.
So buy this dip in COST stock. Hold. And wait for the company to keep reporting blowout comp numbers.
As of this writing, Luke Lango was long COST, TJX, ROST and AMZN.