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Comprehensive Report

By Lawrence D’Addio, Jeff Tabet, Evan Colegrove and Ding Song

For this project, our group was tasked with collecting and analyzing data collected from item listings on Amazon.com and Costco.com, with the goal of creating a direct comparison between the two companies.  By doing this, we hoped to answer the question: What makes Costco successful, while other retail stores are in decline as Amazon continues to grow? In order to accomplish this, the team put together a collection of links to item pages that were available on both web-stores, and Mr. Jeff Tabet set up a web crawler that collected pricing and review data for each particular item using those links.  When the crawler was finished, we had raw data on nearly a thousand items that were listed on both Amazon and Costco respectively.  In order to process this raw data into a meaningful conclusion, each team member then analyzed the data from one or more of the different store departments those items belonged to, depending on how many items were available in each department.  To make interpreting the data easier, Mr. Tabet converted the data into easy to read graphs using Tableu data visualization software.  Each team member then made a report of their discoveries and observations, the results of which are explained below.  This report shall serve as a comprehensive listing of all our findings and observations as a group, and what conclusions we have drawn from them.  Prior to completing our analysis, the general consensus among our team was the expectation that Amazon.com would offer the better pricing between the two stores, an opinion predicated on everyone’s past experiences while shopping for a specific item through multiple storefronts. 

 

It is important for anyone reading these findings that while Amazon.com  functions as both a retailer, and a re-seller, through Amazon Fulfillment Services, for the purposes of our project we wanted a direct comparison and so therefore we only obtained data for items on Amazon.com that were sold by Amazon.com, and not third parties operating under the Amazon Fulfillment Services umbrella.

 

Computers and Electronics

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When comparing items from the computers and electronics department, we noticed an easily identifiable trend:  While Amazon is the clear market leader between the two, this wasn’t due to simply pricing, but due to business strategy.  There were many examples of items that were offered at a lower price through Costco, but these were mostly outliers.  On average, Costco offered electronics at a lower cost than Amazon, which is surprising when considering Amazon’s behemoth status in the tech industry (Amazon Web Services, etc.) and their massive supply chain network, which likely allows them to acquire, ship, and therefore sell goods at a lower price than their competitors.  This trend holds true in the other departments, but the computer and electronics departments were notable due to the single outlier swinging the mean price quite far.  As you can see in the graph on the next page, while the largest outlier is an incredibly expensive item cheaper through Costco, the majority of the items are slightly cheaper on Amazon, and this combined with the other outliers in Amazon’s favor push the average price differential to only $8.95 in favor of Costco, which is barely notable and not really indicative of a large price difference between the two storefronts.

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We found these findings surprising, as Amazon.com has long been #1 in online transactions, and has strong ties to the tech industry, while by contrast Costco is a retail wholesale company for the most part and is in no way a major player in technology and consumer electronics sales. 

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When we take a look at reviews for the Computers and Electronics departments, we see that on average, Costco customers tend to be more satisfied with their purchases, with an average rating across all products of 4.2/5, while Amazon’s average was only 4.0/5.  However, given the large difference in number of reviews (Amazon had 971 average per item to Costco’s 269) it isn’t safe to conclude that Costco customers are happier with their purchases, just that the sample size for the data is smaller.  Since unsatisfied customers are more likely to leave negative reviews (Schleicher, 2018) than satisfied customers, the more reviews left, the more likely the average rating is dragged down.  Also, the discrepancy between average number of reviews is important as it illustrates how Amazon sells much more in Computers and Electronics than Costco.

 

Health and Beauty

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The next department we looked at was the Health and Beauty department, and with this data set we noticed a different trend than with Computers and Electronics.  In that department, the average price was swung into Costco’s favor through a single outlier and very expensive item, in Health and Beauty, the vast majority of products fall within a small pricing range, and 78% of them were cheaper through Costco.  Looking at our graph, we can see that the difference between the two storefronts is much easier to distinguish and that Costco, being a retail wholesale giant, sells a higher volume of products between the items that were compared.

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It is important to note that this data is not indicative that Costco sells more Health and Beauty items than Amazon, as we only compared items that were available for purchase on both sites, and Amazon has a much wider selection of total items.  However, what we can see from this is that when it comes to a direct comparison, Costco offers its customers a better price than Amazon does on the same items.  In this department, every single data point was in Costco’s favor, as the average price was $8.57 lower, and the review score was higher, despite having a larger number of reviews (average 290 per products vs 163 for Amazon) which is indicative that customers are more satisfied with purchases from Costco, likely due to the lower pricing.

 

Sports and Outdoors

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In the Sports and Outdoors department, we again observed that among the items we had acquired data for, Costco was the clear winner in overall pricing.  What is interesting about this department considering this is that despite Costco’s focus on wholesale, most of the sports and outdoors items (treadmills, camping tents, outdoor sets, etc.) are not items that are typically bought or sold in bulk.  In observing this, it was becoming clear that Costco’s overall business strategy that allows them to stay competitive with Amazon is based on a philosophy of selling a more limited selection of high-quality items and passing the savings on to the consumer.  In this department, 76% of the total selection of items analyzed were available at a cheaper price through Costco than Amazon, with an average price differential of $54.32 in their favor. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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With these points being surprising, we decided to do a more detailed comparison of a few specific items to illustrate this pricing differential.  Each of these six items are examples of exercise equipment, including cycles, ellipticals, and treadmills.

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As you can see from these items, Costco is very aggressive in their pricing of certain items and has a very noticeable pricing edge on Amazon.  And while two of these machines are significantly cheaper through Amazon, you can see that Amazon’s pricing appears very specific, and is likely subject to variance with sales and pricing trends.  It appears that while Amazon is the clear winner in selection of machines, the prices that they sell them for are a market rate, while Costco, possessing a more limited selection, is willing to offer items at a lower or higher price based not on sales trends, but simply on what they have available at the time.  This leads us to believe that Costco’s strategy revolves around moving small lots of products quickly, rather than keeping items in stock indefinitely.  Indeed, many of the items we acquired data for in this project are no longer available on Coscto.com, while they are still purchasable through Amazon.

Regarding reviews in Sports and Outdoors, there wasn’t enough difference to draw any conclusions about how customers felt about their purchases from either storefront, as both had very similar average review scores even though there was a large difference in average number of reviews.

 

Home and Kitchen

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In the Home and Kitchen department, we had a bit smaller sample size again due to Costco’s conservative selection, with only 80 items.  However, again illustrating the trend seen in other departments, of the items available on both storefronts, 89% of the items were available at a cheaper price through Costco.com.  In addition to having cheaper prices overall, the pricing differential was substantial as well, as there were quite a few items with large differences in pricing of over $100 between the storefronts, and of these high-ticket items all but one was available cheaper through Costco.com.  Looking at the graph, you can see the clear advantage Costco offers its customers among items available on both storefronts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When we came to these conclusions, this department wasn’t quite as surprising as some of the others, since many of the items listed on Costco were items that they have a reputation for selling.  Home appliances, cooking ware, and commercial kitchen appliances (such as espresso makers and deep fryers) were among the items listed, and it made sense that a wholesale company such as Costco would be able to offer better prices than other competitors.  However, the pricing differences extended into other items in this department, such as mattresses, decorative items, and linens, all items that again illustrate Costco’s overall strategy of offering less selection, but lower prices.  In this department, review averages were again very close between the two stores, with Amazon having a 4.0 average to Costco’s 4.3.  As seen previously, Amazon had a significantly higher number of average reviews (255 to 110) making the score difference less significant.

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Clothing & Toys

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The last department we covered is actually two different departments, the Clothing and Toys & Baby departments.  Since Costco.com’s selection of items in these departments was so limited, we decided to combine them rather than analyze them separately. While the data from these departments is not particularly useful in illustrating pricing differences, they do continue to illustrate Costco’s strategy of only offering products that they can sell at lower prices than their competitors.  In the clothing department, we only found 27 items with data that were available on both storefronts, and in Toys and Baby, there were a mere 7 items.  Nevertheless, we constructed graphs for both, as seen below.

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When looking at these graphs, you can clearly see that while the sample size is very small, the data presented is much the same as the other departments with many more items available for analysis.  We again have a clear majority of lower pricing through Costco, with a 10-15% price differential, just as seen in all of the other departments.  So we continue to see that although Costco doesn’t have anywhere near the selection of Amazon, of the items that they do offer, they will usually have the cheaper price between the two. 

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Full Comparison

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With all of the data analyzed, we can show that Costco is the clear winner in our study.  This took our team by surprise, given our original expectations for this analysis.  We found that Costco.com has a much more limited selection of items than Amazon.com but of the items they do offer, 7 times out of ten they will have a lower price than the same item listed and sold by Amazon.com.  Our analysis shows that on average, items have a price 10.64% lower on Costco.com across the board, as shown in the graph below:

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A as a result of these observations, It seems that it would benefit online shoppers to look first at Costco.com before visiting Amazon if they need a generic item and are not looking for something specific, because if they can find an item they are willing to purchase they are likely to get a better price through Costco.  It is also important to note that while the Costco wholesale retail store requires a membership to shop there, this does not apply to Costco.com.  While there are some items on the website available for purchase only by members, the majority are open to any online shopper, with the only stipulation being a 5% surcharge to non-members.  With the average price differential being 10.64%, a regular shopper is still likely to get a better price through Costco than Amazon, no membership required.

 

Financial Comparison

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At the beginning of the project, our assumptions and expectations were based on the understanding that Amazon is one of the largest, if not the largest companies in the world in sales & revenue.  After looking at financial reports, this is true:  Amazon is in the top 10 companies globally in terms of revenue and is currently experiencing massive revenue growth year over year, to the tune of 30.8%. (Wikipedia, 2019) This makes Amazon the #2 retail company in the world, trailing only Walmart in revenue. (It’s important to note that Walmart is also the #1 overall company, with astounding revenues in excess of half a trillion dollars in 2018) No one on the team was surprised by this, given how prolific Amazon is in the online retail and technology space.  What we were surprised to learn, however, was that Costco is also a behemoth company, with revenues of over 129 billion dollars in 2018, and the #3 retail company, just behind Amazon.  And while Costco’s growth rate isn’t anywhere near Amazon’s, at just 8.7%, they are still currently growing at a faster rate than any of the other major players in the retail space, including the behemoth Walmart, which experienced a modest 3% growth in 2018.  (Fortune 500, 2018)

 

With this information, we return to  our original question:  What is it that makes Costco so successful, even as Amazon continues to gain market share and the brick-and-mortar retail  market continues to shrink? (Montgomery D., 2019) At first glance, it would appear that Costco simply has a sales model that is effective in the market,  but in reality it is a bit more nuanced.  Costco’s main driver of revenue is through the sales of goods, that is true, but they are unique in that they require a subscription for their customers to shop in the store, and this subscription allows them to use economies of scale to sell bulk quantities of goods to consumers at lower prices than traditional retail outlets.  Within that realm, Costco also uses a practice that many other big-box retail stores use, the marketing of internal brands to increase profits.  Costco’s gross profit margin from 2018 sits at a comfortable 13.01%, and this is achieved by selling the internal brand at a higher margin.  By selling Kirkland Signature, their own brand, at a higher margin than other items, they are able to sell name brand products at lower than average prices than their competitors, and since Costco deals in wholesale, they are able to lower prices even further, due to the subscription their customers pay offsetting some of the losses and spoilage that happens when items are bought in quantities larger than sold. (Page, V., 2019)

 

Another practice that Costco is often praised for is their attitude toward their employees.  Costco workers on average earn $21 per hour and receive health benefits, vacation time, and a 401(k) match, things which are not a guarantee to employees of any of their competitors.  While most companies of this size instead try to pay workers as little as possible, this leads to higher turnover.  Costco has adopted a unique strategy and philosophy that saves them money on training new employees, since their workers are less likely to quit or leave for other jobs given their increased pay and benefits.

 

Conclusion

           

In conclusion, the answer to our original question is as expected determined by more than a few factors.  When it comes to online shopping, Costco is able to continue their model of lower prices and offer their service to everyone, though their members get even deeper discounts.  And even though Costco doesn’t seem to be trying to compete with Amazon in the online retail space, offering far less items and oftentimes not in all varieties, their online store is easy to navigate and is full of great deals for those willing to look.  Their retail stores are successful despite the rise of Amazon because they offer something Amazon doesn’t:  Name brand goods in bulk quantities at lower prices.  Due to Costco’s subscription, they are able to do this and carve out a niche in the market for themselves.  Comparatively, Amazon has a similar business model with their Prime subscription, which gives subscribers free shipping on qualified items.  This subscription removes one of the biggest barriers to consumers frequently shopping online, and it allows Amazon to use economies of scale just like Costco to offer their customers lower prices, which is why often, items on Amazon will be listed at lower prices than they are at retail stores.  These two companies are both successful based on some of the same principles: offering a service for a subscription and having a having a loyal subscriber base to offset the cost of that service, allowing them to be more competitive in their respective markets.  The reason Costco in particular continues to grow and succeed despite the rise of Amazon is because they simply exist in a different market niche, one which they have created for themselves.  And while Amazon continues to steal customers away from traditional retail stores, the Costco subscriber base keeps growing and that base keeps shopping at Costco, a result of their unique service not offered by Amazon. 

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References

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Jeff_Item_Comparisons.PNG
Computers and Electronics 2.PNG
Health and Beauty 2.PNG
Sports and Outdoors 2.PNG
Home and Kitchen 2.PNG
Baby and Toys 2.PNG
Clothing 2.PNG
Comprehensive Graph 2.PNG
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