cos-12-15-16-checkout
A retailing colossus, Costco's worldwide sales trail only those of Walmart, which has 11,528 stores to Costco’s 715, and Amazon, which just climbed into second place. The check-out counter, above, during the pre-thanksgiving rush at a Costco in Torrance, CA.  Photograph by Spencer Lowell for Fortune

Costco’s Battle Plan for the E-Commerce Wars

Dec 08, 2016

Costco Wholesale (cost) is inarguably one of the best performing retailers out there. Yet for all its success, the bulk discounter has an Achilles heel: it's an e-commerce laggard.

The company, beloved by its affluent clientele, gets about $15 billion a year in U.S. sales from its Kirkland brand alone. But online sales are not even $4 billion, or 3% of sales, according to eMarketer, making it a smaller e-commerce player than the likes of Best Buy (bby) and Macy's (m) whose total revenues are much smaller.

Costco for years preferred to focus on its stores and merchandise even as its most direct rival, Wal-Mart Stores' (wmt) Sam's Club has tried to narrow its sales gap with its bigger rival with big e-commerce investments such as curbside pick up.

In its first fiscal quarter, ended Nov. 20, Costco's online sales rose 8%, well below the clip at Walmart and Target (tgt). But in the following two weeks, which included the Black Friday and Cyber Monday weekend, that rose into the low-to-mid teen percentages, Costco Chief Financial Office Richard Galanti told Wall Street analysts on a conference call on Wednesday. Indeed, many Costco initiatives in the last year are finally starting to pay off.

"We're clearly taking the offense," said Galanti. He added: "Again there are some things that perhaps we should've done earlier but we're already seeing some improvement."

Those improvements have include adding more high-end brands in its online merchandise and improve stock levels for high volume items that sell quickly. Costco also says it is working on the experience and functionality of its site by improving the search function and shortening the checkout process to two clicks from many more before.

What's more, Gallant says Costco is simplifying and automating its returns process, and making it easier for customers to track orders and giving them narrower delivery times. And Costco is using more of its distribution centers to help it fill online orders more quickly and less expensively.

These sounds like e-commerce basics, but Costco has to master them if it wants to be competitive.

Walmart recently tripled its online assortment and grocery pick up is available at hundreds of stores. Sam's Club allows shoppers to scan items in stores themselves and ring up their own order. Target has spent the last year beefing up its infrastructure IT and search too. And Costco by Galanti's own admission is way behind industry standards in terms of enabling shopping on smart phones, a big vulnerability given that nearly 40% of digital sales this holiday sales have been made over a smart phone.

As Cowen & Co analyst Oliver Chen put it in a research note, "It's not just merchandise that will make Costco special -Costco will also need to help save customers time too. The treasure hunt needs an integrated online experience as well."

At the same time, there are some e-commerce offerings Costco is not ready to jump on yet. For instance, Galanti said no to offering in-store pick up for online orders, saying it would require the use of too much space and customers aren't demanding it. He also won't turn Costco into some sort of online store for everything- the average store carries about 8,000 kinds of items (it's about 150,000 at a Walmart) and Galanti sees that going at most to 40,000.

Stores remain a top priority at Costco, a company Galanti admits has "grudgingly" gone after e-commerce.

"We think that we could and should do a lot more online," he said. But Costco also wants "to get people into the warehouses."

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: http://www.djindexes.com/mdsidx/html/tandc/indexestandcs.html. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions