.png)
And why Costco will lose in the long term
If you can’t explain it to a six year old, you don’t understand it yourself.
— Albert Einstein
Lawyers and doctors are notorious when it comes to ‘not being intelligible’… on purpose! As if they have a particular joy of seeing blank faces when they talk to ordinary mortals.
For the avoidance of being seen as cynical, let’s clarify that the reason for the Latin full of legalese or medicalese is not to justify the ridiculously high hourly rates of these professions but to be more precise with less words as opposed to plain language.
I’ll add consultants to this group, including yours truly, as the laziest of them all as they’re in love with abbreviations particularly. Especially if they have big tech backgrounds.
I’ll talk about two terms today that are easy to understand at first glance, but the contextual difference in their meanings could affect your business’s survival into the next decade.
So first, let’s review the top three differences between Digital Transformation and Digital Mindset, and then apply the model to Costco for a real life case study.
1. Digital Transformation is reactive, Digital Mindset is proactive.
Digital Transformation is a reluctant, half hearted answer to market forces. Companies react to pressure by shifting grounds, changing trends and customer preferences in a panic mode. Their motivation is to do a ‘face lift’ only (e.g. launch an online store, acquire technologies to help new projects) which at best may slow down the inevitable irrelevancy but doesn’t solve the long term survival and growth problem.
Digital Mindset on the other hand is proactive; it doesn’t play catch up with customers’ shifting behaviour. Companies who adopt this approach prefer a ‘healthy diet’ (e.g. review the entire business model and identify all areas of digitalisation opportunities in a wholesome way). They embed the mindset in their DNA, so they can see the tsunami coming their way before it hits their shores.
2. Digital Transformation is siloed, Digital Mindset is integrated.
The data that’s gathered by Digital Transformation efforts sits in silos; they don’t feed other areas of the business to inform decisions. All these product areas are still classified as online and offline separately, they still rigidly represent different line items following the accounting books. The leadership treats them differently including the personnel; you can bet, the head of online sits at the far end of the table in meetings as opposed to the physical warehouse or branch manager occupying a prominent seat closer to the decision makers.
For instance, in Costco’s latest earnings call, all questions about online basket sizes, managing customer behaviour on all channels in a smart way end up unanswered. Even successful acquisitions such as Innovel, are presented only to address the online delivery need for big items as ‘people don’t want to put them in the back of their suburban or trucks to take home’.
In contrast, Digital Mindset looks at all data points equally and makes decisions based on collective intelligence. Companies, who embrace this approach, understand their online users’ behaviour and track them in their physical stores with relevant offers or vice versa. This is not rocket science; it is a way of thinking which companies easily acquire if they’re open minded and future oriented.
3. Digital Transformation aims for ‘mass reach out’, Digital Mindset aims for ‘individual reach out’.
Digital Transformation sees potential customers, whereas Digital Mindset creates targeted customers. There’s no online or offline customer anymore. There’s behavioural input which floods from all channels which could be used to understand your customer wherever they are (e.g. browsing the isles of Costco, or searching for products on their online store, or just browsing the web or apps), and offer them the things they don’t even know they want at that time at that right price.
Let’s go deeper on Costco to see why digital transformation is not enough
Costco’s main strength has historically been offering the cheapest products to customers in large stores in-person. It has traditionally grown by opening new stores each year, which has stalled lately. More than half of their revenue is from groceries which is the main growth driver for the industry overall.
Amazon has been slowly and steadily eating up their cake. In comparison, Walmart and Target have been much more active in digitalisation and have adapted their business models accordingly.
Costco is late into the game admittedly, and online (read it as ‘e-commerce’ in their case) has been forced upon them by the market necessities as an afterthought. On a positive note, they have partnered with Instacart for same day delivery in Canada and bought out Innovel for big ticket items for final mile delivery and installation, both of which are moves in the right direction.
It is telling that, ‘digital’ is mentioned only once in their latest earnings call and despite several questions by the analysts, even ‘e-commerce only digital’ has been a reluctant discussion point without much care on its performance and how it can spurt growth.
Simply put, Costco wants to see its customers in the stores, and looks like the leadership doesn’t believe in the value of digitalisation much, at least not yet.
We still want you to come in. You’re going to buy more stuff when you come in, period.” Richard A. Galanti, CFO
So far Costco is still doing alright, their shareholders may not yet be complaining (its P/E ratio is on average ~65% higher than Walmart and Target).
Given the pace of digitalisation for anything and everything that can be digitalised, Costco’s piecemeal approach clearly doesn’t live with that mantra, and compared to its competitors’ more heartfelt embrace of a wholesome approach (close to a digital mindset), their position is not sustainable.
Digital Mindset would prepare Costco better for the future
We’ve taken the liberty to dream up a parallel universe where Costco has embraced digital at its core for holistic growth across its offline & online business without cannibalisation.
Imagine that you have store analytics such as time spent in different aisles, products picked up, purchased and returned, combined with that member’s online shop activity.
And now imagine you use this combined behavioural input to feed a like algorithm to start predicting what that specific customer would want to buy.
Combine that with wider market trends from search, YouTube and other browsing behaviour to train your like algorithm even more.
Now add contextual information to this mix to be able to offer ‘similar items’ at the right place and at the right time for every member. This would also allow Costco to do smart stock / order decisions and open warehouses and physical stores where the right customers are.
It all builds on behavioural inputs that feed into a like algorithm which allow the business to provide made-to-sales products and services and offer channel agnostic distribution.
This is exactly the reason why Amazon has moved on to opening physical stores and buying out prominent ‘offline’ brands such as Whole Foods, as they don’t have that offline data. They partner with supermarkets in their grocery sales because they don’t know how the customer behaves in their aisles (what prompts a young mother to buy a weekly magazine alongside baby formula?).
This is not science fiction. It is happening today.
Costco is well positioned to make the most out of this new landscape if only it has embraced Digital Mindset and has taken seriously where their customer has been going towards for years now.
The outcome would be substantial on all their business metrics from cost reduction to higher basket size to higher relevancy with Gen-Z customers.
If you're interested in a free assessment of your business or target investment, you can find out more about our consultancy on our Digital Mindset for Growth Capital page.