Costco – Electronics Market Share Opportunity is an Uphill Battle

Recent reports suggest that retailers like Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) are taking some of Best Buy’s (NYSE:BBY) consumer electronics market share with the help of their promotional discounts and offers as well as effective online sales strategies. For additional details you can see our recently published article Can Best Buy Correct Product Missteps?

Here we take one step further and examine whether warehouse clubs like Costco (NASDAQ:COST) could also ride this bandwagon and grab market share in consumer electronics.

Costco traditionally competes with warehouse club operators including BJ’s Wholesale Club (NYSE:BJ) and Sam’s Club, in addition to large retailers. We maintain a price estimate of $49.76 for Costco, well below current market value.

Costco Can Leverage Discounting Power

Costco offers bulk purchase of a variety of heavily discounted merchandise as well as a limited selections of branded goods. The retailer is able to provide deep discounts due to higher product turn-over from bulk buyers and business customers. Similar to Wal-Mart and Amazon, Costco could also leverage its discounting power to lure potential electronics customers that might otherwise go to specialty retailers like Best Buy.

Best Buy gains its edge by providing trusted service support and frequently being the first to display the latest electronics and gadgets. However, recent reports indicate that consumers might be tentative to adopt some of the latest technologies, instead opting for more established products. For example, consumers are commonly choosing established flat panel TV’s over the new 3D-TV technology. This trend could open a window of opportunity for Cotsco, as the company is able to utilize its personalized discount scheme to drive sales (particularly during holiday shopping). (See our previous article on Sam’s Club)

Stock Impact from Improved Revenue per Square Foot

Costco’s revenue per square foot (RPSF) stands much higher than that of Wal-Mart, despite selling similar merchandise. However, Costco still lags slightly behind Best Buy on this metric. We estimate that average revenue per square foot for Costco stood at around $814 for 2009 compared to $908 for Best Buy’s US stores.

If Costco is able to gain electronics share from Best Buy, sparking RPSF upside closer to the retailer’s levels, what impact might it have on Costco’s stock? We estimate that this scenario could generate 6% upside to our Costco price estimate, which at $49.76 remains well below market value.

Drag the trend-line in the chart below to see the impact of various US revenue per square foot trends on Costco’s stock value. We estimate that Costco generates roughly 43% of its stock value from merchandise sales in the US, with another 19% added by international merchandise.

But Costco Faces an Uphill Battle for Market Share

However, this potential upside is mitigated by the nature of Costco’s customer base, as well as its limited brand selection. Customers that are not currently Costco members might choose Wal-Mart when looking for a one-time discount, rather than bear membership fees. Additionally, many of Costco’s customers are small business owners that might not be inclined to purchase new gadgets. Hence the possibility exists that the electronics market share opportunity could quickly be gobbled up by Wal-Mart and Amazon, who maintain a clear head start over Costco. In order to successfully grab market share, Costco must entice both its existing customer base as well as customers who might initially be looking for a deep discount on a one-time purchase.

You can see the complete $49.76 Trefis price estimate for Costco’s stock here.