3 ways Costco can win leveraging AI and its treasure trove of member shopping data

Published Fri, Oct 13 20239:44 AM EDT

Wall Street analysts believe Costco (COST) can benefit from the expanded use of artificial intelligence to enhance the customer experience, manage inventory and supercharge its private-label offerings. So do we. While it may be one of the best-run retailers in the world, Costco is not known for being on the cutting edge when it comes to implementing new technologies. We appreciate management's solid operating model but would like to see Costco drive more of a digital experience for its customers like Walmart (WMT) and Target (TGT) are doing. It still lags in that regard, but that could be changing. Highlighting its takeaways from this year's Groceryshop industry conference, TD Cowen praised Costco's efforts to "improve its digital capabilities." The analysts in a note last week said they also think the retailer can "improve its use of data analytics." For the entire grocery industry, Cowen sees AI amplifying "loyalty by harnessing customer interaction data to offer prescriptive advice." Shopping data from its large and very loyal membership base is certainly Costco's competitive edge — so, capitalizing on any new AI capabilities to develop more sophisticated ways to analyze and act on it is a worthy and necessary pursuit. AI could also better equip Costco to deal with the kind of headwinds that other retailers struggle with. Customer experience Costco has the "unique opportunity to drill into the buying habits of their individual members," Morningstar retail analyst Noah Rohr told CNBC in an interview. He believes that AI enhancements can lead to a more personalized member experience in physical stores and online, improved management of its inventory, and a boost to its private label Kirkland business. While already incorporating some AI capabilities to tailor marketing campaigns, Costco could leverage generative AI to do it "better and more efficiently," Telsey Advisory Group analyst Joe Feldman told CNBC. Interest in generative AI, which can take user input and create images and human-like written responses, exploded when ChatGPT went viral late last year. Rohr believes that generative AI advancements could be as simple as making promotional emails more relevant to each individual member. "Rather than filling someone's inbox with emails every week, you limit the number of emails you send out but increase the ROI [return on investment] per email because each one is more relevant to the individual customer," he explained. In the stores, Feldman thinks generative AI could improve customer service functions. The Costco app might one day remind you to buy a product that you bought the last time you were shopping, he said, offering a hypothetical example. But, whether using AI to make asking questions to a chatbot more natural or to manage inventory levels or monitor supply chains, Feldman said it's crucial that Costco "keep up with the times." Inventory management In retail, managing supply and demand can make or break financial success. Last year, some retailers got into trouble when they became overstocked with stale goods that customers weren't interested in. That resulted in increased costs in renting more space to store goods. During this period, Costco was able to manage its inventory more effectively because it's a master at turning inventory quickly. However, more recently this year, Costco experienced moderating sales in March, when total company comparable sales dropped 1.1% . This occurred because Costco experienced a seasonal headwind where it didn't change its inventory quickly enough to accommodate the changing spring season. We know that Costco has a strong legacy of stellar inventory management, but there is always room for improvement. The retailer utilizing its large customer data sets is "a big advantage when it comes to inventory planning," Morningstar's Rohr said. Data and AI can be helpful with demand forecasting and anticipating which goods consumers are going to want at which times, Rohr explained. The result is that Costco can "cut down on the time between the receipt of inventory and time of sale and get goods to the floor quicker." This way, management can turn inventory at a lower cost and more efficiently. Rohr said Costco can also optimize its data with AI by making sure store employees are using their time efficiently. For example, he points to an example of sending digital notifications to employees to track when inventory needs to be restocked. "By knowing exactly which goods need to be replenished and knowing exactly where in the store the replenishment needs to occur, you can cut down the number of steps the employee needs to take and the time it takes to move inventory." "Now, employees can spend more time with customers which enhances their shopping experience," he said, stressing that retailers like Costco want to "cut down on the laborious tasks and free up employees to engage more at the store level at the customer level." That also improves the shopping experience for customers who won't walk away frustrated when the products they want are soldout on the shelves. Kirkland insights Another benefit to having a great deal of data and potentially using AI for forecasting purposes is to help Costco learn more about its industry-leading private label business: Kirkland Signature. TD Cowen estimates Kirkland drives nearly 30% of total Costco sales. While a big number, there's plenty of room for growth in what the analysts characterize as an "iconic" brand already recognized for its "balance between quality and value." Morningstar's Rohr points out that Amazon (AMZN), also a Club stock, sells a high volume of goods through its marketplace every day, which gives the e-commerce giant the ability to see demand in real-time and develop its own products to capitalize on that demand. Similarly, Costco gets a great deal of consumer data, which Rohr suggests gives the company solid insights into rolling out new Kirkland products. "If there is a gap, Kirkland can fill it in demand and supply," he said. (Jim Cramer's Charitable Trust is long COST, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Customers wait in line to check out purchases at a Costco store in Teterboro, New Jersey.

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So do we.