Costco, like many of its retail rivals, has embraced artificial intelligence (AI).
That’s perhaps a little surprising given that the chain has traditionally waited for its rivals to prove the benefits of using emerging technology before adopting it. AI, while it has become common, has also had its fair share of missteps.
Starbucks, for example, recently dropped its highly heralded AI inventory tool after deploying it across the chain for under a year.
The tool, NomadGo’s Automated Counting, worked well in demos, but in real life, it struggled to tell the difference between skim, oat, and soy. whole, 2%, and other types of milk, Reuters reported.
It was supposed to be eight times faster than manual counting and 99% accurate, but the AI was good at counting milk, just not ordering the right kinds of it. Starbucks, to the credit of CEO Brian Niccol, adjusted and moved back to humans doing inventory.
Costco has not used AI for inventory purposes, but it has deployed the technology on its website.
Costco uses AI to show value
Costco reported triple-digit growth in AI-sourced ecommerce traffic, with the highest conversion rate among all traffic sources,” according to comments executives made during its third-quarter earnings call.
It’s an area where “activity is still low-volume but rapidly expanding,” the retailer shared.
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CEO Ron Vachris explained the company’s AI playbook during the call.
“As we learn more about how consumers are embracing AI in their shopping habits, we are working with the leading AI companies to improve the visibility of our values to current and potential future Costco members,” he said.
He believes that using AI will allow Costco to do a better job in communicating value to its members shopping digitally.
“We believe AI is changing how consumers research products, and has the potential to be a significant opportunity for Costco given our pricing authority, and our focus on quality,” he added.
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A real example of Costco’s AI working
CFO Gary Millerchip explained that Costco has been leveraging AI to enhance its online product pages, which in turn is increasing its relevance with the large language model.
He shared a key example: the company’s appliances.
“We have got a good value on appliances, a very good everyday value, but our real big value is in an all-in pricing. Our prices include delivery, installation, and haulaway,” he said. “Regular search did not show all that value.”
He also noted that the same applies to the membership-based club’s tire services, where it offers prices with installation included.
“We are very bullish on this AI search and the strength that is gonna bring to telling the whole Costco story about the true value of what we offer,” he added.
Costco embraces an opportunity
In my 30-plus years of covering the retail industry, my biggest frustrations have involved companies not being transparent on pricing and bad customer service.
AI has been used by many retailers and service providers to mixed results. A few months ago, for example, I was trapped in a 45-minute AI loop with my electric company because my address did not exist in their system, and most consumers have experienced similar frustrations.
Costco’s use of AI, however, showcases its actual pricing, which could give it an edge over rivals who aren’t being equally transparent.
Constellation Research’s VP of Analytics and Data Produts Indy Cho, VP Analytics and Data Products, said the retailer is looking to create a flywheel between data, inventory, demand, and pricing.
“Understanding the demand at a localized level is an incredibly challenging task. Every time you shop, that’s a demand signal. We get that back to buyers, and we they go through a tremendous amount of analysis to figure out how much product needs to get to the right location,” Cho said. “The bar for a higher level of accuracy is absolutely necessary, but that doesn’t mean we don’t stop experimenting.”
The warehouse club has opted to take a practical approach to AI, according to AIM Media House.
“Costco’s anti-hype approach to AI is refreshing given the hype-fest today. The real differentiation for Costco is in inventory, pricing, and warehouse efficiency. The stack for Costco isn’t flashy or bleeding edge but focused on value,” according to the website.
Vachris noted that Costco’s approach has been working.
“We are seeing great returns on the investments. Gary spoke about the sales that we are leveraging on e-commerce. There is a cost to that AI, but it is being offset by greater sales and great leverage that we are seeing there as well,” he said.
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