One of Costco customers’ favorite perks is turning into the retailer’s biggest weakness

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Costco’s struggling to keep up.
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Flickr / Graeae Eye

The joy of bargain hunting is being replaced by the convenience of e-commerce – and Costco is struggling to keep up.

While companies such as Walmart and Target are making major investments in online shopping, Costco is lagging.

Part of the reason for Costco’s reluctance to build its online business is tied to the retailer’s business model.

“The key to warehouse club shopping is the hunt for new stuff that was not there last month or even last week – a real treasure hunt!” Frank Riso, principal at Frank Riso Associates, recently told Forbes of Costco.

Treasure hunts work well in person. However, in 2016, online sales is one of the biggest areas of growth in the retail industry as customers ditch brick-and-mortar stores.

E-commerce sales are expected to reach $385 billion in 2016 and $632 billion in 2020, according to BI Intelligence, Business Insider’s research service. While the average growth rate in the US retail industry was just 2% in the first half of 2016, it reached 16% online.

Essentially, if retailers want to grow sales, e-commerce is key – and Costco is falling short.

Even Costco is realizing it needs to catch up.

“There are some things that perhaps we should’ve done earlier,” Richard Galanti, Costco’s CFO, said in a call with analysts earlier in December.

The company is currently focusing on increasing the number of items available online, making the checkout process more convenient, and working to deliver online orders faster. Galanti said in the earnings call that Costco plans to grow its online apparel business in particular.

As a result, online sales are growing, increasing 8% in the most recent quarter compared with the same quarter last year.

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A Wal-Mart Pickup Grocery test store in Bentonville, Arkansas.
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REUTERS/Rick Wilking

Still, Costco has a long way to go. The company says it is not going to add click-and-collect, an area other retailers like Kroger and Walmart are exploring. Nor is it planning to compete with Amazon or Walmart in terms of the sheer number or variety of products.

“To Amazon and others’ credit, they’re trying a lot of things,” Galanti said. “Some will work and some won’t, and we’re pretty good at understanding what works [for Costco].”

A shortcoming Costco is trying to address is mobile sales. According to Galanti, the company has a lower ratio of mobile sales – a huge growth category – than the industry average.

In general, Costco seems to have less urgency in growing online sales than competitors such as Walmart, Target, or even grocery chains like Kroger.

“We have never been big on convenience. Our success has been based on pricing value, quality, and quantity at the lowest possible price,” Galanti said during an earnings call in September. “You will see some differences, and mostly the differences are from an offensive standpoint, not a defensive standpoint. But we look at our core business of getting you in the store still is paramount to what we want to do.”

For comparison, in October, Walmart CEO Doug McMillon said that Walmart, “over time, is going to look like more of an e-commerce company.”

Walmart has made some serious investments in e-commerce recently, purchasing the online retailer Jet.com and building new software called Electrode that it says helps its webpages load 33% faster.