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Yes, Costco (and Other Retailers) Can Compete With Amazon

Stocks in this article: COST AMZN STKL IBM HPQ RAX KR WMT HD

NEW YORK (TheStreet) -- This week, TheStreet's Jim Cramer took Costco (COST) shares out of his charitable trust because he doesn’t think anyone can get retail margins with Amazon (AMZN) so anxious to grow and willing to cut prices to the bone in order to do so.

I think he may be misreading the situation.

First, Amazon does have margin. If you are addicted to, say, those fancy dried mandarin oranges made by SunOpta’s (STKL) Nature's Finest unit, Amazon isn’t selling it to you at cost. It's making money on the deal.

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You know who else is making money on those oranges? An outfit called Ducky's Shoppe, which uses Amazon for its marketing and fulfillment. It has 44 pages of Amazon merchandise, most of it in small lots. Toys, food, books and branded merchandise.

If it were a physical store, it would be a hole-in-the-wall on some dirty city street. Its ability to source things people might want and sell them through Amazon means it has a retail business that works.

Thousands of companies piggyback on Amazon in this way. Amazon can handle their sales taxes and credit cards, plus their marketing and deliveries. And it’s not just people selling goods who depend on the company. There are a host of companies reselling  Amazon Web Services, a cloud-computing service, as well.

My guess is that IBM (IBM), Hewlett-Packard (HPQ) and Rackspace (RAX) have a lot more to worry about from Amazon than Costco does. Those are the companies that are losing all their margin to Amazon, not Costco. 

How is Costco doing? Not badly. Sales this year are running about 4% ahead of last year’s $105 billion, and it brought less than 2% of those sales to the net income line for its most recent quarter. Amazon’s sales for its last four quarters, by the way, come to $81.82 billion. That’s less.

Lots of retailers continue to do well by understanding their niches and sticking to their knitting. Kroger (KR), for instance, is almost as big as Costco and is competing more directly with Walmart (WMT), turning some of its grocery stores into the equivalent of supercenters. And Walmart is more than six times bigger than Amazon is in sales.

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