Costco is missing out on an exploding grocery trend

New York(CNN Business) Curbside pickup is exploding in the pandemic as more people choose to order online and scoop up their groceries outside the store without leaving their car. But you won't find that option at a Costco store anytime soon.

The warehouse chain has long held that curbside pickup doesn't make sense to offer, mainly because it doesn't have the space in its stores to pull it off and because it wants customers to come inside its locations to make impulse purchases. That's even as rivals like Walmart-owned Sam's Club, Kroger and Whole Foods expand their own curbside pickup offerings.

That could be a mistake in an environment where online ordering is taking off, retail analysts say.

Picking up groceries has become popular in the pandemic because shoppers want to limit their time inside stores. It can also be faster for customers than waiting for home delivery, and there are no delivery fees.

In August, 25.5 million households bought groceries online and then picked them up at stores, according to a survey of 1,817 consumers conducted August 24 to August 26 by consulting firm Brick Meets Click. That was up from 10.1 million households in August of 2019, the firm said.

Costco's sales surged early in the pandemic as people rushed to stock up on groceries as they faced stay-at-home orders and social distancing rules. But the company, which reports its quarterly results Thursday, has seen sales growth taper off as restaurants reopen and consumers buy less in bulk. Some analysts say that introducing curbside pickup would boost growth.

Costco (COST) is "behind the ball," said Timothy Campbell, analyst at Kantar. "They risk falling behind if they don't invest in pickup. You have customers establishing routines with other retailers."

Michael Jackson, 37, in Round Hill, Virginia, is one customer who's been turning to curbside pickup more often in the pandemic. Although he is a Costco member, Jackson has been ordering up to $125 worth of groceries online for his family of four and driving to pick them up at Walmart and Kroger-owned Harris Teeter during the pandemic.

"It's convenient. I don't have to wrangle around kids in the store and tell them not to touch stuff. I can keep them in the car," he said. "Walmart has dedicated curbside pickup lanes and it works great."

Jackson doesn't plan to drop his Costco membership because it doesn't offer pickup, but "we would go a lot more to Costco" if it gave him the option.

So far, the chain isn't budging.

"We continue to look at [pickup]. We haven't decided to do it at this point. We don't see a lot of members asking for it. And we do offer other alternatives," Costco chief financial officer Richard Galanti said in an interview with CNN Business.

Jam-packed warehouses and parking lots

Space in its stores is the main issue for Costco. The club doesn't have much room in its jam-packed warehouses and parking lots to pull off the logistics of pickup. The option requires a staging area inside the store for workers to assemble orders, extra cooler space to keep items fresh, and dedicated parking spots for customers driving in to come grabbing their groceries.

"Their clubs are so busy. It's a tough thing to do," said Scott Mushkin, analyst at R5 Capital. "There's not a lot of backroom space. Stuff goes right to the floor."

Galanti said Costco would need to reconfigure stores to handle grocery pickups.

"You have to have a place to store the stuff," he said. "You can't store it at room temperature. You've got to separate it into refrigerated, frozen and dry."

The company, which operates on razor-thin profit margins, also says it's too expensive for its business to have employees dedicated to putting together customers' orders and bringing them out to their cars. "There's costs associated with it," Galanti said.

And Costco wants shoppers to come into warehouses, where they often make unexpected purchases while browsing around. Pickup takes away this opportunity for Costco to drive sales.

"We want you to walk the warehouse and see what we have to offer," Galanti said.

While you can't pick up your groceries curbside at Costco, you have the option of doing so with certain higher-priced items.

Costco began offering pickup in 2018 on expensive items, such as jewelry and electronics. The company took this step, Galanti said, because people don't want pricey items shipped to their homes and sitting on their doorsteps.

Costco also offers customers same-day delivery through Instacart for fresh groceries. Instacart shoppers -- not Costco employees -- select customers' orders, and customers pay a fee to Instacart for delivery. Galanti declined to comment on the financial arrangement between the two companies.

And Costco also offers two-day delivery on dry grocery items, which it ships through carriers like UPS (UPS) from around 17 "business centers" across the country — Costco warehouses that are designed for small business customers like restaurants, janitorial services, food service providers.

Sam's Club's 'easy decision'

As Costco holds off on getting into curbside pickup, it's getting more common at grocery stores. That's because rivals are seeing success with the option and expanding it.

Walmart (WMT), which offers free grocery pickup for orders above $35 at more than 3,500 of its stores, said last month that customers add more items to their baskets when they order for pickup than they do when buying in person. Meanwhile, Kroger (KR) said earlier this month that pickup, not home delivery, made up the bulk of its online sales.

Since the beginning of the pandemic, Whole Foods has expanded grocery pickup from 80 stores to more than 470. Target (TGT)plans to offer fresh and frozen grocery items for pickup at more than 1,500 stores in the fall for the fist time.

Warehouse chain competitors Sam's Club and BJ's Wholesale Club (BJ) have also introduced curbside pickup for the first time in the pandemic.

"In the [pandemic] environment, our members have valued quick and contactless shopping experiences," Eddie Garcia, senior vice president and chief product officer at Sam's Club, said in an email. "It was an easy decision for us" to introduce curbside pickup "as a way to provide a further convenience."