Inside Costco's Practical AI Playbook
"AI is being interwoven into our business where we believe it can strengthen our model"
When Costco CFO Richard Galanti confirmed during the company's March 2025 earnings call that it was "still in the early innings" of AI adoption, he was definitely understating. Behind this conservative framing lies a sophisticated, multifaceted strategy where AI becomes a tool for refining operations already defined by efficiency, not a transformative technology requiring wholesale business model reinvention.
"We've had third-party AI companies, large companies, including ones that are headquartered in Seattle, come out and talk to us," Galanti stated, adding that Costco was "doing with working with IT and our CEO and our heads of operations and merchandising to see where and how it might fit." Rather than chasing AI for its own sake, Costco is evaluating use cases with precision, a philosophy that reflects the company's disciplined capital allocation and member-first ethos.
Current CEO Ron Vachris reinforced this philosophy with characteristic bluntness, "AI is also being interwoven into our business where we believe it can strengthen our model. We're approaching it in a very Costco way, practical, member-focused and grounded in tangible business value."
This contrasts sharply with how competitors are pursuing AI. Amazon invests billions to centralize AI integration across its sprawling, complexity-laden technology stack. Walmart advocates for aggressive automation with an "eliminate, automate, optimize" mentality. Costco is playing a fundamentally different game, one where the company's operational simplicity becomes its most defensible competitive advantage in the AI era.
The true strategic power of Costco's approach lies in the unique structure of the data it generates. Unlike Amazon's individual-centric transaction data or Walmart's mass transactional records, Costco collects information organized at the household level. A Costco membership, particularly its Executive tier, links multiple cardholders to a single household account, providing what data strategists call a "Household Graph," a comprehensive view of collective family consumption patterns rather than isolated transactions.
When an AI model analyzes a shopping basket containing diapers, teenage apparel, multivitamins for seniors, and bulk paper goods, it can infer household composition, life stage, and future needs with accuracy an e-commerce competitor simply cannot match. Historical purchase data spanning years creates a longitudinal record ideally suited for predictive modeling. As of fiscal Q3 2025, Costco had 79.6 million paid household memberships providing this stable, structured data foundation.
Costco ranks among the top three most trusted corporations in the United States, a permissioned asset that allows the company to deploy data-driven features with less consumer friction than competitors face. When Target or Amazon rolls out AI personalization, consumers often react with skepticism. When Costco does so, members are more inclined to believe the technology genuinely serves their interests rather than corporate profit maximization.
Practical AI in Action
Costco's AI journey began with a measurable impact. As far back as 2018, the company deployed a machine learning model across 30 stores to predict daily bakery demand by analyzing historical trends, weather patterns, and local event schedules. The pilot saved Costco approximately $100 million through reduced waste and better inventory alignment, compelling the company to scale it company-wide.
More recently, the company has embedded AI directly into mission-critical operations. In its pharmacy business, Costco integrated AI into inventory systems that compare prescription drug pricing across vendors and autonomously reorder stock to maintain above-98% in-stock levels. This single initiative delivered measurable results, mid-teen growth in pharmacy scripts filled, improved margins, and lower prices for members.
Costco has also partnered with Travelport, a travel technology company, to deploy what Travelport calls its "AI-powered Content Curation Layer" within Costco Travel. The system aggregates travel content from multiple sources and personalizes search results based on member preferences and historical behavior, transforming Costco Travel into a more competitive offering against standalone travel platforms.
"Costco Travel is focused on delivering more value to its members by giving them more choice and better offers when planning their trips," noted Travelport's Jason Toothman when the deal was unveiled in February 2025.
While Amazon manages millions of products and Walmart carries 100,000+ SKUs, Costco deliberately limits its warehouse inventory to approximately 4,000 distinct products. This radical curation actually becomes an enormous advantage when deploying AI at scale. Developing a highly accurate demand forecasting model for 4,000 products is computationally far less burdensome than doing so for 100,000 or millions. The reduced complexity lowers implementation costs, accelerates model training, and enables faster iteration cycles.
CEO Vachris identified scan-and-go checkout technology as a tangible win from this approach. Warehouses that adopted pre-scan technology early achieved checkout speed improvements up to 20%, with record checkout productivity levels reached during Q1 2025. Beyond operational efficiency, scan-and-go serves a different purpose. It closes the data loop on in-store customer journeys, capturing path-to-purchase and product interaction data that will further refine personalization and merchandising models.
Supply chain optimization represents the most needed application of AI at Costco, building on decades of "no touch" warehouse practices and cross-docking systems that move goods from supplier to sales floor without intermediate storage. AI augments this lean model with predictive muscle. Machine learning algorithms can now analyze real-time sales data to prescribe optimal inventory allocation across Costco's global warehouse network, predict replenishment needs with pinpoint accuracy, and dynamically optimize delivery routes from regional depots to individual stores.
Costco is also positioning AI as a strategic tool for Kirkland Signature, its private-label powerhouse that accounts for approximately one-third of U.S. sales. Historically, Kirkland product development has been a blend of expert buyer intuition and rigorous manufacturer collaboration, culminating in what were famously known as "green ink meetings" requiring CEO sign-off. AI will revolutionize this process by using household-graph data to identify "white space" opportunities, products or categories that significant numbers of members consistently purchase elsewhere, representing gaps Costco could fill with higher-quality or better-value alternatives.
Data science teams can now model optimal price-to-quality ratios before development even begins, analyze commodity pricing trends, and surface consumer sentiment. This transforms product development from art into precise science, accelerating the innovation pipeline for an $86 billion brand while maintaining the curation discipline that defines Costco's appeal.
Competitive Positioning
Costco is not attempting to out-Amazon Amazon or out-Walmart Walmart. It is competing on an entirely different axis. Its cloud infrastructure runs on Microsoft Azure with Google Cloud's Vertex AI for machine learning. Its AI initiatives focus on "precision strikes" in high-ROI areas like supply chain optimization, Kirkland Signature development, and household-level personalization.
This creates an asymmetric advantage. Walmart and Amazon must invest billions to apply AI across sprawling, complex operations to achieve incremental efficiency gains. Costco achieves similar or superior outcomes in its core areas with a fraction of the investment complexity.
Vachris emphasized this during the Q1 earnings call: "This isn't about technology for technology's sake, it's about using technology to strengthen the fundamentals that makes Costco who we are, increasing member loyalty, driving top-line sales and improving efficiency in our operations so that we can bring goods to market at the lowest possible price."
Costco's business model is already optimized for how artificial intelligence would "think." Agentic AI shopping assistants, programmed to prioritize best price, highest quality, and most reliable fulfillment, will naturally gravitate toward Costco's value proposition. This makes Costco uniquely resilient to the shift that threatens ad-reliant models like Amazon's. When shopping agents disrupt traditional e-commerce, they will play directly into Costco's hands.
Despite these advantages, Costco faces various challenges. The company's cautious approach to technology rollout means widespread deployment of innovations like scan-and-go and dynamic pricing progresses deliberately rather than aggressively. Attracting top-tier data science talent in competitive hubs like Seattle requires competing with technology giants for scarce resources.
The organization's culture, historically people-centric with leaders promoted from within who mastered brick-and-mortar operations, must evolve to embrace data-driven decision-making without disrupting the operational excellence that defines the company.
Yet recent strategic pivots suggest management understands what is at stake. New leadership has prioritized technology investment more visibly than predecessors. Job postings emphasize experience with cloud platforms and machine learning. Costco's IT architecture has been fundamentally rebuilt in recent years to enable future scaling. These foundational investments are now bearing fruit.
E-commerce sales have surged 20.5% in Q1 2025, while total digital sales represent 10% of fiscal 2025 revenue. Yet this 10% figure also signals opportunity. For comparison, Walmart's Sam's Club derived more than 27% of revenue from e-commerce over nine months ended October 31. Costco explicitly acknowledged in SEC filings that it needs to close this digital gap through investments in mobile applications and online infrastructure.
AI will be the bridge. As household-level personalization improves, members will increasingly use digital channels for replenishment of staple goods. Predictive recommendations informed by years of shopping history will enhance the "treasure hunt" experience that defines in-warehouse visits. Retail media network opportunities can be scaled while maintaining the member-value-first ethos that differentiates Costco from competitors mining advertising for pure profit.