Why Costco is walloping Wal-Mart
In anticipation of the warehouse store's earnings, it's worth noting there's much more to its stock than low prices.
COST) is America's largest wholesaler by revenue and is watched closely by investors and consumers alike as a sign of how the economy is doing in general. If folks flock to Costco for deals in bulk, it's probably not good news for most family budgets. If Americans spend more on name-brand and upscale products instead of the no-frills items at Costco, it's a sign consumers have more money to burn.
It should come as no surprise that Costco has been doing pretty well recently amid high unemployment and consumer spending woes. COST is up about 15% so far in 2011.
But more interesting is the fact that Costco isn't just riding this broader economic trend to bigger profits -- it's also stealing customers from low-price rivals, including Wal-Mart (WMT).
Here are three reasons Costco is beating Wal-Mart:
1. A clear focus on low-cost deals. Wal-Mart just killed off an ill-advised focus on selection and quality earlier this year. The retailer had apparently been trying to emulate Target (TGT), but obviously consumers weren't buying the new branding and the exercise was a flop. Costco has never strayed from its no-frills, low-cost focus.
2. Urban reach. Costco has warehouses in cities, while Wal'Mart is still by and large a store that thrives in the suburbs and rural America. While Costco is too big to capitalize in very dense areas the way Dollar General (DG) and other strip-mall discounters do, it is still much more an urban operation.
3. Plush membership dues. While Wal-Mart may be the king of squeezing suppliers, Costco charges (and strictly enforces) membership dues, a great source of revenue. Couple that with low overhead (pallets of goods often are just placed unceremoniously on bare concrete floors), and you can understand why the company manages to squeeze out high returns on its asset base despite a "race to the bottom" pricing mentality.
