From the beginning of 2015 to the end, Wal-Mart Stores Inc. (NYSE: WMT) lost more than 36% of its market cap. Across the same period, Costco Wholesale Corporation (NASDAQ: COST) logged a 20% gain. Wal-Mart is far bigger than Costco from a revenues perspective. It generates half a trillion dollars annually, versus the $120 million or so of Costco, and there is no shortage of U.S. and global consumers looking for deep discount purchases. So why the disparity in performance from the two retailing giants?
Essentially, it comes down to business model, and the impact that model has on customer satisfaction. The cost of an annual Costco membership comes in at $55 for the base membership, and $110 for the executive. Customers pay for the right to shop there. Wal-Mart is, of course, free to shop in. Why is this important? It means that Costco is not reliant on sales margins for its revenues.
The vast majority of Costco’s earnings derives from its membership fees, which allows it to sell products at little to no, or even negative, margin. Wal-Mart relies on product sales for its revenues. Of course, Wal-Mart has a huge amount of leverage on supplier pricing, based purely on the volume of products it purchases for resale, but in the deep discount retail environment, even the narrowest of margins can make a big difference.
Where does customer satisfaction come in? Anecdotal reports suggest the retailing experience Costco offers its customers is far superior to what Wal-Mart brings to the table. The fact that shoppers are willing to pay to shop in a store backs this up, and it is quantified in the annual American Customer Satisfaction index report, in which Costco regularly tops the list and Wal-Mart generally comes in last place.
24/7 Wall St.This distinction likely resides in the way both companies treat their employees. Costco pays its workers far more than Wal-Mart does (close to double), and is renowned for a strong benefits program. A happy workforce translates to improved customer service and a better retail experience.
What can we expect for 2016? The trend of Costco outperforming Wal-Mart looks set to continue going forward. Costco is set to open 22 new domestic stores throughout the year and continue its aggressive international expansion strategy with 10 new overseas locations before the end of the year. Wal-Mart expects to close 269 stores throughout the year, and with mounting pressure from chain grocery retailers for its grocery revenues, which account for a little over 55% of total revenues, could suffer a weakened bottom line going forward.
By Matt Winkler
The Average American Has No Idea How Much Money You Can Make Today (Sponsor)
The last few years made people forget how much banks and CD’s can pay. Meanwhile, interest rates have spiked and many can afford to pay you much more, but most are keeping yields low and hoping you won’t notice.
But there is good news. To win qualified customers, some accounts are paying almost 10x the national average! That’s an incredible way to keep your money safe and earn more at the same time. Our top pick for high yield savings accounts includes other benefits as well. You can earn up to 3.80% with a Checking & Savings Account today Sign up and get up to $300 with direct deposit. No account fees. FDIC Insured.
Click here to see how much more you could be earning on your savings today. It takes just a few minutes to open an account to make your money work for you.
Our top pick for high yield savings accounts includes other benefits as well. You can earn up to 4.00% with a Checking & Savings Account from Sofi. Sign up and get up to $300 with direct deposit. No account fees. FDIC Insured.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
Our expert who first called NVIDIA in 2009 is predicting 2025 will see a historic AI breakthrough.
You can follow him investing $500,000 of his own money on our top AI stocks for free.