Value Investing

Wal-Mart vs. Costco Case Studies

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Wal-Mart vs. Costco

Wal-Mart vs. Costco Case Studies

Data         WMT      Cost Difference
Supercenters 3158 448
Discount Stores 561 0
Sam’s Clubs 620 0
Neighborhood Mkts 266 0
Foreign Stores 6,148 174
    10,753 622 17.3 times
Employees 2,200,000 147,000  14.97 times
Stock Keeping Units (SKUs) 70,000 3,600  19.4 times
Revs. ($bil.) 495 107       4.63 times
Return on Tot. Cap (VL) 15% 13% 2%
Ret. On Equity (VL) 22% 14.50% 7.50%
Gross Profit Margin 24% 10% 140%
Oper. Income/Margin 5.90% 2.85% 100%
Sales per square foot 437 976 110%
Book Value $25 $25 0%
Price Aug. 2 $78.55 $119.10
P/BV 3.1 4.8 55%
Debt 37000 4800
Equity 82,500 13,825
Debt to Equity 45% 35%
Est. Growth
     Sales 6.50% 8.50%
     Earnings 9% 11%

cost vs wmt

sm cost vs wmt


I think when you compare numbers, what strikes you is the difference in # of SKUs between retailers. WMT’s business model is much more labor intensive coupled with a lower-income customer. The squeeze on the middle class has crimped WMT.  You would think with WMT’s higher ROC and ROE compared to COST’s that WMT would not be lagging CostCo’s in share price performance but remember that COST is growing faster above its cost of capital and has more room to grow than behemoth, Wal-Mart. In other words,CostCo can redeploy more of its capital at higher rates than WMT can (grow its profits faster).

That said, the market knows this and has handicapped Costco with a higher price to book and P/E ratio than WMT’s. As an individual investor, your time might be better spent looking at smaller, more unknown companies to find mis-valuation. Also, when a company gets as big as WMT (1/2 TRILLION $ in sales), the law of large numbers sets in and the company becomes a magnet for social engineering and protest. But if you had to have me choose what company to own over the next ten years, I would choose COST because its moat is stronger (greater customer captivity) shown by its huge inventory turns/high sales per square foot plus greater PROFITABLE growth opportunities.  However, I do see WMT becoming more focused rather than expanding overseas where their local economies of scale are lessened.

My analysis is cursory, but for those that picked out the main differences, you have a better grasp of whether WMT can raise its employees’ wages to the level of Costco’s. It can not unless it reduces its SKUs and employees.

More analysis from others:

Why Wal-Mart Will Never Pay Like CostcoBloomberg writer Megan McArdle hits the nail on the head with her analysis of the situation in Why Wal-Mart Will Never Pay Like Costco.Wal-Mart is trying to move into Washington, a move that said local housing blog has not enthusiastically supported. Hence, we’ve been treated to a lot of impassioned reheatings of that old standby: “Costco shows it’s possible” for Wal-Mart to pay much higher wages. The addition of Trader Joe’s and QuikTrip is moderately novel, but basically it’s the same argument: Costco/Trader Joe’s/QuikTrip pays higher wages than Wal-Mart; C/TJ/QT have not gone out of business; ergo, Wal-Mart could pay the same wages that they do, and still prosper.Obviously at some level, this is a true but trivial insight: Wal-Mart could pay a cent more an hour without going out of business. But is it true in the way that it’s meant — that Wal-Mart could increase its wages by 50 percent and still prosper?Upper-middle-class people who live in urban areas — which is to say, the sort of people who tend to write about the wage differential between the two stores — tend to think of them as close substitutes, because they’re both giant stores where you occasionally go to buy something more cheaply than you can in a neighborhood grocery or hardware store. However, for most of Wal-Mart’s customer base, that’s where the resemblance ends. Costco really is a store where affluent, high-socioeconomic status households occasionally buy huge quantities of goods on the cheap: That’s Costco’s business strategy (which is why its stores are pretty much found in affluent near-in suburbs). Wal-Mart, however, is mostly a store where low-income people do their everyday shopping.As it happens, that matters a lot.  Costco has a tiny number of SKUs in a huge store — and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more.But what about QuikTrip and Trader Joe’s? I’m going to leave QuikTrip out of it, for two reasons: first, because they’re a private company without that much data, and second, because I’m not so sure about that statistic. QuikTrip’s website indicates a starting salary for a part-time clerk in Atlanta of $8.50 an hour, which is not all that different from what Wal-Mart pays its workforce.

Trader Joe’s is also private, but we do know some stuff about it, like its revenue per-square foot (about $1,750, or 75 percent higher than Wal-Mart’s), the number of SKUs it carries (about 4,000, or the same as Costco, with 80 percent of its products being private label Trader Joe’s brand), and its demographics (college-educated, affluent, and older). “Within a 15–minute driving radius of a potential site,” one expert told a forlorn Savannah journalist, “there must be at least 36,000 people with four–year college degrees who have a median age of 44 and earn a combined household income of $64K a year.” Costco is similar, but with an even higher household income — the average Costco household makes more than $80,000 a year.

In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe’s, it also dramatically decreases the amount of space you need for your supermarket … which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy).

Wal-Mart’s customers expect a very broad array of goods, because they’re a department store, not a specialty retailer; lots of people rely on Wal-Mart for their regular weekly shopping. The retailer has tried to cut the number of SKUs it carries, but ended up having to put them back, because it cost them in complaints, and sales. That means more labor, and lower profits per square foot. It also means that when you ask a clerk where something is, he’s likely to have no idea,