Springtime Budget-Busters -- Savings Experiment
5 Sneaky Ways to Get In-State Tuition for Your Out-of-State KidThis post is part of our Battle of the Brands feature. Let us know which brand you prefer, and watch out for more Battle of the Brands posts.
A portfolio manager once said, "If a nuclear explosion hit my city and I had to pick one place to hole-up for a couple of years until all was calm, I would want to be at a Costco store. It has everything any human being could ever want or need." Well, I don't know if I could spend a couple of years in a Costco store, but no problem with a couple of hours!
Sam's Club, a division of Wal-Mart Stores Inc. (NYSE: WMT) versus Costco Wholesale Corp. (NASDAQ: COST): they have collectively changed the way people shop. The differences are profound between the two, yet conceptually they are very similar. Both "warehouse" concepts sell in bulk fashion. If you're looking for a small jar of Grey Poupon mustard, forget either of these two warehouse stores. But, if you want two side-by-side 16-ounce jars of Grey Poupon, enough to satisfy a football team, then you have come to the right place.
As similar as these two are, the differences do exist. Costco offers tremendous prices to its customers (club members) and quality. Costco has figured out the consumer will come in with a set list of items to be purchased, only to be enticed to expand that list as they walk the store. Strategically placed "special" items, or Costco employees serving out free samples of delicious food and drink items not normally found on the customer's list. It's brilliant marketing: on-site demonstrations and/or sampling of the product. "An impulse purchase" is the expression I have used many, many times as I've explained to my wife why I bought this or that.
Costco has a private label brand named Kirkland that has become synonymous with quality and low prices. The simple business model at Costco is to mark up the general products by 13% to 14%, and that's after they have acquired the product in bulk at a very low price. The private label, Kirkland, carries a similar mark-up of 14% to 15%, just a little higher than general merchandise.
Costco has the most loyal employees because they pay exceptionally well, $13 to $14 per hour, with full benefits. Sure, Costco could cut corners on their labor costs, but they have this funny idea about actually offering customers something unusual -- it's called service. Amazing for a store that big to add the human touch.
Sam's Club offers similar general items as Costco, but the choices can be limited and the quality, upscale selections are marginal. The environment at Sam's can be a little disheartening: mediocre lighting, cluttered aisles, and very little in customer service. Sam's Club will fullfill the "list" as previously mentioned, but Costco enhances the list.
The proof is in the pudding. Costco has beaten Sam's Club in the critical metric of same-store sales 64 of the past 73 months. The other vital, key component is that 87% of Costco members renew their memberships. The club memberships are tiered from $45 per year to $100 per year. Customer loyalty is fiercely guarded at Costco, and having happy, well-compensated employees is important in building that customer loyalty.
Costco currently has 490 warehouse units throughout the United States and key foreign locations, such as the United Kingdom, Mexico, and Taiwan. Sam's Club has 567 units, also spread out strategically in the U.S. and beyond. Costco sells more than Sam's on a per-square-foot basis and, of course, renews its customers memberships at a higher rate than Sam's Club.
Costco carries a market capitalization of $24 billion and has a clear opportunity to build the company to a $100 billion market cap. The market size and acceptance will easily allow Costco to double the store base over the next decade. Costco's consensus estimates for August 31, 2007, fiscal year call for revenues of $65 billion and earnings per share of $2.55. The 2008 numbers are revenues of $73 billion and earnings per share of $2.90 to $2.95.
Sam's Club numbers are part of the larger Wal-Mart numbers. The market capitalization of Wal-Mart is currently $200 billion and consensus estimates for January 31, 2008 and 2009 call for revenues of $381 billion and $410 billion, and earnings per share of $3.20 and $3.50 respectively.
Clearly, from an investor's point of view, the better growth story is Costco. From a shopper's point of view, the more pleasant experience is also at Costco.
For more of Georges Yared's stock ideas, please visit Yared Investment Research.
Be sure to vote in our poll for Costco or Sam's Club as your preferred brand, and let us know why you love it in the comments. Results of all Battle of the Brands match-ups coming soon.
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Reader Comments (Page 1 of 1)
2-10-2008 @ 2:46PM
HelenWoods said...
I was visiting my son in Florida in December and purchased a pair of Kirkland Hearing Aids. I love them. Costo was a very nice clean store, mcu better than the Sam's Club Store here. Will they be considering a Cosco in the Lima, Ohio area? Sure hope so, so I have one close in case I need some adjustment with my hearing aids. Hope to hear from you on this this.
Hope to visit Cosco again.
5-23-2008 @ 7:06PM
khristian cortez said...
I think it's understandable that there are differences between costco and sams club. I live in the otay ranch area of chula vista and it has a great community and there are many places for a family to go shopping. I feel that we need a very nice sams club in the area because there are people who can't always afford the membership prices and they don't want to be driving to say the costco on broadway and east h street. I'm also saying the we need one because Costco tends to have too many people esecially on weekends. I feel that with sams are lives are easier to get through because i have been going to the H street costco and it is crowded in the store, parking lot,and gas station! the area where it is is terrible! A new sams club should be put in this area! We need a big warehouse store the meets everyones expectations no crazy warehouse stores, cheap prices,good quality stores with tons of items,and a store that is very spacious!
5-24-2008 @ 12:31AM
khristian cortez said...
Chula vista costcos get too crazy so we need a brand new sams club now!
10-20-2008 @ 10:21PM
Anonymous said...
Its funny because I work at Costco and I would say that at least half of our members have a membership with Sams Club and Costco. I never really seen what the point of that was? Sams Club is definitely white trash and obviously has something you might like to buy once in a blue moon (compared to Costco)...The only complaints I have gotten from our members is that one we don't have an ice machine BOO HOO! and two that we can't do separate transactions which makes perfectly complete good sense for marketing and business reasons. If you owned a business that people paid to shop at would you appreciate someone bringing in fifteen friends that haven't paid a membership price and used just one membership to "get the good deal" heck no. Bottom line...don't waste your time at Sams Club its part of wal mart, its dirty, employees are rude and they simply just do not measure up to today's demands.
p.s. you should update this article. Employees are started out at $11.00/hr w/ full benefits and memberships prices have increased and now range from $50-100.
4-15-2007 @ 6:20PM
jason said...
Costco > Sams. However competition never hurt anyone [well the consumer that is] so it is still a good idea to check out Sams once in awhile because the inventory is different and at times the prices are different too. The Sams near my house has gone to great lengths to play catch up with the Costco a few miles away which leaves me to wonder whether this is neighborhood competition or a largescale restructuring plan.
9-13-2007 @ 12:11PM
linda said...
costco is too far away from where i live to join the cost of driving excludes any benefit of my going there for the available products... sorry do you know if they plan to build anywhere in south east dallas soon?