Costco vs. Sam's Club: What's the Difference?

In the world of retail, the consumer has a lot of choices, so for a store to pop up and be successful, it often needs to have a unique pull. Big retailers like Walmart Inc. (WMT) and Target Corp. (TGT) use low prices to draw in customers, but this is not a model that works for everyone. Other retailers must find different ways to drive consumers to their businesses. We see those that focus on healthy foods, locally grown or made products, specialty niche stores, those that only carry high-end brands, those that only carry low-end brands, and in the case of Costco Wholesale Corp. (COST) and Walmart unit Sam’s Club, those that only sell in bulk. How do these last two compare? Here’s a look.

Costco is considered the original bulk retailer. It has been selling bulk goods through its warehouse-style stores for more than 30 years and has had that area of the market cornered for quite a while in most states.

The idea is simple: Costco builds a warehouse that is very minimal; it only sells in bulk; and it keeps frills to a minimum. Pair this with a membership fee ($60 per year, as of 2019), and you get access to what is usually the best deal around. The caveat is that you either need a large family to eat all of the food that you buy, or a method to preserve it (canning or freezing). Through the years the store has expanded and started to offer a number of other items, including large electronics, vehicles, and vacation packages.

Costco is a publicly traded company under the ticker symbol (COST). It has a market value of over $100 billion as of March 11, 2019. It has several smaller subsidiaries, such as Costco Travel and Kirkland brand products, but aside from that, the company has not branched out into a broad range of other brands and stores.

Costco membership has a certain cachet that membership to Sam’s Club does not have. Although the fee comes out to less than $5 per month, the membership comes with the idea that you are now a part of an elite club. Not everyone has a Costco membership, but once you sign up, you get to be a part of the special few that are members. Does it matter? Not really; it is all psychological.

When you hold a Costco membership, and you do not use it for a few months, you begin to wonder why you have it. Because the price is slightly higher than Sam's Club, the membership actually drives more people to shop at the store. It is similar to paying for a gym membership: it’s a financial incentive to work out. Costco could afford to offer their products to the general public without the membership dues; they are a small percentage of the stores' revenues. But they keep them because people will shop at their store simply because they do not want to “waste” their membership.

Sam’s Club is actually just as old as Costco. Both were founded in 1983 and have similar business models—sell memberships to a store where customers buy bulk items. The difference is that Sam’s Club did not expand to the same areas and product categories as Costco.

Sam's Club made headlines in January 2018 when they announced the closing of 63 stores, firing thousands of workers. Sam's Club didn't give an explanation other than the following statement: "After a thorough review of our existing portfolio, we have decided to close a series of clubs and better align our locations with our strategy. Closing clubs is never easy and we are committed to working with impacted members and associates through this transition."

A membership to Sam’s Club is slightly cheaper than at Costco ($45 per year, as of 2019). Costco offers a wider range of products than Sam's Club, and has many more locations. As of 2018, there were 762 Costco locations worldwide with 527 in the U.S. and Puerto Rico. The company had sales of $138 billion in FY2018. Sam's Club, which is a division on Walmart, generated $59 billion in sales in FY2018.

• Costco and Sam’s Club have very similar business models.
• They charge essentially the same prices for their memberships and the same prices for their goods. Yet Costco generally fares better.
• The reason is that Sam’s Club may be shooting themselves in the foot with their parent company Walmart stores.
• Many of their potential customers simply shop at Walmart for many of the same deals, but without the hassle of membership.
• Two companies, both founded the same year, both with similar business models, both attracting the same customers, and both highly successful.