Walmart Will Never Be Costco (WMT, COST)

What retailer wouldn’t want to be Costco Wholesale Corp. (COST)? Costco has a strong customer following, loyal employees and makes money without even selling a single product. All of this while operating in nine countries and having stores which are the farthest thing from aesthetically pleasing.

Walmart Inc. (WMT) has a multi-billion dollar plan to improve its American stores and is venturing into Costco’s territory, paying its staff higher wages and improving the customer experience to regain its customers. However, Walmart, or even Sam’s Club for that matter, will never be Costco. (For related reading, see: Costco, Target or Walmart: Which Is the Best Best?)

Walmart is moving in the right direction with its plan to increase staff wages to $11 an hour. Raising wages will motivate employees to be more productive and will encourage better applicants to apply to Walmart. A base wage isn’t the whole story though. Since Walmart’s raised its entry-level wage to $9 in 2015, reports have emerged from employees that the increases have done little to improve their quality of life. Stories of higher wages resulting in fewer of hours and a lack of employee benefits for not-quite-full-time employees are commonplace on the Internet.

Contrast that to the way Costco treats its workers. The average wage at Costco is over $20 per hour and most employees are covered by the company’s benefits plan. Costly employee turnover is minimal and staff are uber-productive and promoted from within.

Walmart has over a million more employees in the U.S. than Costco. The cost of increasing the average wage to anywhere near $20 and providing full-time hours to whomever wants them and providing benefits is way too economically risky for the company whose share price has already tumbled 30% since wage increases were first announced.

Costco’s low prices are related in part to its acquisition process: the retailer has a relatively low number of SKUs and only offers one brand of each product to secure lower pricing from suppliers. The retailer buys in bulk and has only 518 stores across the country, as of the end of 2017, which lowers their shipping costs.

Walmart, though, has a huge network of stores that must constantly receive deliveries and its thousands of supply trucks crisscross the nation to the tune of millions of miles a year. The economies of scale that Walmart has achieved have enabled it to provide lower prices than its competitors, but it can’t possibly drop its prices to Costco’s level because of Costco’s subscription business model. The reason that Costco can cap its margins to a tiny 10% is because it makes money every day through the sale of its memberships. (For more, see: Who Are Costco's Main Competitors?)

Instead of having a ‘race to the bottom’ with Costco over lower prices and lower margins, Walmart is trying to woo back its customers and achieve the same level of customer loyalty that Costco has. With new products like an Amazon-style free shipping pass, in-store pick-up options, curbside delivery and an improved in-store customer experience, Walmart hopes to instill loyalty in their customers. With shopping at Walmart becoming more convenient and pleasant customers ought to prefer it to the alternative, right?

Costco, on the other hand, isn’t getting bogged down with providing copy-cat convenience options for its customers; Costco’s management promises low prices for its members. New members return initially because they’ve got to justify the cost of their pricey Costco card, but the customers who renew their memberships at an amazing rate of 91% do so simply because Costco makes good on its promise.

Customers are loyal to Costco because they get quality products and good prices. Walmart is trying to gain customer loyalty through gimmicky experiments instead of providing customers what they really want. (For related reading, see: Does Costco Have Room to Grow Its Margins?)

Walmart spends an incredible amount each year on advertising. In contrast, when was the last time you saw a commercial for Costco? Costco relies on mailer promotions for its members and word-of-mouth advertising. There is no weekly Costco flyer because Costco has achieved what Walmart was doing 20 years ago: everyday low prices.

In an effort to reduce costs and provide the lowest prices, Walmart is trying to cut back on their advertising. Once it improves its reputation as a safe, welcome and inexpensive place to shop, Walmart too will be able to rely on word-of-mouth advertising.

Walmart is trying to regain customers it’s lost to other general merchandise retailers and grocers. In its latest move, Walmart seems to be moving towards Costco’s business model: providing higher wages for staff to get better employees and improving their back-end business to lower their supply costs. However much Walmart tries though, it will never be Costco because of its reputation, its large number of stores, and its insistence on cutting corners with staffing costs.