Wal-Mart versus CostCo: A Tale of Two Cheapies

I was sitting around, looking at stock reports like we financial writers often do, and happened to look at the recent fortunes of cost-saver giants Wal-Mart and CostCo.  I discovered some interesting similarities, some differences, and a startling discovery.

In This Corner:  Wal-Mart

Wal-Mart is well-known throughout the United States as the mega-store that sells for less.  You can walk into any Wal-Mart and rest assured that you are getting the most for your dollar.

Wal-Mart is also the parent company of Sam’s Club, the bulk discount chain franchise that sells vast amounts of food at a discount.  They’re usually built right next to each other, and Sam’s Club offers further discounts by offering the customer items in bulk.  If you’re savvy enough to plan your meals out in advance, this can really be a money-saver.

However, Wal-Mart is no stranger to controversy, particularly with their employee practices. They are notorious for paying wages that keep their employees below the poverty level, about 20 percent less than the average employee of a retail store. Wal-Mart also provides health insurance to less than half of its employees in the United States.  In fact, many Wal-Mart employees invest in a state-sponsored health care plan over Wal-Mart’s.  The company has also been the subject of a class-action gender-discrimination lawsuit and some of its stores employed illegal immigrants as cheap janitorial labor. Part of this is certainly due to the sheer number of people Wal-Mart employs, and that a successful organization will inevitably have some detractors.

The Other Discount Store

Our next subject is CostCo, a discount chain much like Sam’s Club.  Both the stores operate under the same principle—offer food and other items in bulk.  Customers at both stores have to buy a membership card at each chain to take advantage of these wonderful offers, however, a privilege that starts at $35.
           
What’s unique about CostCo is how well it treats its floor workers.  The averag worker at CostCo makes $16 per hour, which is almost luxurious compared to Wal-Mart’s average of $9.68 wage. Floor workers also get 92 percent of their medical insurance paid by CostCo, which is almost unthinkable in the retail sector.  CostCo executives claim that paying their employees well reduces turnover and encourages them to be more efficient and productive. Since CostCo’s turnover rate is under half of Wal-Mart’s, this theory would appear to be paying off.

Interestingly, CostCo has drawn criticism for how they treat their workers. In 2004, Wall Street analyst Bill Dreher of Deutsche Bank Secrurities took CostCo to task, saying that, as a public business, CostCo, “need(s) to care for its shareholders first.”

Dreher does have a point.  After all, if a company’s profits go back to their employees, is there any money left over for the shareholders?  Let’s take a look.

A Good Clean Fight

Currently, Wal-Mart’s stock is at a comfortable $56.83 per share. CostCo’s stock is a bit higher at $61.76 per share.  The big difference, though, is how the stock has performed throughout the years. Wal-Mart’s stock resembles a valley, decreasing from its high of $60.24 in March of 2004 to a price fluctuating between $43 and $50 per share before climbing back up in 2008.

CostCo, on the other hand, has seen a slow but steady growth over the last five years.  Its stock has climbed from a low point of $29.22 in 2003 and steadily continued upwards, peaking at $71.32 in May of 2008. Its stock dropped in July, as did Wal-Mart’s.  The current speculation is that the stock is dropping due to the inflation in cost of food and energy.

We can take a few lessons away from this.  First, conventional wisdom doesn’t always reflect what’s going on in reality. Secondly, and more important, CostCo’s business model is working just as well for the shareholders as it is for the employees. Their stock shows consistent growth, and I would recommend buying it.

While Wal-Mart is definitely not a financial slouch, their past performance shows that you’ll be in for a roller-coaster ride when you purchase their stock.  CostCo’s stock is the kind you buy with the intention of setting it aside for a year or five, then coming back to reap the rewards.  Even with the current decline, I’d still pick up some shares of CostCo and see how the stock develops.

Chris Gottschalk
Analyst, Bourbon & Bayonets