What retailer wouldn’t want to be Costco (COST)? Costco has a strong customer following and loyal employees, and the retailer makes money without even selling a single product. It does this by operating in eight countries with locations that are far from aesthetically pleasing. Walmart (WMT), on the other hand, 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. But Walmart, or its Costco-like warehouse Sam’s Club for that matter, will never be Costco.

Key Takeaways

  • With 1.5 million employees in the U.S, it would be risky for Walmart to provide full benefits to employees and raise its wages to match those paid by Costco.
  • Unlike Costco, Walmart has a huge network of stores that must constantly be stocked.
  • Walmart is taking steps to keep customers loyal including in-store pick-up options, curbside delivery, and improved in-store customer experience.
  • Walmart spends a great deal of money on advertising to the general public—something Costco doesn't really do.

Staffing Costs

Walmart employs roughly 2.2 million people around the world—1.5 million of those are employed in the United States. According to a report from CNBC, the retailer pays its full-time field associates $14.26 per hour. Higher wages motivate employees to be more productive and encourage more dedicated employees to apply for employment. A base wage isn’t the whole story, though. Since Walmart raised its entry-level wage to $9 in 2015, employees reported that increases have done little to improve their quality of life. Stories of higher wages resulting in fewer hours and a lack of employee benefits for not-quite-full-time employees are commonplace on the internet.

Things are a little different at Costco, which employs about 200,000 people. Wages vary based on each employee's role and most workers are covered by the company’s benefits plan which includes a 401(k), health insurance, dental insurance, drug plan, vision care, and others. The minimum starting salary for a Costco employee is $15 per hour. The company is known to pay $25 per hour for certain positions within its retail locations. 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 match Costco's and providing full-time hours to whoever wants them and providing benefits is way too economically risky for the company.

Low Prices

Costco’s low prices are related in part to its acquisition process. The retailer buys in bulk, has a relatively low number of stock-keeping units (SKUs), and only offers one brand of each product to secure lower pricing from suppliers. All of this helps Costco lower its shipping costs to its locations—almost 550 as of March 2020.

Walmart, though, has a huge network of stores that must constantly receive deliveries. Thousands of supply trucks crisscross the nation, racking up millions of miles every year. The economies of scale that Walmart has achieved allow it to provide lower prices than its competitors, but it can’t possibly drop its prices to Costco’s level because of its subscription business model. The reason Costco can cap its margins to a mere 10% is that it makes money every day by selling its memberships.

Costco's business model is to collect fees from members and sell items in bulk, while Walmart is a traditional retailer that aims to push its prices down.

Customer Loyalty

Instead of having a race to the bottom with Costco over lower prices and lower margins, Walmart is trying to woo back its customers to achieve the same level of customer loyalty Costco enjoys. With new products like an Amazon-style free shipping pass, in-store pick-up options, curbside delivery, and improved in-store customer experience, Walmart plans 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 because Costco’s management promises low prices for its members. New members return because they have to justify the cost of their pricey Costco card, but those 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 wants to gain customer loyalty through gimmicky experiments instead of providing customers what they really want.

Little Advertising

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 its 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.

The Bottom Line

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 toward Costco’s business model with higher wages for staff to get better employees and improving its 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.