Business model of Costco versus Walmart

Both Walmart and Costco are well known brands in the US physical retail industry. However, compared to Costco, Walmart has a larger footprint, both domestically and internationally. Walmart is pursuing an aggressive expansion strategy to expand its customer base overseas. It has also made some acquisitions to expand its international customer base and ecommerce capabilities. Each week, Walmart stores around the world including physical and ecommerce stores serve more than 265 million customers. The customer base of Costco is much smaller. However, it is still among the leading competitors of Walmart and has maintained a strong competitive position in the US retail industry. One thing that is common about the operating models of Costco and Walmart is that both of them focus on saving money through reduced operating expenses and on offering lower prices to their customers. Both have established an efficient operating model but each with its own unique features. 

Costco’s membership based business model:

One reason that Costco’s customer base is much smaller compared to Walmart’s is that it is a membership based business. Costco operates a chain of membership based warehouses. As of 2019, the company operated 785 warehouses of which 546 were located in the USA and Puerto Rico as well as  100 in Canada, 39 in Mexico, 29 in the United Kingdom, 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, one in Iceland, one in France, and one in China. In 2019, the company opened its first store in China. Costco received an exceptional reception in China and by the day the store opened around 139,000 people had signed up for memberships. The total number of Costco members in 2019 was 98.5 million which was 4.2 million higher than the last year. Costco’s membership based business model has proved successful since the company successfully retains a very large percentage of members each year. Costco is also investing in ecommerce to strengthen sales and find revenue growth. In 2019, ecommerce sales accounted for around 4% of its net sales. Walmart has pursued a slightly more aggressive ecommerce strategy. Its share of ecommerce sales as a part of its consolidated net sales was also higher compared to Costco. 

Competitive advantage in the business model of Costco:

Costco has maintained a strong reputation based on low prices, good customer service, strategic HR management and a unique customer experience. It runs a  membership based business model where you pay membership fees to obtain products at lower prices. However, it is not only the prices that attract customers to the Costco warehouses. There is something more distinct about Costco that brings members flocking to its warehouses. 

It has created a differentiated and unique shopping experience. The company pays its employees better than other retailers. Highly motivated staff have helped the company maintain higher standards in terms of customer service and the result is very high overall customer satisfaction which shows in its retention rate. Globally, the renewal rate of Costco memberships was 88% in 2019 and in the US & Canada that represent the core markets of Costco, the renewal rate was 91%.

In fiscal 2019, the company experienced a growth of 7% in its net revenue from membership fees. The total revenue of the company from membership fees reached $3.35 billion in 2019.  The US & Canada are the largest markets of Costco which together account for the largest part of its consolidated net revenue.  In fiscal 2019, US & Canada together accounted for 87% of the brand’s net sales and 84% of its net income. In the US, Costco has the highest sales in the California region that accounted for around 30% of the net sales of the brand in the country.

Walmart’s business model:

The business model of Walmart is very different from that of Walmart and unlike its membership model, Walmart is open to all. It is why a large number of its customers are also from the lower income segment. The company sells to a very large segment of customers and with time its number of affluent customers has also increased which is mainly because of its investment in technology and ecommerce that led to growth in tech savvy and rich customers buying from Walmart. As of January 2020, the company had 11,501 stores operational worldwide of which 5,355 were operational in the US including 599 Sam’s Club stores.

In the US, Walmart runs four main formats of stores that include discount centers, super centers, Sam’s Clubs and neighborhood markets. Apart from these Walmart runs ecommerce websites and has experienced a sharp rise in its e-commerce revenue in fiscal 2020 compared to the previous year. 

Competitive advantage in the business model of Walmart:

Walmart’s competitive advantage lies in several factors but the leading source of competitive advantage for Walmart is its pricing strategy. The EDLP pricing strategy of Walmart draws customers from the lower income and middle income segments in huge numbers. However, the primary factor that has helped the company sustain its EDLP pricing strategy is its operating model. The efficiency of its operating model which the company has continued to improve over time is also a source of strong competitive advantage.

Its efficient operating model helps it keep its operating expenses including  transportation and inventory costs lower.  Apart from that, the supply chain management strategy adopted by Walmart has also helped the company maintain lower prices. The company sources directly from the producers. By eliminating the middlemen, it has been able to manage even lower prices. Since the company purchases in bulk, the producers sell their products at very low prices to Walmart and in turn the company sells to its customers at lower prices compared to competitors.

Apart from that, Walmart has maintained a large fleet of trucks which is among the largest owned by a single firm in the entire US.  Managing its own logistics has also helped the company control operating expenses and save money. Since its foundation, Walmart has adopted cost saving practices and continued to improve them. As a result its competitive edge has continued to strengthen with time.

Comparing the Revenues of Costco and Walmart

Year	Costco Revenue	Walmart Revenue
2020		$523,964
2019	$152,703	$514,405
2018	$141,576	$500,343
2017	$129,025	$485,783
2016	$118,719	$482,130

Walmart’s revenue has remained more than triple of Costco for the last several years. In fiscal 2018, the net revenue of the company touched $500 billion for the first time. During fiscal 2020, the net revenue of Walmart was $524 billion of which $35.9 billion was from e-commerce. Coscto’s net revenue climbed past $150 billion in  fiscal 2019. In the latest fiscal, its net revenue climbed to $152.7 billion.

Similarities and differences between the business models of Costco and Walmart:

There are many similarities as well as several differences in the business models of Walmart and Costco. Both are successful retail brands enjoying heavy popularity and enormous financial success. Walmart has its EDLP pricing at the core of its value proposition and it is also the main factor that differentiates Walmart from Costco and other retailers in the US.  The US retail industry is marked by heavy competition and other retailers also strive to sell to their customers at lower prices. However, that also means sacrificing profit margins. This is what Costco also does. It keeps its profit margins low in order to sell to its customers at lower prices. However, compared to Walmart, the product range available at Costco is smaller. Walmart comparatively offers a very large assortment of products in its stores and online. Both Walmart and Costco procure in bulk to save costs.

Walmart employs an open to all approach whereas Costco is only a membership based warehouse chain. Apart from Gold Star and Business memberships, Costco also offers household cards. The business and Gold Star members can upgrade to an executive membership for an additional annual fee of only $60. The executive members of Costco that represented 39% of its around 53.9 million paid memberships, generally purchase more frequently from Costco and also spend more than the other members at an average.

When it comes to human resource management, Walmart has taken a few strategic steps to improve its reputation in this area. Until some years earlier, the cost cutting strategy of the company also included paying staff less. However, the company has improved the hourly wages it pays its associates. On the other hand, Costco has managed a strong reputation in the area of HR where it has excelled since its foundation. Apart from an organizational culture that values employees’ contribution, it has always paid its staff well and offered them a work environment that maximizes work satisfaction. It has ranked among the top in the Forbes list of world’s best employers.

Overall, there are various similarities between Costco and Walmart but also some foundational differences. Costco might not be as enormous as Walmart but it is a successful retail firm known to do things in its own unique manner. Its success is also based on successful supply chain management and HR management. With regards to supply chain management, some of the practices adopted by the two leading physical retail firms, are the same. Improved inventory management practices have helped both firms reduce costs. However, a lot has changed in the retail industry since the pandemic and the move towards digital sales and marketing has accelerated. Costco still does not spend on marketing while Walmart spends a lot on demand creation.

What Costco saves in these operational areas including marketing, it spends on its people. Speaking in terms of technology and innovation, Walmart has a stronger edge compared to Costco. Walmart was among the first in the physical retail sector to have started investing in building ecommerce capabilities and is making a strong investment in innovation each year. Costco might still have to go a long way to develop Walmart like tenchnological capabilities. Considering that its operating model is different from Walmart, it might also decide to take a different route when it comes to expanding sales via digital channels. However, it is certain that the future lies in digital and Costco cannot manage without investing in this area.

Other resources: Annual Reports of Walmart & Costco.