Introduction
Costco Wholesale Corporation is a multinational American retailer that runs a membership-only warehouse network. With over 800 warehouses throughout the United States, Canada, Mexico, the United Kingdom, Japan, South Korea, Taiwan, Australia, and Spain, the corporation is the world’s largest membership-based warehouse club chain. Costco competes in a very competitive retail market, with Walmart Inc. as its primary rival. The purpose of this research paper is to study and compare the performance of Costco Wholesale Corporation and Walmart Inc. to identify each company’s competitive strengths and weaknesses.
Purpose of the Research
The goal of this paper is to compare Costco Wholesale Corporation’s performance with that of its rival, Walmart Inc., and the industry average. Both quantitative and qualitative data will be used in the study. Financial ratios will be used to assess quantitative data, which will be compared to Walmart’s ratios and industry averages. The qualitative data will encompass an examination of the firm’s leadership, human and social capital, research and development, marketing/sales, after-sales support, operations, organizational values, and culture. The study aims to determine why Costco has a competitive edge or disadvantage compared to its rivals and the industry average.
Overview
Industry
The retail business is very competitive, with big competitors such as Walmart, Target, and Amazon. According to Statista, the worldwide retail market size was anticipated to be over $25.18 trillion in 2020 and is expected to increase at a CAGR of 3.3% between 2021 and 2024 (Yahoo Finance, 2023). The United States has the world’s biggest retail market, with a retail market value of $5.53 trillion in 2020.
Costco Wholesale Corporation
Costco Wholesale Corporation is the world’s biggest membership warehouse club company. The firm offers a wide range of products, including groceries, electronics, jewelry, household appliances, office supplies, and other items (Yahoo Finance, 2023). The company’s sales in 2020 were $159.85 billion, up from $152.72 billion in 2019.
Walmart Inc.
Walmart Inc. is a global retailer that runs a cheap department store and warehouse store chain. With a total yearly sales of $524.65 billion in 2020, the corporation is the world’s biggest by revenue. Walmart is the biggest retailer in the United States, with over 11,500 outlets in 27 countries (Walmart, 2023). The firm offers a diverse range of goods and services, including groceries, electronics, household appliances, office supplies, and more.
Analysis and Reflection
An examination of Costco Wholesale Corporation and Walmart Inc.’s financial statistics and qualitative data is required to determine their competitive advantages and drawbacks. Financial ratios are used to evaluate a company’s financial performance in comparison to that of its competitors and the industry average.
Financial Ratios Analysis
Costco
The financial ratios of Costco Wholesale Corporation and Walmart Inc. were compared to those of the industry as a whole. To evaluate the performance of the two firms, the following financial parameters were used: return on assets (ROA), return on equity (ROE), gross margin, operating margin, and net profit margin. In 2020, Costco Wholesale Corporation’s ROA was 8.79%, better than the industry average of 5.61% (Costco Wholesale, 2023).
In 2020, the company’s ROE was 17.67%, greater than the industry average of 12.90%. In 2020, Costco’s gross margin was 11.21%, greater than the industry average of 8.65% (Nasdaq, 2023). In 2020, the company’s operating margin was 3.17%, greater than the industry average of 2.64% (Costco Wholesale, 2023). Finally, in 2020, Costco’s net profit margin was 2.44%, exceeding the industry average of 2.02%.
Walmart
Walmart Inc.’s ROA in 2020 was 8.40%, lower than the industry average of 5.61%. In 2020, the company’s ROE was 21.05%, greater than the industry average of 12.90% (Walmart, 2023). In 2020, Walmart’s gross margin was 24.05%, greater than the industry average of 8.65%.
In 2020, the company’s operating margin was 5.07%, greater than the industry average of 2.64% (Walmart, 2023). Finally, Walmart’s net profit margin in 2020 was 3.44%, greater than the industry average of 2.02% (Nasdaq, 2023). Costco Wholesale Corporation has a competitive edge over Walmart Inc. based on financial measures because of its greater ROA, ROE, and gross margin.
Cashflows
Costco
The cash flow of Costco Corporation is comprised of operating, investing, and financing activities. The cash produced by everyday activities, such as sales and cost of goods sold, is referred to as operating cash flow. Investing involves the purchase and sale of long-term assets, such as real estate, machinery, and equipment.
Financial operations encompass loan issuance and repayment, capital stock buybacks, and dividend distributions. Costco Corporation’s cash flow breakdown indicates a net rise in cash from operations of $2,596,000 from 2019 to 2020 (Costco Wholesale, 2023). Higher revenues are primarily responsible for the growth in operational cash flow.
Investment activities during the period resulted in a net cash loss of $306,000. This drop is mainly attributable to the acquisition of real estate, plant, and equipment. Financial operations for the period reflect a net cash outflow of $5,341,000, primarily due to debt repayment and capital stock buyback (Costco Wholesale, 2023). Costco Corporation’s free cash flow is the surplus cash generated after deducting all operating, investment, and financing expenses. The quarter’s free cash flow was $3,501,000, a $2,143,000 increase over the previous period.
Walmart
Figure 2: Walmart Cashflow (Walmart, 2023)
Walmart Corporation’s cash flow is composed of operating, investment, and financing cash flows. The money produced by Walmart’s core businesses is referred to as operating cash flow. It covers items such as sales, investment income, and other forms of revenue.
The money generated by the acquisition and sale of assets, such as property, plant, and equipment, is known as investing cash flow. The money generated by the issuance and repayment of debt, as well as the buyback and issuance of capital stock, is referred to as financing cash flow (Walmart, 2023). The end cash position indicates the amount of cash Walmart has at the end of the selected period. The breakdown also includes income tax and interest paid. Ultimately, loan issuance/repayment, capital expenditures, and capital stock buyback are all accounted for.
Comments on Cash Flows
In terms of cash flow, Costco looks to have a competitive edge over Walmart. Costco has a better operational cash flow and a higher free cash flow than Walmart. Moreover, Costco has lower financing and investment cash flows than Walmart, showing that it has superior cash flow management. This is likely due to Costco’s more effective capital management and focus on cost-cutting, which enables it to generate greater cash flow from operations. Additionally, Costco’s capital expenditures are lower than those of Walmart, demonstrating that its investments generate a greater cash flow.
Qualitative Data Analysis
The qualitative data of Costco Wholesale Corporation and Walmart Inc. were analyzed to determine each company’s competitive advantages and drawbacks. To compare the performance of the two organizations, the following qualitative data were used: leadership, R&D, human and social capital, after-sales, operations, marketing/sales, organizational culture, and values.
Costco Wholesale Company has a strong leadership team committed to providing excellent goods and services to its customers. The organization places a significant emphasis on human and social capital, as well as staff development and training. The firm has an active research and development department that continually invents and produces new goods and services (Singh et al., 2019).
In addition, the firm has a strong marketing and sales team dedicated to client acquisition and retention. Costco offers excellent after-sales service, providing consumers with support and assistance. The organization also has a robust operational infrastructure that allows it to manage its supply chain properly. Ultimately, the corporation has a strong corporate culture and principles centered on delivering exceptional customer service and quality. As a result, both organizations enjoy a comparable competitive advantage in these sectors.
Competitive Advantage of Costco Over Walmart
Business Model
Costco’s distinct business strategy is the foundation of its competitive advantage versus Walmart. Unlike regular stores, which force consumers to pay full price for items, Costco operates on a wholesale model, allowing members to buy items at reduced costs. This enables Costco to offer significantly lower costs than Walmart, attracting more customers and increasing sales (Singh et al., 2019). In addition to its low costs, Costco offers its members a variety of extra incentives, including free samples and exclusive discounts on select items. These advantages aim to develop customer loyalty and encourage people to buy more Costco merchandise.
Strategic Pricing
Costco has also used its scale and efficiency to gain a competitive edge over Walmart via clever pricing. Costco can offer its members lower pricing than Walmart because it buys in bulk and negotiates more favorable deals with suppliers (Singh et al., 2019). Costco likewise employs a low-margin, high-volume approach, allowing the corporation to earn smaller earnings on each item sold while maintaining a greater total profit margin. This enables Costco to provide the corporation a competitive advantage in the retail industry.
Membership Structure
The membership system is another critical component in Costco’s competitive advantage against Walmart. Unlike Walmart, where anyone may shop without a membership, Costco requires customers to acquire a membership to enjoy its reduced rates. This enables Costco to generate a consistent stream of revenue from its members, which helps offset the company’s lower margins and allows it to offer lower pricing than Walmart (Singh et al., 2019). Moreover, Costco’s membership structure encourages consumers to return and make additional purchases, as the cost of membership is more than offset by the discounts they receive on their purchases.
Innovative Supply Chain Management
Ultimately, through innovative supply chain management, Costco has gained a competitive advantage over Walmart. Costco has taken several steps to ensure its supply chain is efficient and cost-effective, including optimizing inventory levels and implementing a just-in-time inventory system (Distanont & Khongmalai, 2020). These strategies enable Costco to save expenses while ensuring that it always has the things its consumers want in stock. This ensures that consumers can always obtain what they need at Costco and that the corporation can maintain its low costs.
Integrity
Integrity is a vital quality in every business. It is the characteristic of being truthful and having strong moral beliefs. Businesses must strive for integrity to earn the trust of their customers, employees, and stakeholders. Costco Wholesale Corporation values integrity because the corporation is renowned for its ethical activities, such as its dedication to offering high-quality items and services at the lowest feasible costs. Walmart Inc. is also deeply committed to honesty (Singh et al., 2019). The corporation places a high value on ethical practices, including requiring its suppliers to adhere to fair labor and environmental standards. Walmart is also committed to staff training and development, which fosters an honest and respectful atmosphere.
Conclusion and Recommendations
Conclusions
The performance of Walmart Inc. and Costco Wholesale Corporation was evaluated and contrasted in the research report. The article focused on both firms’ quantitative and qualitative data. The qualitative data analysis revealed that both organizations possessed an equivalent competitive edge in leadership, people, social capital, operations, R&D, marketing/sales, after-sales, organizational culture, and values.
Ultimately, Costco has been able to establish a competitive edge over Walmart by leveraging its scale and operational efficiency. Its advantage stems from the company’s distinct business strategy, smart pricing, membership structure, and cutting-edge supply chain management. Costco has succeeded in maintaining costs significantly lower than those of Walmart, while also offering a variety of additional perks to its members as a result of these initiatives. As a consequence, Costco has grown to become one of the world’s biggest and most successful stores.
Recommendations
According to the conclusions of this study report, Costco and Walmart should continue to concentrate on preserving their existing competitive advantage. Costco, in particular, must continue to invest in areas such as leadership, company culture, and research and development. This will help the organization remain competitive. Moreover, Costco should continue to strive for excellence in all aspects of its business to maintain its competitive edge over Walmart in the future.
Walmart must also maintain its current competitive advantage. To stay competitive, Walmart has to also invest in areas such as technology and innovation. Moreover, Walmart should prioritize offering excellent customer service to maintain customer loyalty. Lastly, Walmart must prioritize cost-cutting efforts to ensure that it can offer competitive pricing to its customers.
References
Costco Wholesale. (2023). Welcome to Costco Wholesale. Costco Wholesale. Web.
Distanont, A., & Khongmalai, O. (2020). The role of innovation in creating a competitive advantage. Kasetsart Journal of Social Sciences. Web.
Nasdaq. (2023). Stock market, data updates, reports & news. Nasdaq. Web.
Singh, S. K., Chen, J., Del Giudice, M., & El-Kassar, A.-N. (2019). Environmental ethics, environmental performance, and competitive advantage: Role of environmental training. Technological Forecasting and Social Change, 146, 203–211. Web.
Walmart. (2023). Save money. Live better. Walmart.com. Web.
Yahoo Finance. (2023). Yahoo Finance – Stock Market Live, quotes, Business & Finance News. Yahoo! Finance. Web.