Say What? This Company Inspires Better Customer Loyalty Than Costco!

Costco's employee and membership perks are well-known, which makes the idea that it's NOT the price-club customer-loyalty leader somewhat hard to swallow. Find out which company hurdled over Costco for the top spot.

Aug 10, 2014 at 11:12AM

You don't have to look further than your mailbox these days to understand that grocery stores, supermarkets, and warehouse retailers are gunning for your business. In a given week I receive anywhere from five to eight pieces of mail and a mound of sales advertisements from local grocery, supermarket, and superstore chains so big it looks as if it could eat the rest of my mail for lunch.

Grocery and warehouse businesses have to be aggressive when courting new customers because margins within the industry are often razor-thin. Consumers tend to be highly price-sensitive, but they also have other factors which can come into play, such as customer service quality, location of the store, selection of product, and product quality. It's important for this industry to have a constant flux of new customers walking through its doors.


Perhaps even more important are repeat customers. Loyal consumers have the potential to be less reliant on promotional events to visit a store because they've already developed some form of attachment to the brand, which means they're a valued source of higher margins. For grocers and price clubs like Costco Wholesale (NASDAQ:COST) loyalty is the bread-and-butter of their business.

Costco attempts to set the bar high on customer loyalty
Costco's story is well-documented. The company is renowned for compensating its employees handsomely, for offering health care options to both full- and part-time employees, and for instilling the small factors that help consumers form attachments to the store. The company's $1.50 combo price for a hot dog and soda, a price that hasn't changed in nearly 30 years, is a genuine gesture to consumers that helps place the company on equal footing with its customers rather than on a pedestal.


Source: Bev Sykes, Flickr

As hard as this might be to believe, considering these aforementioned factors that have driven Costco's success, it's not the loyalty leader among price clubs, according to research firm Brand Keys.

Utilizing its proprietary Customer Loyalty Engagement Index (link opens PDF), Brand Keys surveyed more than 32,000 respondents regarding 555 companies in 64 sectors and examined what emotional and rational expectations made consumers more loyal to one brand than another.

As discussed above, loyalty is crucial in the price-club sector. Generally speaking memberships play a key role in keeping consumers loyal -- as it's unlikely someone is going to pay an annual membership to shop at a price club then shop elsewhere -- but word of mouth from members, product selection and pricing, and a number of other factors determine whether those customers renew their membership or if the company in question can garner new members.

The price club with better customer loyalty than Costco
Would you care to venture a guess as to which price club surpassed Costco in customer loyalty?

Have your answer?

If you said Wal-Mart's (NYSE:WMT) Sam's Club then you've hit the nail on the head, as privately held BJ's Wholesale brought up the caboose.

Source: Mike Mozart, Flickr

Let's have a look at a few of the possible reasons behind Sam's Club topping Costco in this ranking.

I would suggest first and foremost that price played a big factor in generating consumer loyalty toward Sam's Club. Though both Costco and Sam's Club offer various tiers of membership pricing, Sam's Club's comparable plan in the basic tier ($45) and premium tier ($100) are $10 cheaper than Costco's, which cost $55 and $110, respectively. In addition, Sam's Club's advantage membership, or its basic tier membership package, comes with two annual membership cards as an added convenience to family members who no longer have to share just one, free flat-tire repair, car battery testing, wiper blade installation, and its "Click 'n' Pull" service, which allows members to order something online and pick it up in store the next day. All told these perks are pretty good for $45 per year.

Costco's premium membership certainly offers ample rewards for those who spend a lot in its stores (its executive membership makes members eligible for 2% rewards up to $750 each year on qualifying purchases), but across a wider swath of price club shoppers it would appear that membership fees tends to be of the utmost importance.  

Sams Club Card


But pricing advantages can extend beyond just membership fee comparisons. According to, which compared prices of 38 typical grocery items, Sam's Club was the clear leader with its goods coming out 3.6% lower than Costco.

A number of factors help in keeping Sam's Club's costs down, including the immense scale of parent Wal-Mart's operations, which allows Sam's Club to piggyback onto its parent company's distribution and supplier network in order to keep costs down and, in turn, offer its goods at a perceived discount to its peers. Sam's Club also pays its employees far less than Costco does, which is another factor that helps keep its costs low and allows it to remain price-competitive.  

Another important factor where Sam's Club can claim an edge over Costco would be customer convenience. Generally speaking, Sam's Club's member hours are on par with or more generous than Costco's, giving members more opportunity to shop and doing its best to be as accommodating as possible to its members' diverse schedules. Not to mention that Costco is closed on all major U.S. holidays, while Sam's Club is open on Memorial Day, Fourth of July, and Labor Day for all of its members. It's these little conveniences that certainly help Sam's Club keep its members loyal.

Loyalty isn't everything
While loyalty is certainly important to the success of price clubs, investors should keep in mind that loyalty isn't everything. External factors and company strategies can also influence how well, or poorly, they perform.

Costco, for example, tends to target a more affluent clientele. The advantage of this is that higher-income consumers are usually less price-sensitive and tend to be more indifferent to swings in the economy. In other words, if the U.S. economy is struggling there's a good chance that affluent members aren't changing their buying habits much, if at all, which bodes well for Costco's long-term growth and cash flow stability. Costco's 4% same-store sales increase in the third quarter, reported in May, is a testament to the strength of its strategy.

Source: Zinger, Flickr

Sam's Club, on the other hand, tends to focus on a lower-income to middle-class consumer where price is essentially everything. Brand Keys' survey clearly shows that the Wal-Mart-owned company has been very successful to that end. But, Sam's Club's strategy won't always translate into success because lower-income consumers are more susceptible to economic fluctuations. Weak wage growth, rising inflation, or delayed tax refunds can all have adverse impacts on Sam's Club's core customer. This is one reason why Sam's Club witnessed its same-store sales dip by 0.5% in its latest quarter despite being the so-called customer loyalty leader.

When evaluating these businesses as investments it's important to consider customer loyalty, but it's also vital that you look at the big picture. At this very moment, or at least until lower-income and middle-class individuals are feeling less budgetary pressure, Costco continues to look like the better bet even if it is taking a back seat to Sam's Club in customer loyalty.

Nothing inspires loyalty for investors more than a high-yield dividend.
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information