Why Less Choice Means More Profits for These Warehouse-Club Operatorshttp://www.fool.com/investing/general/2014/01/24/why-less-choice-means-more-profits-for-these-wareh.aspx Mark Lin
January 24, 2014
Wal-Mart (NYSE: WMT) is the world's largest retailer, but it isn't necessarily the most profitable. In fiscal 2013, Wal-Mart delivered an impressive return on invested capital of 12.1%, but its profitability was still inferior to that of its warehouse-club operator peers. Costco Wholesale (NASDAQ: COST) and its Latin American counterpart PriceSmart (NASDAQ: PSMT) achieved 2013 ROIC of 13.3% and 15.5%, respectively. PriceSmart was founded in 1996 by Sol and Robert Price, the pioneers of the warehouse-store concept.
Inverse relationship between profitability and SKUs
Costco carries an average of about 3,700 SKUs per warehouse, while PriceSmart carries approximately 2,200 SKUs. Given that PriceSmart's warehouse clubs are smaller in size to their U.S. counterparts, the average number of SKUs per square foot is comparable. In contrast, an average Wal-Mart supercenter boasts more than 20 times the number of SKUs that warehouse-club operators carry.
High inventory turnover
High inventory turnover has several benefits. Firstly, the faster you turn over your existing inventories, the more shelf space available for new trending products. While Wal-Mart clears the old stuff on its shelves, Costco and PriceSmart keep their assortment fresh with what consumers are demanding right now. Secondly, high inventory turnover increases sales per SKU over the year, resulting in stronger bargaining powe