In this episode of Industry Focus: Consumer Goods, Emily Flippen is joined by Dan Kline to discuss the warehouse retailing business in general and Costco (NASDAQ:COST) in particular. Discover what it takes to run a warehouse retailer, what Costco's business model and growth strategy are, who its main competitors are, and what differentiates it from them. Find out what makes it so great for consumers, what makes it a great stock to keep on your watch list, and much more.

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This video was recorded on September 29, 2020.

Emily Flippen: Welcome to Industry Focus. It's Tuesday, September 29th, and I'm your host Emily Flippen. Today I'm joined by Motley Fool contributor Dan Kline to talk about the warehouse retailing business and take a look at one major warehouse retailer; you can probably guess what it's going to be, it is Costco.

Dan, thank you for joining, as always.

Dan Kline: Oh, thanks for having me. This is one of my favorite companies to talk about.

Flippen: Yeah, this is an interesting company, it doesn't tend to have a lot of competition, because being a massive [laughs] warehouse retailer requires a lot of CapEx, requires a lot of space, but there's a little bit of competition for Costco out there, we'll get into it. But before we do so, let's just talk about the Coke [Coca-Cola] in this space, which is of course Costco.

For our listeners who just aren't aware, maybe they don't live in the United States or live in one of the handful of countries that have a Costco, or otherwise only exclusively shop at Walmart, I'm not sure, who don't know what Costco is, what is Costco?

Kline: So, Costco is a membership-based warehouse club. What does that mean? In order to walk inside a Costco, and there are some exceptions to this, but in general, you need to be a member. You can buy a $60 membership, that just gives you access. You could buy a $120 membership that gives you 2% cashback up to $1,000. So, it's pretty simple math, whether that's worth it for you, for some people it isn't, some people are just going to Costco for fun, they're not making a lot of purchases or maybe they forget to go, but for a lot of people that would be a value. And once you get in the door, what you're getting is very low prices, but on very limited selection.

So, it's not a grocery store, it's not like you walk in and there's going to be, like, four different sized boxes of Fruity Pebbles. There might be Fruity Pebbles and four other kinds of cereal, not 200 other kinds of cereal, and they're only going to be in one size. It's probably going to be a large size; you might have to buy two large boxes. There's not going to be a whole row of Aspirin and Tylenol, there's going to be two or three different types, and it's going to be Tylenol and a 500-capsule drum next to a Motrin and a 1,000-capsule drum. It's a very limited selection.

Why do they do that? The goal is to keep the price as low as possible so they make a very limited markup. And when they say it's a warehouse, it's literally a warehouse. There's no frills, there's very few people working on the floor, and it is kind of like they let you in the back of a warehouse and you're taking items off of pallets. The quantities tend to be big and the selection tends to be low, but you're going to save money and they've selected it really well. So, if you go in looking for K-Cups, you might not find exactly the one you want but you're going to find a reasonable selection at a very good price.

Flippen: As a household of two people right now, it kind of blows my mind that somebody would pay a subscription fee to maybe not get what they originally [laughs] purchased. But as we talked about last week on Industry Focus, we spent a while talking about Ollie's, and how Ollie's plays off of this discount mentality that not only everybody, but especially Americans, seem to have when they're going to shop for goods. Is it fair to say that Costco is going after the same group of people, those people who really feel and enjoy getting a good deal when they go shopping?

Kline: Yeah. So, there's a couple benefits of Costco. There's the pure deal people, the people that go in saying, like, I need to feed my family this week, I have no preconceived notion of what that's going to look like. And, oh, crab legs are on sale, excellent! Then there's the person like me, who goes to Costco and maybe in the back of my mind I'm thinking, I don't want to buy a toothbrush for the next two years, so I'm going to go find the toothbrush section and I'm going to buy, you know, a 24-pack of toothbrushes and I'm just not going to have to think about it for a long time. And then I might happen upon something else, then there might be a book, there might be a shirt, there might be a candy that they're sampling -- not really sampling right now, but they used to do a lot of free samples on the floor.

There's also a food court which is inexpensive and fun, so I could get my son to go by bribing him with $1 churro, that is a good investment. You know, we kill 90 minutes walking around Costco looking at stuff. They might one day have toys; they might have some electronics that are a good value. You never know what you're going to get, but you do know on certain staples that they're going to meet your needs. So, if you know, you know you want to buy a 24-pack of diet coke, well, they're always going to have that. If you want to buy something a little more obscure and you know, hey, I want an interesting candy to have in the house. Well, they're going to have an interesting candy, they're just not necessarily going to have the same one you bought last time or the one you're thinking of.

So, it is a little bit of that treasure hunt where you might go in looking for chicken for dinner and leave with the kayak, like that has happened to people. You know, I always joke about the 8-foot teddy bear and who's buying that, but periodically they sell an 8-foot teddy bear, which means somebody must be buying it.

Flippen: So in preparation for today's show, I collected some data about Costco and its handful of competitors, one of which is BJ's (NYSE:BJ), you may not be familiar with that name unless you're living on the East Coast, but one of the stats that really stood out to me when I was collecting this information was the SKUs. So, essentially the number of products that a Costco versus a BJ's stock. And Costco has about 3,700 different SKUs per warehouse; that number was kind of meaningless to me. But in comparison to BJ's, which has over 7,000, it means that Costcos are stocking less than half that of BJ's. Now, does that make BJ's a better warehouse or does that make Costco a better warehouse? This to me seems so strange.

Kline: No, it makes Costco a better warehouse, because I have never gone to Costco and felt like, hey, I was looking for toilet paper and I couldn't find toilet paper. Was there the selection you might be looking for? But that's how you keep prices low, the more you buy of one item, the better you're doing. So, BJ's is already working from some disadvantages. It's a smaller company, they don't have the purchase power that Costco does. If they're buying twice as many SKUs, that means they're not buying as many. So, Costco knows, hey, I better have cornflakes and it better be the name brand cornflakes, and I'm going to make the best deal possible, I'm going to sell as many of them as I can. At BJ's they might be going like, well, I think we should have cornflakes, maybe we also need frosted flakes. And that's going to hurt their buying power.

3,700 SKUs is something like 10% of what I sold running a local toy store. So, it's a tiny fraction. I don't know what they have in a traditional, you know, Kroger or Publix, but it's over 100,000, the numbers are significant. So, this is laser-focused.

I mean, think about it, when you go into a Whole Foods, there's like 14 kinds of soy sauce. Costco would just have soy sauce, and it might not be the same kind every time, you're not going to get your gluten-free variety, it's just going to be one SKU that meets the need. And this is a company that's laser-focused on purchasing at the best price and selling at the lowest price possible.

Flippen: I semi-joked earlier in the show that Americans love a good deal, while also acknowledging that Costco has stores, I believe, in 12 different countries. But the vast majority of revenue for Costco, I think it was 87% of sales last year, came from North America. So, they are really focused right now on most of the United States and Canada. They have over 50 million paid members across the world in 2019, up just less than 5% year-over-year, so it's still a growing business; admittedly not fast growing, but growing. So, when you look at the locations that Costco has now, when you look at the membership, at just over 50 million paid members, is this still a growth story? Is Costco just trying to retain people or are they trying to expand their membership base?

Kline: So, their membership base grows every quarter and a bigger percentage of it becomes a premium member; spends that extra $60. They grow in two ways, obviously, they slowly add existing members. And their retention rate, which is at about 88% now, it's actually usually closer to 90%. They're probably having a little bit of pandemic-related, some people can't afford it, some people joined and realized it wasn't right for them, it's probably a little bit more churn than they normally have. So, they add members at existing locations and they open somewhere between 20 and 30 new warehouses a year.

They're very methodical in how they do it. They get to profitability very quickly. Part of why they haven't expanded internationally quickly is supply chains. Their ability to move things around to get stuff in-and-out, these are bare basic, no frills; everything you see is on the floor, there is no back warehouse. They say it's a warehouse, it's literally a warehouse. So, if they sell out of something, there will be holes. So, getting their supply chain really working well is very, very important for them. So, I often joke about the stock price, it's an elephant moving up a hill, it's going to get there, and that's kind of what their membership is like, it's very predictable, it goes up by similar amounts every quarter.

And here's the other nice thing, their membership gives them a monthly pulse of how their business is doing. So, if they see an uptick in people dropping their membership, they can make adjustments, they can contact people, do a survey, hey, why did you leave? And if people say, well, geesh, your online options weren't good enough during the pandemic, they can make adjustments. This is never a company that has to be first. They were very slow to offer, really, anything in terms of digital. And then they very slowly beefed up their website, they added some delivery options. Now they're partnered with Instacart, so you can get some same-day delivery. They don't do curbside pickup because their stores aren't set up for it. If their members really, really wanted it, they would know and they could find out. So, some companies are in trouble before they find out, Costco can find out at the barest hint of a problem and make adjustments. And they've been very, very good at that.

Flippen: We use the word omnichannel a lot, but it is kind of an omnichannel strategy for Costco. You mentioned they have e-commerce presence and delivery, but they don't have curbside pickup. It's really hard for me to imagine what e-commerce looks like for a massive warehouse retailer where people are buying [laughs] literal pallets of goods sometimes. It's hard for me to visualize that. But if you look at their most recent quarter, e-commerce grew at greater than 90%. What is that e-commerce and is it actually important for Costco?

Kline: Yeah. So, they're offering a couple of different methods of delivery. One is a set price box, where you can fill the box essentially and it takes a few days to get there. I don't remember the exact parameters of it, it's nothing I would ever use. And they also sell some items, just traditional items. You want to go buy a laptop, you can buy a laptop from Costco and it'll come to you in a few days. So, they went from basically the website being a brochure to then they started offering services on their website, like Costco Travel is something. So, if you want to book a cruise or a theme park vacation, one of the better ways to save money, in fact the only way if you're not in certain unions, like, teachers get a deal at Disney, but for the most part there are no deals at Disney. Costco will give you a package that will be a deal. Now, are you saving money on your theme park tickets? You're not; even if they position it that way. You're saving money on your hotel, your airfare, your rental car. And some of that has moved online. The Costco car buying, that's online.

But they do have a lot more merchandise. And with Instacart, you can place a normal order from Costco. And because they have such a limited amount of SKUs, and I don't know what percentage turns over every day, but let's pretend there is a 25% changing merchandise and 75% -- I don't want to say fixed, because it isn't fixed forever, but merchandise that's perennially there, there's not a big ask on their website to keep it up-to-date. So, by using Instacart, they've moved into sort of a true more or less omnichannel, because I'm not sure how returns work. Like, Instacart won't pick up a return, so you would have to go back to the store to do that. But for the most part they offer just enough online that it works during a pandemic.

And look, right now, I'm sure people are placing Costco orders for paper towels, toilet paper, cleaning supplies, rice and other bulk food and having this big order show up at their house, whether it be through Instacart or somebody else. Be careful when you use Instacart, they markup the prices, so you're not necessarily getting the savings you would get shopping at Costco. They're not transparent on that. So, if you don't know the prices going in, it's very difficult to tell what the markup is.

Flippen: So, let me get this straight. Costco, for a membership fee, you can come in, you can buy pallets of goods at a discounted price. That was my impression of Costco. But Costco, as you alluded to, is becoming more than just that. And we haven't even mentioned the food court experience, [laughs] it's probably not worth getting into any detail, but they have a pretty notorious essentially food court that I would imagine sells things like rotisserie chickens and hot dogs at a loss to retain members. But you have access to the discounted goods, you have access to the food court, you have access to travel benefits, car rentals, you have access to tire repairs and gas. Gas sales made up greater than 10% of revenue in 2019. So, there's so much more to Costco than just the experience of buying discounted goods.

When you think about the value proposition, it seems like it gets bigger for Costco every single year; they add more and more. Is this going to get to the point where it could be uneconomical for you to not be a member of Costco, because it's a one-stop shop?

Kline: So, if you live near a Costco, and when we lived in Connecticut, we lived about two miles from a Costco. And I did an article for Fool.com saying, is it worth it to be a member just for gas? And I did the math. I had about a 20-minute commute and I didn't go into the office every day, so maybe three or four days a week. I did the math, and it was unequivocally worth it for me to be a member just for gas.

Forgetting that if you make one big purchase through Costco you might save your whole membership fee. Let's say, you buy a $2,000 computer that's $300 less than it was elsewhere, that right there saves your membership fee. But just generally shopping at Costco is a good value with one exception, you have to be careful that you don't buy more than you're going to use, that can be a problem. You know, you don't want to buy a pallet of croissants and throw away two-thirds of the croissants. I joke, because my mother once, and it was from BJ's when I was a kid, brought home a giant thing of croissants. I'm like, are we having a party? How could we eat this many? [laughs] So, you have to be careful with portioning things out, making sure your shampoo doesn't go bad and separate before you use it. So, there's a little bit of planning to some of it. But for the most part, yeah, you're almost crazy not to be a member.

And people ask all the time about, well, what about Amazon Prime? Most people should be members of both. And there's a ton of overlap. I don't think these companies are competitors. Amazon can get you one item quickly; Costco is a really easy way to inexpensively get a lot of stuff. And for most people, that's a really good value.

Flippen: Before we move on and talk about some of the competition that exists in this space, you have some interesting notes here in our document talking about membership fees. And I noted that membership fees were only just greater than 2% of net sales in 2019, obviously, because Costco reports on a gross basis. So, all the purchases that you're making at a Costco go straight to their topline, but it was still greater than $3 billion in 2019, just from the membership fees themselves. And what I think is interesting is that comp growth, which is something that a lot of analysts focus on, that's the comparable sales of the same-store year-over-year, while that's growing, you think it's less important than the membership fees. This only makes up 2% of the topline, why is that?

Kline: Well, because the membership fee is about two-thirds of their profit, that's where they're making their money, they're not making a lot of money selling you things. And they're probably making more money, they don't break this out, on things like their car referral or their travel program where they get a fee, than they are selling you, you know, a loaf of bread. Their goal is to sell things cheaply and that will keep you a member.

But here's the reality, if I join Costco and never go, they don't want that, because I'm not likely to stay a member if I don't use it, but if I am a member who goes in once or twice a year and thinks it's a value, it doesn't matter how much they are selling goods, I could just go in and kick the tires if I stay a member, and their data shows that memberships are going to hold true, it's not really about selling. Now, selling you stuff does build loyalty. If you buy your $2 bottle of wine from Costco or your Kirkland house brand scotch from Costco, and you like it and that keeps you going there. And in some cases, you don't need to be a member to go to the liquor store when they have attached liquor stores, that depends on what state you live in. Or if you always buy your tires from them and that's enough to keep you as a member, all they care about is membership retention, everything is about making that a good experience, and that means keeping prices low. So, same-store sales are absolutely irrelevant, and in some cases, it might actually drive less profits, depending what you're buying.

Flippen: And we talked a little bit about BJ's, not that this is a company that we need to spend a ton of time digging into, but it is worth noting, because you can argue it's a competitor to Costco, to the extent that Costco -- as horrible as this metaphor is, we get feedback on it every single time I use it, [laughs] but Costco is Coke here, right; BJ's is Pepsi, [PepsiCo] ignoring the fact that Pepsi has actually outperformed [laughs] Coke for the past five years. But regardless, BJ's is the smaller version of Costco. They were actually founded around the same time, BJ's just expanded more slowly. And despite the fact that it's growing, and you could argue that it has bigger growth prospects than Costco just based on the number of stores they have, they only have around 220 stores versus 800 for Costco.

It's also interesting, because they only have about a tenth of the members. So, I'm not sure if it's as sticky as Costco is, when you think about the ecosystem that Costco has built.

Kline: So, in the Coke and Pepsi analogy, Coke and Pepsi here are Costco and Sam's Club; I think that's important to say. BJ's is Royal Crown maybe, maybe house brand; I'm not really sure which cola they are, but they are a much lesser cola -- you know, Jones Soda, they're not an important cola.

Look, I hate saying this, because I've been a member of all three, because Groupon has had deals on all three, so at various points I've joined them all. BJ's is largely an inferior experience. And I know there are BJ's that have food courts, but the one I went to didn't have one, it had less merchandise. It just wasn't as fun an experience. Now that said, if what you live near is a BJ's, it's still a good deal, it's still a good experience. But if there's a Costco and BJ's, or even a Costco, a BJ's, and a Sam's Club, which happens sometimes, there's no reason to go to a BJ's. So, the BJ's growth potential is to get to markets before Costco and hope Costco doesn't come there. I don't know that that's a great model when your competition is Walmart, which is everywhere, which has all the data it needs to know what the good markets are and where they should be going. BJ's here is -- I don't think there's any way for them to win, they've bounced on-and-off of public markets, they're publicly traded now. But I don't see really what their path to success is other than if they can really, really engender loyalty. And being from the Northeast, where they're heavily concentrated, I actually know people that are really, really BJ's loyal. So, if that's true deeply throughout the chain, well maybe they can very slowly grow, but I don't think it's nearly as exciting a story as is either Costco or Sam's Club, which is, of course, Walmart.

Flippen: Of course. And before we move on to talk about Sam's Club, again, I'm burying the lead here, because Sam's Club is probably the most interesting competitor to Costco. I think BJ's, because it had such a great quarter last quarter, it's gotten a ton of attention from financial media. And some say that the quarter is bad, and it's not to say that BJ's is a bad investment, but I just want to throw some numbers out there for our listeners. If you look at the performance of BJ's versus a company like Costco, BJ's has $3 billion in net debt. So, it essentially owes more money in its debt and leases than it has on its balance sheet. Not that that's a bad thing, lots of companies have positive net debt, BJ's is obviously a huge company that can support those interest payments. But Costco has negative net debt, which you would have never guessed considering the amount of capital expenditures it requires to build out a Costco, even just one location.

So, for me, the financials, just looking at the balance sheet, Costco gets the nod. But it also, if you look at the past few years of revenue growth, Costco is more than double that of BJ's. Not to say that the history will dictate what happens in the future, but I would even argue that given the fact that BJ's can build out more locations than Costco can right now, I think Costco still has the edge in terms of potential growth, simply because it has such a close relationship with those members and it makes an experience that those members seem to be really enthused by. Even as we're talking here, I'm seeing comments come in from listeners saying, hey, Costco is the best experience. They have rave reviews from the people that are long-term subscribers to Costco, which says a lot about the business.

But minus my little tangent [laughs] there, let's talk about Sam's Club. Because Sam's Club, owned by Walmart, is probably the most formidable competitor to Costco. And unfortunately, because it is withheld inside of Walmart, we don't have as much granular data for the performance of a Sam's Club versus Costco, but they do break it out a little bit, and it's pretty good.

Kline: Yeah. So, you know, they did $58.8 billion in sales in 2019. It's only about 11% of Walmart's total sales, but you have to realize how big Walmart is. I know people are going to get mad at me for saying this, but I don't put a lot of difference between the experience at a Costco and the experience at a Sam's Club, I think they're pretty similar. They have similar food courts; they have a similar product mix. I think it's really whichever one is closest to your house. They have gas stations; it works pretty well. They also have the advantage of Walmart. And I think that's actually a pretty significant advantage they haven't used all that well.

You talked about things like wireless checkout, the ability to fill your cart and leave, which is kind of a frill, that's not the type of thing Costco is famous for. Well, that's something Walmart is working on that can thereby end up in a Sam's Club. So, all of the omnichannel experience that Walmart has, like its pickup kiosks, are things that they can look at data and decide if they're going to bring them to Sam's Club. They haven't brought a lot of innovation to Sam's Club, but they could, and I think they will. That gives them a little bit of an edge over Costco, which would have to spend the money on its own. But of course, the way Costco has worked is it's just going to watch and see what they do and if it works for Sam's Club, they'll probably do it at Costco.

Flippen: Yeah. And what's interesting about Sam's Club, Walmart within itself has been innovating a lot. And I think it's fair to say that Sam's Club could be a lever in them, with this Walmart+ membership; that's something that they could, they haven't worked on it, yet I just see a lot of optionality in the relationship between Sam's Club and Walmart. And that will be interesting to watch. But what's also interesting, and this is from the year-ended 2019, so these numbers are not reflective of the pandemic, but if you look at just their core business, Sam's Club has about 75% the stores of Costco, around 600 versus 800 for Costco, but it has less than 40% of the total sales that Costco does. Again, this is not to say that Sam's Club does a bad job. I think they also have rave reviews from people that shop there. The people that shop there [laughs] are still purchasing a lot of their daily household items there. But it goes back to the travel, it goes back to the cars and the gas and all the things that make Costco just a behemoth in this space. It is really telling, when you build out 75% of Costco stores but can't even get half of their topline.

Kline: Yeah, it's an issue. And they do many of those same things that Costco does, they maybe just don't execute them as well. But it's also worth noting that they tend to be near a Walmart, [laughs] so some of the sales that might be going to Sam's Club are going to Walmart, so that's all staying within the family, there's good value across that chain. So, again, it's not so much about their sales. When you look at their membership retention, it's only a teeny-tiny bit below where Costco is, and that generally tracks out, that's normally where it is, they're both down a couple of percentage points from where they normally are.

It's also worth pointing out that the pandemic has been a massive opportunity for these companies. There was a point where a lot of people who weren't members of a warehouse club went, I don't want to leave the house that often, I need an awful lot of stuff, what's the easiest way to get it quickly? Maybe I should join Costco, because I no longer care if my hallway is stacked with paper towels or ice coffee or whatever it is. That's what it was like in our house for a while, where you would just walk in, and you'd be like, there's a row of ice coffee, there's two cases of water, there's toilet paper. Because we weren't really concerned about having things out of sight; who's coming over? We were concerned about having what we needed without having to leave the house that often. And there was a period where it was difficult to get stuff, where you'd go to the grocery store and you were only allowed to buy one roll of paper towels and, you know, hand sanitizer, one bottle if they had it. So, they met a need.

And I think in the post pandemic world, a lot of those people are going to see the value. They're also going to see the entertainment value. When we return to a time where you can shop and, sort of, aimlessly wander around, it's really fun to walk around a Costco or a Sam's Club, and you might be like, oh, that's a best-seller I almost bought last year and it's $5. Oh, that's a magazine from three months ago, I don't know why they have that but I'll buy that. And like, you know, there's a board game over there. It's an endless, sort of -- I don't know, I've always found it fun and just sort of going in and, you know, you go in thinking you're going to buy coffee and you leave with a volleyball and you're happy for it. And maybe you stopped and got that rotisserie chicken.

You mentioned Costco selling rotisserie chicken at a loss. In order to sell rotisserie chicken for $4.99, Costco opened a chicken farm. They had to take the supply chain into their own hands to manage their process. That is a company that understands where every nickel is coming from. And if you ever watch, like, there's a CNBC show that breaks down some of the Costco purchasing, it is unbelievable. You know, you'll come in and say, I have Emily's coffee pods and they are $0.12 apiece and you can sell them for whatever. And I'm going to go to you and say, well, if I buy 10 million, can I get them for $0.08 apiece? And you're going to go, oh! that maybe, and like you have to go back -- it is really, really every penny is accounted for.

And as a consumer, as a shopper there, you actually can appreciate that. Like, if you buy something, you can feel pretty confident that it's a really good deal. It's not always the lowest price. Amazon can sometimes be a lower price, even Walmart can sometimes be a lower price than Sam's or Costco. But if you look at 8 out of 10 items, they're going to be the lowest price; and the ones where it's not, they're going to be a really, really good price. You're never going to buy something at Costco and feel like you were taken advantage of.

There is one caveat, I bring this up, and I've written like eight billion galleries on do's and don'ts of Costco over the years, when you're buying electronics check the model number really, really carefully. Because, especially at Christmas season, you might be buying what you think is analogous to what's being sold at Best Buy or Target, but it might be missing a feature, it might have lower resolution. The model number is 8526-C, and you're looking for 8526-B. You got to look really, really carefully, unless all that matters to you -- and this is sometimes true with electronics -- is what's the biggest, cheapest screen; what's the laptop that looks... but that's a caveat. Like, they're not going to fool you that way with M&Ms, they can fool you that way with electronics, so be careful.

Flippen: [laughs] Spoken like a true expert. I have to say, after listening to you talk as someone who is not a member of Costco and as somebody who is -- it's probably uneconomical, given my spending for me to be a member of Costco. I still want to be a member of Costco now, because I'm getting this FOMO, this Fear Of Missing Out, [laughs] on the Costco experience after listening to you talk about it.

Kline: Yeah. I think in a normal world, it's worth being a member, because as much as we talk about that it's bulk, it's not like everything comes in a drum, it's really more just about -- I mean, yes, you're probably not going to be able to buy, say, like one toothbrush or one deodorant, but you might have to buy four, like it's not like crazy -- there are some things that are silly quantities. But I know in our house, and I'm guessing you live in less space than I do, but I don't have a ton of space, that it is something we really have to think about. You know, right now my closet has toilet paper in it, because we stocked up due to the pandemic, there was just no place to put it. That being said, it's probably still worth it for us just for the things that aren't giant quantities.

And Costco might have, like, a gift card to join a gym for a year, and maybe -- you know, we're both Planet Fitness members, maybe it's the high-end Planet Fitness membership which is $20-something a month, maybe you get it for the price of, like, nine months if you buy the one-time coupon. Now, they probably don't have Planet Fitness or you might get, like, $100 worth of gift cards to Chili's for $70. They have some really interesting values and gifts and other things like that, that could really, just in one fell swoop, save you all the money you paid, and it's not a bad rotisserie chicken. I haven't had the pizza, but my son says it's a decent piece of pizza, the churro looks delicious.

So, you know, there is a lot of value to be had there. And like, in the food, OK, you're probably not cooking four pounds of chicken at once, but do you have a freezer where you could split that up into three different meals? You might be able to do that. So, you know, people can shop there. If they don't have a lot of storage, it's just not as valuable.

Flippen: So, this might be a moot question; I think I know your answer, I think my answer may be different than yours. But I'm going to ask the Mac Greer desert island question anyway. If you have to buy one of these companies, and only one of these companies and you have to choose between Costco, BJ's, and Walmart, which are you buying and why?

Kline: It's Costco. I think Walmart has bigger upside, but I also think Walmart does have some risk. I think they haven't always been a perfectly run company. And there's a definite fight between their digital people and their in-store people. Right now, digital is winning, but they've had to sacrifice. But Marc Lore, who runs that group, has had to sacrifice the Jet.com brand, basically all of his lieutenants. He's kind of out of pieces to play defense if there's a big -- and I'm not sure they don't make some bad moves.

Costco just trudges forward. They know what they're doing. And every time you think, boy! Why isn't Costco doing that? Like, they have a press conference and they announce that they're doing it. Like, they don't spend a lot of money on innovation, they spend a lot of time looking at where the market is going. And when they absolutely have to go there, they go there. So, more upside in Walmart, but Costco is just going to slowly go up and up and up. And it's a company that people don't understand how to value, so it sometimes has really weird fluctuations in stock price when they report. That being said, this company will be in a much better place 10 years from now, so I hope I get back from that desert island.

Flippen: [laughs] I think you've convinced me here. I have to admit, I personally would be a little bit torn between Walmart and Costco. And I never thought I'd say that before, but I think Walmart has been, kind of, reinventing itself. And that does make it higher risk, because there, as you alluded to, is always that risk of failure on Walmart's part. But I think Walmart still has a lot of optionality. Part of that's connected to Sam's Club, in my opinion, that's more connected to healthcare and Walmart+ and all the innovations they've been doing with technology. So, I will lay off on that, I'll just say, I think both of these companies can be really interesting additions to an otherwise diversified portfolio. That's just my humble opinion though. [laughs]

Kline: I'm not against owning both of them, but you gave me the desert island question, so I had to pick -- Mac has gotten mad at me for playing with the desert island convention or joking about it, because why would I want a stock on a desert island? I would much rather say a knife, like, that would be a lot better.

Flippen: [laughs] Well, hopefully you can't go wrong with the stock on the desert island, right? I mean, maybe you'll have a pina colada, maybe you'll sit there and you can just watch your Costco ticker go up, right, assuming there's -- I mean, desert island doesn't necessarily mean deserted island, right?

Kline: I sort of feel like it does for the purpose of this game. But you know ...

Flippen: [laughs] I think it was intended to be deserted island, so agreed, I think I would pick a knife over Costco if that's the case.

Kline: [laughs] It's always possible you could be heading to a deserted island. I like the populated islands where you could get that pina colada, though it would probably be a margarita in my case.

Flippen: [laughs] Yeah, I think I've had my fill of deserted anything after this pandemic. I want to be around people as soon and as often as possible, although it doesn't seem like that's likely. But as always, Dan, thank you so much for joining. It's always a pleasure to have you on.

Kline: Thanks for having me.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say "Hi!" you can always shoot us an email at IndustryFocus@Fool.com or tweet us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for his work behind the screen today. For Dan Kline, I'm Emily Flippen, thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.