Global economic conditions continue to drive soaring oil prices worldwide, and shoppers nationwide are looking for cost-saving alternatives for many key goods amid inflation at home. Costco (COST 0.10%) offers a balm for consumers stung by the pain at the pump, with low prices and loss leaders on many consumer staples as well as membership benefits unavailable from many other wholesale competitors. These might just be the tools it needs to outpace the bear market, stay strong in a recession, and even emerge stronger for its efforts.
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Gas, hot dogs, and rotisserie chicken could beat the bear
Prices at the pump are up 50% in just a single year, and recession may be just around the corner. Costco tempts shoppers to visit, or even drive out of their way, for average savings of up to $0.37 per gallon, which can add up quickly over time. Once they've arrived, shoppers can drop in for $1.50 hot dogs and drinks, $10 pizzas, and $4.99 rotisserie chickens, and maybe pick up additional consumer staples along the way.
This combination of consumer staples under one roof helps Costco remain recession-resistant. Gas shoppers need a company membership, and that card provides a slippery slope to discount savings on bulk purchases from many top brands, as well as Costco's own Kirkland Signature store brand, which continues to receive rave reviews. With groceries, alcohol, cosmetics and other staples under one roof, the wholesale warehouse can quickly fill the one-stop-shop need for consumers looking to save money and fuel with fewer trips.
The strength of satisfaction
Despite needing to drop $60 to $120 just for an annual membership to shop, customers' satisfaction with Costco remains very high. The company engendered further goodwill by announcing that anticipated membership price increases won't be coming anytime soon, given the economy's broader hardships.
With higher wages than many competitors and solid employee satisfaction, Costco has a strong advantage over close competitors. Walmart (WMT 0.92%), which remains a leader in the discount shopping market and challenges Costco with its Sam's Club wholesale outlets, fails to capture the same perception of quality with its in-store brands. Costco further distances itself from Walmart with items including a wealth of gift card options, found alongside in-store tire sales and even car insurance discounts.
The bear could still eat an investor's lunch
The future could still deliver a series of challenges for Costco investors. A recession could fail to materialize, leading the bear to give way to bullish markets once more and put competitors on more solid footing. But even the current bear market delivers at least some benefits to the company.
Costco also might be overvalued. The company currently trades at a valuation twice that of Walmart, over 30 times its estimated earnings for next year. Growth may slow, but there's still a lot of untapped market potential for the company, unlike Walmart, which seems saturated in many areas of the country. Costco continues to grow, adding 22 stores over the past year.
High-profile negative press could erode customer satisfaction. Two Costco shareholders recently filed suit with the King County Superior Court, charging that the company knows chickens headed for the popular rotisseries may have been mistreated.
A decrease in oil costs and fuel prices could similarly take away Costco's competitive advantage. As gas prices increase, the value of Costco's discount on them could also dwindle. Savings of $0.37 looks a lot better on $3 gas than $9, for instance. But those same higher prices could sell the value proposition even more.
Costco makes strong case for stability, if not growth, during recession
Historically, Costco does well during recession periods and typically falls off as the economy emerges before rebounding stronger than ever. The wholesale giant weathered the 2008 recession better than the market in general, and shrugged off the effects of the 2020 dip quickly and effectively.
Costco's strong customer and employee satisfaction, when coupled with its image as a source of savings on gasoline and recession-resistant consumer staples, position it as a smart investment even as clouds darken and the specter of recession looms. Its economic resilience and continued growth offer retail stock investors a potential winner -- with a chicken dinner.
