But which of these iconic retailers is the better business? Let's take a closer look at how Wal-Mart and Costco match up along some important dimensions.
Prior to the Great Recession, Wal-Mart and Costco had similar revenue growth rates. However, consumer spending among lower-income Americans has never really bounced back from the credit crunch and the Great Recession. This has hit Wal-Mart hard.
By contrast, the average household income among Costco members is about $85,000. For the most part, Costco members aren't living from paycheck to paycheck. As a result, Costco quickly returned to strong growth following the Great Recession.
Today, Costco routinely posts high single-digit revenue growth. Revenue grew 7.1% last year, and analysts expect slightly faster growth for the next two years. Meanwhile, Wal-Mart's revenue grew just 1.6% last year, and Wall Street analysts expect 2%-3% growth for the next two years.
Sales per square foot is an important measure of how efficiently a retailer can use its real estate. The more a retailer can sell in a given amount of space, the more it can stretch fixed expenses like rent and utilities.
Last year, the Wal-Mart U.S. segment had a footprint of 659.1 million square feet and posted sales of $279.4 billion. That equates to sales per square foot of $424. Wal-Mart's Sam's Club division -- which has a business model similar to Costco's -- had 84.4 million square feet of space and sales of $57.2 billion, putting sales per square foot somewhat higher at $677.
By contrast, Costco has 95.3 million square feet of warehouse space and generated sales of $110.2 billion. (This figure excludes membership fee income.) This works out to sales per square foot of $1,156. When it comes to maximizing sales volume in a store, Costco beats competitors like Wal-Mart by a country mile.
Costco doesn't beat Wal-Mart in every category of retailer performance, though. Wal-Mart still has a higher profit margin than Costco. Wal-Mart's operating margin over the past year has been 5.53%: almost double Costco's 2.86% operating margin.
For Costco, accepting a relatively low profit margin is the cost of driving high foot traffic and thereby maximizing revenue growth and sales per square foot.
Additionally, Costco's profit margin has been fairly stable over the past five to 10 years, while Wal-Mart has experienced some margin pressure recently. Still, Wal-Mart maintains a comfortable margin lead, and that's not likely to disappear anytime soon.
As consumers turn to the Internet more and more often when shopping, every big retailer needs a solid e-commerce strategy. For Wal-Mart and Costco, e-commerce still represents a tiny proportion of overall sales, but it is a high-growth area. Wal-Mart and Costco are both investing in initiatives to boost e-commerce growth.
Last year, Wal-Mart's e-commerce sales grew about 30% to reach $10 billion. That represents about 2.1% of sales. Meanwhile, Costco's e-commerce revenue grew 18%-19%, falling just shy of $3 billion, or 2.7% of total sales. Thus, Costco's e-commerce operation is slightly larger as a percentage of total sales, but Wal-Mart's has been growing faster recently.
Two solid businesses, but Costco is the winner
Wal-Mart and Costco have both built up strong positions in the retail industry. Through their massive scale, they have developed cost advantages that few competitors can match.
Comparing the two, Costco has a huge lead in sales per square foot and significantly faster sales growth. Wal-Mart does have a better profit margin, but Costco has demonstrated over a long period of time that it can thrive despite its low margin structure. All in all, Costco looks like the better business today.