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Why Wal-Mart and Costco Will Thrive in the Retail Apocalypse

By Daniel Jennings - Feb 10, 2014 at 12:02PM

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Troubles at Sears Holdings and Best Buy prove that a retail apocalypse might be upon us, but there are two giant retailers that will thrive in the apocalypse: Wal-Mart and Costco.

Anybody who has taken a look at the financials for companies like Sears Holdings and Best Buy (BBY 2.83%) knows that the retail apocalypse is upon us. Large chains with storied histories are collapsing before our eyes.

For the record, Sears Holdings reported diluted earnings per share of -$14.11 and quarterly year-over-year revenue growth of -6.6% on Oct. 31. That was before the dismal Christmas sales figures were published. Best Buy, one of the few retail success stories out there and which achieved quarterly year-over-year revenue growth of 44.6%, saw its stock value collapse after disappointing Christmas sales figures.

These financials show that those pundits who predicted the retail apocalypse wouldn't occur were wrong. It's here, and it might be worse than you might think. As one of the more intelligent retail observers, the Fool's John Maxfield, has noted, the only thing keeping some of these retailers afloat is vendor credit in the form of consignment plans.

Basically, manufacturers give retailers merchandise that hasn't been paid for in the hope it will sell. The problem with such plans is that sooner or later the merchandise must be paid for whether it sells or not. If sales are bad, a company like Best Buy gets stuck with the bills and it can collapse quickly, as Circuit City did in 2009.

Why Wal-Mart and Costco will thrive in the retail apocalypse
The retail apocalypse is bad news for category killers such as Best Buy. These companies make money by being the cheapest place in town to buy one particular item, such as electronics. Yet it is very good news for two other big-box retailers: Wal-Mart Stores (WMT 0.81%) and Costco Wholesale (COST 0.23%).

Wal-Mart and Costco have resources a company like Best Buy cannot tap. They sell many products people cannot live without, such as food, soap, prescriptions, and underwear. People have to shop there regardless of the economy. More importantly, this gives them a steady stream of revenue that keeps coming regardless of the economy.

Another advantage that Wal-Mart and Costco offer is one-stop shopping. Their service is no better than Best Buy's, but a person only has to make one shopping trip. You can pick up your TV set or DVD player, a pair of socks, and laundry detergent at the same place. You don't need to go to Best Buy for electronics.

Part of the problem is that the public has figured out that Best Buy's prices are no better than Wal-Mart's, Costco's, or Sam's Club's (part of Wal-Mart). Better yet, you can get good prices on gasoline and eggs at those places.

Costco and Sam's Club lock customers in with the membership. Those who pay the $45 to $100 a year have an added incentive to shop at those stores.

Perhaps the biggest advantage that both Wal-Mart and Costco have is revenue. Wal-Mart Stores reported revenue of $475.1 billion on Oct. 31, and Costco Wholesale reported revenue of $106.5 billion on Nov. 30. Costco and Wal-Mart have a lot of money to fall back on. Their strategies are apparently working, even with dismal sales figures.

Costco and Wal-Mart will not only survive the retail apocalypse but they'll thrive because many of their competitors are going down the drain. They'll have less competition and be in a better position to wring concessions out of suppliers.

The Amazon.com threat
Okay, the outlook for these two retailers isn't perfect, because there's a big cloud on the horizon called Amazon.com. One of the main reasons why Best Buy's sales are so lousy is that many of its customers have figured out they can buy electronics for good prices at Amazon without having to go to Best Buy. Amazon.com is even mounting a direct challenge to Sam's Club and Costco with its own membership service, Amazon Prime.

Yet Wal-Mart and Costco are well placed to deal with this challenge; both companies have tremendous logistics resources that can easily be applied to online delivery. Sam's Club can ship office supplies to my house in just two days, and it doesn't charge for delivery on them. A Sam's Club membership costs $45 a year, and a Costco Gold Star or Business Membership costs $55 a year while Amazon Prime costs $79 a year.

Wal-Mart and Costco could very well emerge from the retail apocalypse bigger, stronger, and richer than ever before. The massive die-off of competitors will benefit them as traditional retail collapses.

  

Daniel Jennings has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of 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.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$127.61 (0.81%) $1.03
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$78.54 (2.83%) $2.16
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$541.90 (0.23%) $1.23

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