Is Costco Wholesale Corporation or Wal-Mart Stores Inc. a Better Investment?

Costco WalmartCostco Wholesale Corporation Has the Edge in This Retail Battle

In an industry known for its low wages, one company is trying to clean up its act. Costco Wholesale Corporation (NASDAQ:COST) has long paid its frontline employees head-and-shoulders above its peers. Quite paradoxically, this policy has resulted in outsized gains for COST stockholders, especially compared to rival Wal-Mart Stores Inc. (NYSE:WMT).

Costco’s strong profitability might lead some to think it contradicts the company’s practice of paying its employees higher-than-average wages while offering superior benefits. The company’s model, however, is not defying capitalism; it is fully rooted in it.

Costco’s Higher Wages Benefit Employees and COST Stockholders

Costco stock is trading at over $159.00 per share, rising in one year from $134.27, gaining about 20% even as the company, one of the few in 2015, managed to remunerate its employees with sufficient wages to remain healthy and productive. In so doing, Costco helped address concerns raised by the World Health Organization between precarious work, stress-related diseases, and mental health problems according to a Canadian study headed by researcher Charles Laplante. (Source: “It should be $16.77 per hour in Saskatoon to live says study,” CBC Radio Canada, Oct. 28, 2015.)

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Costco has literally shown that better wages can be profitable for enterprises, according to the study. By increasing its wages, the retailer has increased its long-term productivity, including improved retention. Thus, Costco has distanced itself from Wal-Mart, its main competitor.

Higher wages encourage staff to stay longer, creating a family atmosphere, which is more genuine than the artificial sensations customers get when greeted at Wal-Mart by rather sad-looking greeters. In more concrete terms, Costco saves on hiring and training costs. By taking care of its staff, Costco takes care of business.

Indeed, even Wal-Mart has had to adapt, trailing rather than leading Costco, which leaves Costco shareholders in the better position, because Wal-Mart has to react to the wage trend just to survive, while Costco is bringing on the competition. Wal-Mart, which is still the largest retail chain in the United States by number of stores, will be forced to increase the salaries of its 1.3 million employees. Why? Simply to attract and retain the employees it needs.

Last February, Wal-Mart said it would spend $1.0 billion to increase the salaries of its employees. In April, the minimum wage will increase from $7.50 at to $9.00; then in February 2016, it will be $10.00. This is an increase of 34% over one year and unprecedented in the history of a group suffering from an ever more catastrophic social image.

Low Wages Have Hurt Rather Than Helped Wal-Mart Stockholders.

Wal-Mart stock nosedived from $89.35 last January to $57.60 today. Wal-Mart’s wage increases, despite the large number in percentage terms, are still way off Costco, which offers well above government mandated minimum wages. As the U.S. labor market saturates, considering that it is approaching full employment at 5.7% (against almost 10% five years ago), Costco will have a significant superiority in its ability to hire and retain employees. Wal-Mart, thanks to its reputation, can only react, and react badly.

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Costco offers a minimum wage that is 70% higher than Wal-Mart’s best effort, plus benefits as mutual health. Consequently, the turnover is much stronger at Wal-Mart (40%) than Costco (17%).  The new CEO of Wal-Mart, Doug McMillon addressed the issue in a letter to employees, promising to do better. (Source: “In Letter to Associates, Walmart CEO Doug McMillon Announces Higher Pay,” Wal-Mart, Feb. 19, 2015.) But will it be enough to straighten the brand?

Costco Wholesale is the second-largest retailer in the world and the 18th largest company in the Fortune 500 thanks to over 680 stores, primarily in the U.S. and Canada, but also in Mexico, the United Kingdom, Korea, Taiwan, Japan, Australia, and Spain.

Here’s the Bottom Line for Costco Stockholders

Costco still trails behind Wal-Mart in number of stores, but the company has an ambitious expansion plan. Combined with better overall practices, this plan should give it an edge over the former in sales and stock performance alike. Costco’s expansion plan will target Asia and Europe. The company plans to add two more stores near Madrid in Spain while also targeting France, where it hopes to open a store in 2016. Costco is already in Germany and is planning to open in Italy, where it hopes to use its large selection of Italian goods as an advantage to gain market share in a challenging retail environment.

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