Walmart vs Costco 2023

Walmart vs. Costco (2023)

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Lingxiu Dong

Olin, WashU

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Walmart's Industry Classification: Consumer Staples/Food & Staples Retailing/Food & Staples Retailing/Hypermarkets & Super Centers

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In 2023, Walmart's closest competitors in the U.S. Food & Staples Retailing are (1) Costco, (2) BJ's Wholesale, and (3) Price Smart

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Walmart is mainly a B2C company, working with various distributors

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Note: The supply chain mapping provides a value chain mapping, not Walmart's actual supply chain. Walmart also works directly with major consumer goods manufacturers, which is not reflected in the supply chain mapping.

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Industry Overview

Geographic information: The trend, potentials and risks of the industry? Sunrise or sunset?
Concentration and competition intensity: Monopolized or competitive market? Can small companies survive and thrive in this industry?

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Enterprise Distribution - Enterprise Distribution

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In 2023, US Consumer Staples/Food & Staples companies come mostly from California.

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Typical Firm Performance by Region - Profit Distribution

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The firms in Arkansas are much bigger than those in California

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Typical Firm Performance by Region - Profit Distribution

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The firms in Arkansas are much bigger than those in the rest of the countries

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Concentration and Competition Intensity - Total Revenue

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US Food and Staples Retailing Industry is dominated by a few large firms

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In 2023, globally, Walmart's closest competitors are (1) Costco (US), (2) Carrefour (France), (3) E-Mart (South Korea)

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Profitability Distribution by Industry

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US Food & Staples Retailing industry: > 50% of companies make a profit in 2023.

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Industrial Trend - Industry Total Size

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US firms are the largest and growing, stable operating income and net income. However, US and China markets are very competitive.

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Industry Analysis Summary

Food & Staple Retailing industry has had steady growth and many companies are profitable
Walmart’s market share has been slowly declining since 2016

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Competitive Positioning I

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The most profitable and competitive companies in this industry?
Where do I stand in the competitive landscape?

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Revenue vs. Cost

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Walmart is the largest retailer. Top retailers have similar Total Revenue/Total Cost ratios.

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Profit vs. Cost - Gross Profit

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Walmart has a higher gross margin than Costco.

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Profit vs. Cost - Operating Income

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Walmart’s and Costco’s operating profitability are above the industry average. CVS is very profitable

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Profit vs. Cost - Operating Income

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Walmart’s Net Income performance is below average.

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Operating Margin vs. Revenue

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Walmart and Costoc have similar operating margin, CVS and SYY have higher operating margins.

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Return on Assets vs. Liability Asset Ratio

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Walmart is the second best on both ROA and financial health. Costco is the best on both.

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Competitive Positioning II - Ranking

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Where is the company ranked relative to its competitors?
Do I have any abnormalities or potential issues undetected?

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Enterprise Ranking - Total Revenue

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Walmart: 1st  in size
Costco: 3rd in size

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Enterprise Ranking - Operating Margin

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Walmart: 15th 
Costco: 13th
in Operating Margin

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Enterprise Ranking - Operating Margin

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Walmart: 12th 
Costco: 5th
in Net Margin

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Enterprise Ranking - Return on Assets

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Costco ranks the 1st, Walmart ranks the 11th on ROA.

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KPI Examination - Standard KPI examination (Walmart)

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Walmart's Current Ratio is lower than 1.
Walmart's Net Income Growth Rate is negative.

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KPI Examination - Standard KPI examination (Costco)

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Costco's operational efficiency metrics are better than Walmart's, contributing to Costco's higher profitability metrics than Walmart's.

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Competitive Positioning Summary

Profitability: Compared to Costco, Walmart has
- A higher Gross Margin
- Similar Operating Margin
- Lower Net Margin

Walmart’s ROA is much lower than Costco’s

Costo’s high operational efficiency contributes to its high margins

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Enterprise Diagnosis I

What are my strengths and weaknesses. relative to my competitors (more metrics)?

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Enterprise Comparison - Size

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Walmart is larger than Costco in size

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Enterprise Comparison - Profitability

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Except for Gross Margin, Walmart’s profitability is lower than Costco

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Enterprise Comparison - Profitability

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Walmart has lower investment returns than Costco – explains the two companies’ stock market performance difference.

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Enterprise Comparison - Key Indicators

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Walmart has better Gross Margin, but  either equal or worse performance in almost all areas: profitability, growth, financial health and efficiency

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Enterprise Part I Summary

Walmart has a higher Gross Margin than Costco but a similar Operating Margin, suggesting that Walmart’s day-to-day operating expenses is much higher than Costco
Walmart’s Net Margin is lower than Walmart, contributing to Walmart’s lower ROA.

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Enterprise Diagnosis II

Company level trends

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Enterprise Trend - Size

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Both companies’ revenues are increasing. Walmart’s profitability has been fluctuating, while Costco’s profitability has been steadily increasing.

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Enterprise Trend - Profitability

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Gross margin: Walmart and Costco have remain stable. However, Walmart has seen declines in operating margin, net margin, and ROA since 2016, while Costco has seen an increasing trend.

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Enterprise Trend - Financial Health

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Costco's current ratio (>1) indicates good short term financial health. 
Costco's long-term debt has been lower than Walmart's, indicating Costco relies more on equity financing and has less long-term debt, indicating potentially lower financial risk.

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Enterprise Trend - Growth

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Walmart’s growth rates have been dominated by Costco’s since 2016 except the Net Income Growth Rate in 2020 and the Free Cash Flow Growth Rate. The growth rates are strong indicators of stock market performance.

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Enterprise Part II Summary

Walmart’s operating margin, net margin, and ROA have declined over recent years.
Walmart has a higher long-term debt ratio and a lower current ratio than Costco.
Walmart’s growth rates have been dominated by Costco in recent years.

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Value Driver & Breakdown Analysis

What factor(s) may drive a company’s financial performance in this industry?
What are the potential causes of the problems?

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Enterprise Breakdown - Revenue

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Walmart’s COGS is lower than average, but has high SG&A cost.

Costco’s COGS is higher than average but is lower on other costs.

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Enterprise Breakdown - Revenue

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The two firms’ liability-equity ratios are similar.  
The difference lies in Costco’s having a bigger portion of short-term liabilities, whereas Walmart has a bigger portion of long-term liabilities.

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Enterprise Breakdown - Liability-Equity

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Walmart has lower “Cash and Cash Equivalent” and higher “Property Plant and Equipment” than Costco.

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Value Driver Analysis

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Inventory turnover is negatively correlated with Gross margin.
Intuition: cheaper products sell faster

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Value Driver Analysis

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“SGAC/Total Revenue” is negatively correlated with “Inventory Turnover”. 
Intuition: High operational efficiency means more efficient inventory management.

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Value Driver Analysis

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“Total Revenue Growth Rate” is negatively correlated with “Gross Margin”. 
Intuition: Efficiency is higher for high-volume, low-margin businesses

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Value Driver Analysis Summary

High Gross Margin correlates with Low Inventory Turnover
High SG&A Cost/Total Revenue correlates with Low Inventory Turnover
Low Inventory Turnover correlates with Low Total Revenue Growth Rate
Low Total Revenue Growth Rate is a likely metric affecting stock market performance

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Potential Root Causes for Walmart’s High Gross Margin, High SG&A Cost, and Low Net Margin and Low ROA (Compared to Costco)

	Walmart	Costco
Business Model Difference	Offers a broad product assortment with varying margins, including higher-margin items	Operates on a membership model and focuses on high-volume, low-margin sales, particularly in bulk goods. Costco is known for its extremely low markups on products.
Operating Efficiency	Might have higher operating expenses, such as labor costs, store maintenance, and marketing. These expenses can erode the advantage of a higher gross margin, leading to an operating margin similar to Costco's.	Operates with a lean cost structure. Its warehouses are less expensive to operate than Walmart's retail stores. Costco also benefits from lower marketing costs.
Return on Asset	has a large number of stores and a significant amount of assets tied up in real estate, inventory, and logistics infrastructure. If these assets are not generating proportionally high returns, this can lead to lower ROA.	has fewer locations but operates on a high-volume, low-margin models. Its efficient use of space and quick inventory turnover contribute to a higher ROA. The membership model also adds to profitability without significantly increasing assets.

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Walmart vs. Costco Summary

Walmart’s market share in US Food & Staples Retailing and net margin have been declining in recent years
Strategic Focus: Walmart’s broader and more diversified strategy might be spreading its resources thinner, leading to inefficiency
Operating Efficiency: Walmart’s higher SG&A cost/revenue ratio and lower inventory turnover point to lower operational efficiency, which not only lowers its margins but also drivers lower ROA and growth rates
Asset Utilization: Walmart’s higher investment in fixed assets (PPE) is likely to result in lower asset efficiency compared to Costco.

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Walmart vs Costco 2023

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