Costco to keep expanding as rival Sam’s Club struggles

Costco announced last month that it plans to boost capital spending in fiscal 2015 by 25% – 35% in order to open 31 new warehouses and relocate four others, and increase spending on remodeling activities. Costco CFO Richard Galanti said capital spending for 2015 will total about $2.6 billion, compared with $2 billion in fiscal 2014.

Of the 31 new warehouses (compared to 30 opened in 2014), 19 are planned for the U.S.

For fiscal 2014, Costco’s net income increased 0.9% to $2.1 billion, with net sales up 7.1% to $110.2 billion.

While Costco’s results continue to be strong, rival Sam’s Club, a Walmart subsidiary, is struggling.

“The divergence from Costco is striking,” according to an analyst at the Cowen Group who was discussing Sam’s Club for a Huffington Post story earlier this year. “They’re basically in the same business, but apparently they’re not in the same business.”

In the story referenced above, analysts said the reasons for Costco’s success and Sam’s Club’s struggles may include the following:

• Even though Sam’s Club stores are more upscale than Walmart, Sam’s may be relying on customers who need food assistance, and with the decline in government assistance, poor consumers are cutting back on spending. In addition, Costco explicitly targets customers with more money, so its shoppers may be more resilient in times of economic uncertainty and less price sensitive.
• Costco customers are incredibly loyal, and their Kirkland brand may have a lot to do with that. According to an analyst quoted in the Huffington Post story, Costco uses the Kirkland brand to sell quality products at an affordable price, creating brand – and Costco – trust. And as for membership, which accounts for about 75 percent of the company’s operating profit, the renewal rate is nearly 90 percent. The free samples and $1.50 hotdogs don’t hurt, either.
• Costco probably has better leverage with suppliers than Sam’s, because the quality and popularity of the Kirkland brand allows Costco to sell its own version of a product if suppliers don’t meet its demands.