Can Costco thrive on Wal-Mart's international woes?

The warehouse retailer may be taking advantage of Wal-Mart's troubles in Mexico.

By Jim J. Jubak Jun 15, 2012 5:47PM
Walmart © Bloomberg/Getty ImagesCould Wal-Mart's (WMT) pains be Costco's (COST) gains? Looks like it in Mexico, at least.

Although, with Wal-Mart facing a Congressional investigation that has expanded to Brazil, China, India and South Africa, competition from Costco may be fairly far down its list of worries.

Perhaps you've been following the unfolding story of $24 million in bribes allegedly paid by Eduardo Castro-Wright, the former CEO of Wal-Mart de Mexico, to "expedite" construction projects in Mexico. An investigation by the New York Times has revealed that top Wal-Mart de Mexico executives knew about the payments and worked to conceal them at company headquarters in Bentonville, Ark.

The timing is probably just a coincidence, but a recent move by Costco looks likely to take advantage of Wal-Mart's troubles in Mexico. On June 14, Costco announced it was buying the remaining 50% of its Mexican operations from Controladora Comercial Mexicana for $760 million. This will result in Costco adding about 10 cents to 12 cents a share to earnings next year, analysts estimate. Costco has 32 clubs in Mexico now with $2 billion in revenue.

Costco operates 435 clubs in the United States, 82 in Canada, 22 in the United Kingdom, 13 in Japan, eight in Taiwan, seven in Korea and three in Australia. International operations accounted for 30% of Costco revenue in 2011. Compare that to Wal-Mart's 3,804 units in the U.S., 347 units in Africa, 88 in Argentina, 512 in Brazil, 333 in Canada, 622 in Central America, 419 in Japan, 541 in the U.K. and 370 (through joint ventures) in China.

The move to 100% ownership should help Costco close its Mexico gap with Wal-Mart's Sam's Club stores by giving the Mexico unit simpler access to financing from Costco. Costco's club store count in Mexico has been stuck at 32 since the end of 2009, while Wal-Mart's Sam's Club has grown to 127 club stores from 98 at the end of 2009. Sam's Club has an 8.4% share of the Mexican market versus 3.2% for Costco.

But Wal-Mart's troubles in Mexico and an investigation by the House Committee on Oversight and the House Committee on Energy and Commerce into possible violations of the Foreign Corrupt Practices Act highlights the potential advantages in Costco's go-slow strategy not just
in Mexico but in international markets in general. 

Wal-Mart now has 4,557 international units -- that's 753 more than in the United States -- but all that international expansion hasn't resulted in the promised big additions to growth. Revenue growth at Wal-Mart has declined from an annual average of 7.35% over the last 10-years to 5.09% over the last five years to just 3.39% over the last three years.

Costco still earns a lower return on invested capital than Wal-Mart -- 11.25% versus 13.14% -- but the gap is as narrow at it's been in the last few years. Much of that is due to Costco's ability to ramp sales without building as many stores as Wal-Mart. Costco is now No. 3 in the U.S. market with just 417 U.S. stores to Wal-Mart's 3,800.

And Costco certainly hasn't pursued a hot-and-heavy international acquisition strategy like that of its rival. In 2010, Wal-Mart bought 50% of Massmart in South Africa (300 units) and 193 Netto stores in the U.K.

I think it's certainly worth considering that slower is better in the case of these two retailers.

Costco isn't especially cheap at the moment. The shares closed Friday at $91.53. My target price comes out at $94, so this isn't a buy now.

But this market does seem likely to produce another dip or two, so keep your eyes open.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Jun 15, 2012 9:44PM
I can see it, Jim. CostCo is cleaner in many ways. I don't shop at Wal-Mart. Every experience has been unsatisfactory. The staff seems like prison work release candidates biding time. You know, having lots of locations is a pair of cement shoes when you're going down, Just ask JCP and Sears.
Jun 16, 2012 5:34PM
Veteran Lender is probably right. I used to shop at Wal-Mart but it's too depressing now. The employees are apathetic and don't want to be bothered if you need assistance. Not that I blame them, Wal-Mart has screwed employees over to the point that anyone left working there is the bottom of the gene pool.
Jun 16, 2012 2:09AM
I don't shop at Walmart and really don't like their pricing nor the setup. Merchandise is poor quality and the stores use many hookups to make people believe they have the best prices--they don't. And, I dont like their politics! Greedy people, too.
Jun 16, 2012 12:47PM

WE live about 20 miles two different directions from WalMarts.....And there are about 6-8 in and around our old Hometown...We don't live in the middle of no-where, but if you're 20 miles from a Wallyworld; It might seem like it.....?


One near, is in a Resort type small town, the other on edge of Large Metro area.......

The Two have prices that are very different....Sometimes 25-30% without competition.


We buy mostly pet food, and sometimes a few "loss leaders"......Nothing else.

And the rest, we try to help keep our small town grocer in business.......8 miles away... 

Jun 16, 2012 6:52AM
Okay... let's be honest here... how many people go to a Wal-Mart and then get the itchies on the way out?
Jun 16, 2012 10:52AM
There are 2 Wal-Mart's in my town and I know where they both are. However, I don't believe we have a Costco.
Jun 16, 2012 5:52PM
Hi, I would like to be a mouse in the corner and watch you all day at  work!
Jun 17, 2012 8:13AM
I have found a better place to buy new items, for less than what walmart charges. Don't have to leave the house, just order online, and have the mailman deliver. No sales tax, no gas or time wasted, going to Wally world. Most reasonable place to buy online, is to purchase from a established ebay seller. Tens of thousands of ebay sellers have a far better reputation, than Walmart, for customer satisfaction. I do check sellers reputation (feedback) before purchasing.   
Jun 15, 2012 8:15PM
Hi, comparing these 2 stores is like  apples and oranges, Costcos 417 to Wal-Marts 3,800 stores, and you did not mention Wal-Marts stock price , almost $68.00, which is a record high and climbing!
Jun 18, 2012 6:38AM
What does it matter... this didnt happen in the USA... so its not our governments business to butt in... If they want to do something about other countries... block our border... how does that sound.... now that the do have a right to do.......
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