Looking at the proper listing name of Costco Wholesale Corporation (NASDAQ:COST), one can see the word “wholesale” prominently listed. The unique business model of one of the best operators in the grocery retail business (by most valuation metrics including return on equity and return on invested capital) is one which I would like to highlight in this articles as one of the key reasons why I believe Costco to be one of the best investment plays in the market today.
After yet another earnings beat on Friday, shares of Costco declined approximately 7%, primarily driven by concerns the distributor and retailer is not doing enough to counteract the long-term effect Amazon.com, Inc. (NASDAQ:AMZN) is likely to have on the grocery industry following its highly-touted merger with Whole Foods Market (NASDAQ:WFM) which closed earlier this past summer.
With Amazon making a splash, taking over a significant amount of front page real estate with its cost-cutting endeavors and promises of innovation in the grocery space, I agree that some of the concern is warranted, although I would offer a contrary viewpoint for long-term investors considering the underlying business models of the two firms.
While it is true that Amazon’s strength is in the distribution business, I would argue that operating in the bulk sector (24 packs of Coca-Cola or 2 litre packages of salsa) is simply not going to ever be profitable for Amazon. The party-size appeal of Costco, a place to go when loading up on supplies for a large barbecue, or Thanksgiving dinner, or a work event, is unlikely to be altered by the entrance of Amazon into the niche retail sector it has stepped into – that of the highly specialized segment with small quantities and high price points, in which the e-commerce giant will be able to add value.
These two business models are mutually exclusive, and I expect investors will begin to realize this shortly.
Invest Wisely, my friends.