Costco Wholesale Corporation (COST)’s Luxury Game Will Not Last Long

Targeting customers in the high income bracket is not going to save Costco Wholesale Corporation (NASDAQ:COST). This issue was debated on CNBC by Oliver Chen who is a Citigroup retail analyst, and Gregg Greenberg of TheStreet.com.

Chen said the Costco Wholesale Corporation (NASDAQ:COST)’s customers were in the annual income bracket of $96,000 as opposed to Wal-Mart Stores, Inc. (NYSE:WMT) customers who fell in the range of $25,000 to $50,000. Moreover, Costco Wholesale Corporation (NASDAQ:COST) was also the biggest importer of fine European wines and showcased diamonds worth thousands of dollars.

Chen added that a low markup of 15% means that Costco can provide luxury products with a low price and high quality of service. In his opinion this made Costco the treasure hunt candidate for consumers. Greenberg, however disagreed.

“People go to T.J. Maxx when they want treasure hunts, when your wife wants to buy that bag that they can’t just find anywhere . They don’t go to Costco Wholesale Corporation (NASDAQ:COST) which is a warehouse because over there you are going to buy 10 bags. It’s a totally different shopping experience. You go to Costco Wholesale Corporation (NASDAQ:COST) because you don’t want to fill up your car on toilet paper or paper towels […],” said Greenberg.

Greenberg also focused on other problems which included a very high earnings multiple for Costco Wholesale Corporation (NASDAQ:COST), 24 times acutally. Its competitors like Wal-Mart Stores, Inc. (NYSE:WMT) have multiples in the range of 13-14 times.

Additionally, according to Greenberg, Costco’s decision to expand and build more outlets wasn’t a very good decision by the company’s management either. He explained that the retail business is already shrinking as it continues to lose market share to e-commerce retailers which are more convenient for customers to shop from. Hence, Family Dollar Stores, Inc.(NYSE:FDO) and Sears Holdings Corp(NASDAQ:SHLD) are already reducing their footprint.

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