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Wal-Mart Stores, Inc. (WMT), Costco Wholesale Corporation (COST), or Amazon.com, Inc. (AMZN)?

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They’re the three giants of American retailing, Wal-Mart Stores, Inc. (NYSE:WMT) to Costco Wholesale Corporation (NASDAQ:COST) to Amazon.com, Inc. (NASDAQ:AMZN).

Wal-Mart Stores, Inc (NYSE:WMT)

They all promise the same thing, the same thing retailers have promised since retailing was invented. They promise savings. But they each deliver it in different ways, Wal-Mart through Supercenters, Costco Wholesale Corporation (NASDAQ:COST) through warehouses, Amazon.com, Inc. (NASDAQ:AMZN) through online delivery.

The question is, where should your money go now?

Wal-Mart targets both rivals

So far this year, Wal-Mart Stores, Inc. (NYSE:WMT) has done better for investors than either of its rivals. The stock is up almost 9.5% since January 1, and unlike either of the other two it pays a dividend, yielding 2.52%.

Here’s what you have to consider before buying shares now.

Wal-Mart Stores, Inc. (NYSE:WMT) has saturated many markets and it’s huge, with annual sales of nearly $470 billion. Even though it increases its sales $25 billion/year, that’s still barely a 5% bump, so your upside is limited.

Wal-Mart is all about logistics. That’s why Amazon.com, Inc. (NASDAQ:AMZN) sticks in management’s craw. The company has tried all sorts of things to catch up, and is now experimenting with lockers in stores that will handle deliveries for on-the-go consumers. The company claims online sales of $9 billion/year, which makes them the second-largest online retailer behind only Amazon, but not big enough that they didn’t lead the charge to impose sales taxes on its rival.

The company’s problem is its labor costs. Despite everything it has done to limit those costs, it still takes arms to stock the shelves, while an e-commerce player can pick stock with robots. Bloomberg reports that Wal-Mart Stores, Inc. (NYSE:WMT) is now starting to lose customers due to its focus on low head count, but there’s method to the madness. Wal-Mart’s store count is up 13% over the last five years its headcount is actually down 1.4%.

Forget the charges of bribery in Mexico. Wal-Mart is going to become a bargain after it works through these problems, and it will work through them. It’s too big not to be one. You can live with the yield while waiting for the capital gain.

Costco goes upscale

Go back five or even 10 years and Costco Wholesale Corporation (NASDAQ:COST) is a much better investment than Wal-Mart Stores, Inc. (NYSE:WMT). The stock is up almost 68% in the last five years, while Wal-Mart is up just 40%.

The key to understanding is one word: upscale. Costco may look like a store for penny-pinchers, with its huge aisles and mass quantities, but its target market is the upper-middle class, not Wal-Mart’s lower-middle class. This means Costco stocks a wide range of luxury goods, even business services, which it sells very profitably.

One thing these customers like is that Costco Wholesale Corporation (NASDAQ:COST) workers seem happy, and why shouldn’t they be? The company has endorsed a $10/hour minimum wage while recording record profits because it pays its people well, with full benefits. A Costco worker makes almost three times as much as one with Wal-Mart, and the smiles help build the brand.

Another key to Costco Wholesale Corporation (NASDAQ:COST) profit is site selection. The company specializes in suburban and high-income urban locations, and it doesn’t overload markets, either. In Atlanta, for instance, the company has stores along the northern arc of freeways, where the wealthy live, and recently turned its southside store into a “business center,” competing with restaurant supply houses and featuring items packaged for resale.

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