The two chains target a similar kind of shopper — an upper middle class professional with a good job or successful business and a steady income. This makes them practically recession proof. Unlike Family Dollar and Dollar General, they don’t have to worry if Congress decides to cut welfare benefits or raises the payroll tax. A person who can spend money on a Costco membership or Whole Foods organic produce is probably not shopping with food stamps.
Whole Foods and Costco are rule breakers that can attract large numbers of customers without having to resort to advertising and traditional costly retail gimmicks. Their reputation is what brings customers in, not the sales or the ads. In fact, neither company runs much advertising.
Okay, there’s a host of differences between the two chains, but you get the idea; they have very similar characteristics. Both chains are rule breakers that appeal to a new class of consumers that dislike traditional retailers and avoid them like the plague.
Is there a ceiling to the growth?
Obviously, there’s a ceiling to this growth that both Whole Foods and Costco could run into sooner or later. They could over expand, and their stores could start stealing customers from their other locations. Over expansion can also lead to a drop in standards and likeability, which has happened to some big chains, including Wal-Mart.
So will Whole Foods’ share price rise to the levels Costco’s has hit in recent months? Based on the shared characteristics and growth, there’s a strong possibility it might. To be fair, Costco has sources of revenue that Whole Foods lacks, including gasoline sales, appliances and hardware, electronics, office products, and membership fees. That could make the difference, particularly in a prolonged recession.
Yet both chains have demonstrated an intriguing ability to attract and retain the loyalty of a class of very fickle customers. More importantly, that class of customers has a lot of disposable income and appears to be growing. That asset might be more important than any other in today’s retail marketplace.
The article Is Whole Foods the Next Costco? originally appeared on Fool.com is written by Daniel Jennings.
Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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