Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Is Whole Foods Market, Inc. (WFM) the Next Costco Wholesale Corporation (COST)?

At a glance, two recent retail success stories, Costco Wholesale Corporation (NASDAQ:COST) and Whole Foods Market, Inc. (NASDAQ:WFM) don’t seem to have much in common. One sells everything from potato chips to flat-screen TV sets out of a no frills big box club store, and the other sells organic produce and gourmet foods from a fancy supermarket.

Whole Foods Market, Inc. (NASDAQ:WFM)

Yet the two retailers have a few things in common: rising revenues, share prices, and sales. Between November 2010 and May 2013, Costco Wholesale Corporation (NASDAQ:COST)’s revenues went from $72.38 billion to $104.89 billion. Whole Foods Market, Inc. (NASDAQ:WFM)’s revenues went from $9.37 billion in December 2010 to $12.52 billion in March 2013.

Whole Foods Market, Inc. (NASDAQ:WFM)’ same store sales increased by 6.6% in the first quarter, and Costco Wholesale Corporation (NASDAQ:COST) reported that its same stores rose by 5% in May. The increases are pretty similar, aren’t they? What’s going on here? Why are these two retailers doing great while bigger players such as Wal-Mart are reporting anemic sales? Could some of the same factors be driving the two company’s sales?

What Whole Foods Market, Inc. (NASDAQ:WFM) and Costco Wholesale Corporation (NASDAQ:COST) have in common

Whole Foods Market, Inc. (NASDAQ:WFM) and Costco Wholesale Corporation (NASDAQ:COST) do share some characteristics that investors might not see. These characteristics are:

Both chains cater to upper middle class shoppers who like to get the most for their buck, but dislike traditional discounters. These shoppers also value their time. They go to Whole Foods Market, Inc. (NASDAQ:WFM) and Costco Wholesale Corporation (NASDAQ:COST) because they know they won’t waste time there.

Both Whole Foods and Costco are likeable. People like both chains and enjoy shopping at them. We should not dismiss likeability as an asset; it has turned a wide variety of companies ranging from Volkswagen to Apple to Bank of Internet into great investments. Likeability is one of the best assets that a retailer can have because people will spend more money at a store they like.

Whole Foods and Costco both emphasize a strong ethical vision and a definite set of values. This appeals to certain high income shoppers and increases customer loyalty. It also makes the two stores more likeable.

Both retailers go out of their way to be liked and create an enjoyable shopping experience. Shopping at either store can be fun; shopping at Wal-Mart and traditional grocers is often a hassle.

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.

Both chains are also growing. Whole Foods plans to open 40 more stores in Canada and expand to 1,000 stores. Costco added 1.6 million new members in the first quarter of 2013.

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 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.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.