Direct Answer
Hypermarkets and super centers combine grocery and general merchandise in large-format stores, offering one-stop shopping with everyday low prices (Walmart) or curated bulk selection at membership-only access (Costco). Walmart generates $650+ billion in annual revenue across its US stores, Sam's Club, and international operations; Costco generates $230+ billion from its warehouse membership model. Advertising revenue (retail media networks) is a fast-growing, high-margin revenue stream for both.
Walmart's Everyday Low Price Model and Retail Reinvention
Walmart operates the world's largest retail business on the principle of "Everyday Low Prices" (EDLP) -- eliminating promotional pricing in favor of consistently low prices that eliminate the consumer need to "time" purchases around sales. EDLC (Everyday Low Costs), its operational corollary, enables EDLP by relentlessly reducing costs throughout its supply chain, distribution, and store operations. Walmart's cost advantages (purchasing scale, logistics network, distribution center efficiency) allow it to price below competitors structurally, not just promotionally.
Walmart's US business (4,600+ supercenters, Walmart.com) has transformed from a purely physical retailer into an omnichannel operator: Walmart+ membership (with same-day grocery delivery, free shipping, Paramount+ streaming, gas discounts) competes directly with Amazon Prime. The membership fee and subscription habits mimic Amazon Prime's strategy of building committed customers who default to Walmart for purchases. Walmart's pickup and delivery infrastructure (70%+ of US population within 10 miles of a Walmart fulfillment point) is a physical moat Amazon cannot easily replicate.
Walmart's fastest-growing businesses include: advertising (Walmart Connect, the retail media network selling ad placements to supplier brands on Walmart.com and in-store; generates 2x or better margins vs. product retail), marketplace third-party seller fees, financial services (Walmart's banking-like services for underbanked customers), and healthcare (Walmart Health clinics inside stores). These higher-margin revenue streams are structurally improving Walmart's overall margin profile from its historically thin retail margins.
Costco's Membership Warehouse Model: Discipline as Strategy
Costco's business model is structured around a radical commitment to low prices: it prices merchandise at a maximum 15% markup over cost (versus 25-50% typical for grocery and 50-100%+ for general retail). At this pricing level, merchandise gross margin (approximately 10-12%) barely covers cost of goods; Costco earns its profit almost entirely from membership fees ($65/year basic, $130/year executive) -- $5+ billion annually from 130+ million cardholders. The business model insight: if membership is so valuable that renewal rates approach 93%, the fee itself is the business, and merchandise is priced to maximize the value of membership.
The discipline required to maintain this model is extreme: Costco limits its SKU count to approximately 3,700 (versus 30,000+ at a Walmart supercenter or 100,000+ at Amazon), stocking only the best-selling item in each category. This curated selection forces Costco to select only items it can sell in very high volumes, maximizing its buying leverage with each supplier. The limited-time "treasure hunt" character of Costco's limited selection (seasonal and special-buy items that aren't always available) creates urgency and drives visit frequency.
Kirkland Signature (Costco's private label) is one of the most successful retail private label brands in history, generating $60+ billion in annual sales. Kirkland products are manufactured by brand-name suppliers (often the exact same product as the national brand at meaningfully lower price) and carry Costco's quality reputation. The brand trust built through Kirkland creates a two-way relationship: members trust Costco's curation even on unknown Kirkland products, and Costco earns higher margins on Kirkland than on national brands while passing meaningful savings to members.
Grocery Competition: Amazon, Kroger, and Regional Chains
The grocery channel (including the grocery departments of Walmart and Costco) is the most intensely competitive segment of US retail. The competitive landscape includes: Walmart (largest US food retailer, approximately 25% market share), Kroger (second largest, with Fry's, Ralph's, Dillons, and other banners), Costco (strong perishables and packaged food business via membership), Amazon/Whole Foods (premium natural and organic positioning), regional supermarket chains (H-E-B in Texas, Publix in the Southeast, Hy-Vee in the Midwest), and discounters (Aldi, Lidl growing US presence).
Aldi and Lidl represent a structural competitive threat: their private-label-only, limited-assortment model (fewer than 1,000 SKUs versus 30,000+ at traditional supermarkets) enables dramatically lower prices than name-brand supermarkets. Aldi's US market share has grown to 4%+ and is expanding rapidly; its price advantage (20-40% below traditional supermarket prices) attracts both economically pressured consumers and value-seeking middle-income shoppers.
Amazon's grocery strategy has evolved: Whole Foods (acquired 2017, $13.7B) provides premium natural and organic positioning but has not fully integrated Amazon's logistics advantage into perishable home delivery at scale. Amazon Fresh (purpose-built grocery stores with "Just Walk Out" technology) is an experiment in convenience; Amazon's grocery delivery service relies on Whole Foods and Amazon Fresh as fulfillment points. The grocery category's logistics complexity (perishables, temperature control, high SKU count) has proven more challenging than Amazon's initial grocery aspirations anticipated.
Retail Media Networks: The High-Margin Revenue Layer
Retail media networks (selling advertising to brands on the retailer's digital platform, email, in-store screens, and search results) have become the fastest-growing, highest-margin revenue stream for large retailers. Amazon pioneered retail media with Amazon Advertising (which brands pay to appear first in product search results or in sponsored placement on Amazon.com); Walmart Connect and Kroger Precision Marketing are the two largest non-Amazon retail media networks, generating $2-4+ billion annually for each company.
The economic logic is compelling: Walmart can charge a consumer goods brand for a sponsored placement in Walmart.com search results for "laundry detergent" because the consumer searching that term is highly likely to purchase -- first-party purchase data that Google and Meta cannot match. The advertising margin is 60-80% EBITDA (minimal cost beyond the technical platform), versus 5-8% EBITDA on grocery and general merchandise sales. As retail media scales, it materially improves the blended margin of large retailers.
The data advantage is the competitive moat: Walmart, Costco, and Kroger each have detailed, verified purchase history data on tens of millions of households (Walmart has 100M+ US households as customers). This purchase data -- knowing that a specific household buys Tide detergent monthly, Pampers diapers, and Kellogg's cereal -- allows targeting and attribution that is more accurate than any third-party digital advertising. CPG companies are increasingly allocating marketing budgets toward retail media where they can measure exact purchase lift from advertising.
Investment Considerations: Defensive Growth and Margin Expansion Narratives
Walmart (WMT) and Costco (COST) are quintessential defensive growth investments: they grow revenue through economic cycles because consumers buy groceries and consumer necessities regardless of economic conditions. Both have earned premium valuations -- Walmart at 28-35x forward earnings, Costco at 45-55x -- reflecting the quality, defensiveness, and secular growth narratives of their businesses. Costco's exceptional multiple reflects the membership model's predictability and the franchise's ability to grow members and average spend per member consistently.
Margin expansion is the key near-term earnings growth driver for both companies: advertising revenue scaling (high-margin), private label penetration increasing (higher margin than national brands), supply chain efficiency investments, and services growth (Walmart+, financial services) all contribute to improving the earnings growth rate versus pure top-line volume growth. Investors pay for the trajectory of margin expansion as much as the current margin level.
International exposure differs significantly: Walmart International (Mexico, Canada, Central America, China through JV) generates 20%+ of Walmart's revenue; Costco International (Canada, UK, Japan, Spain, Australia, China) generates 30%+ of Costco revenue. Currency translation and emerging market consumer confidence affect reported results; constant-currency organic measures strip out FX noise.
FAQ
How does Costco make money if merchandise margins are so low?
Costco earns the vast majority of its profit from membership fees, not merchandise sales. Its approximately $5+ billion in annual membership fee revenue (from 130+ million cardholders paying $65-130/year) represents nearly 100% of Costco's operating income -- the merchandise sales themselves are priced at a maximum 15% markup, barely covering costs. This business model aligns Costco's interests perfectly with its members: because profitability comes from membership renewals (93% renewal rate), not merchandise margin, Costco is incentivized to offer the best possible prices to maintain membership value. If members stopped renewing because prices weren't compelling enough, Costco's profit base collapses. The model creates a remarkable alignment between company profit and customer value.
What is Walmart Connect and how does retail media work?
Walmart Connect is Walmart's retail media network -- a digital and in-store advertising platform that allows consumer goods brands to pay for prominent placement in Walmart.com search results, sponsored product listings, in-store display screens, and Walmart email campaigns. A brand like Tide pays Walmart Connect to appear first when a consumer searches for "laundry detergent" on Walmart.com. Walmart knows from its purchase data which consumers buy detergent, how often, and which brands they prefer, allowing extremely precise targeting. The advertising is highly effective because Walmart can measure exact sales lift from the ad (the consumer either bought after seeing the ad or didn't, and Walmart's POS data records the purchase). These margins are 60-80% EBITDA versus 5-7% for merchandise, so retail media is structurally improving Walmart's profitability.
Why has Aldi grown so fast in the United States?
Aldi (German-owned) has grown from 1,000 to 2,400+ US stores in roughly a decade by offering prices 20-40% below traditional supermarkets. Its model: stock fewer than 1,000 SKUs (all private label or controlled brands), operate smaller stores with minimal staff (shelf-ready packaging, cart deposit system, bring-your-own bags), and eliminate all brand premiums by not carrying national brands. The result is grocery costs meaningfully lower than any national chain. In an inflationary period (2021-2024), Aldi's value proposition resonated across income segments -- not just low-income households but middle-income consumers seeking savings. Its German owner (ALDI Sued and ALDI Nord) committed to aggressive US expansion and is on track to become the third-largest US grocery chain by store count.
Is Amazon Fresh a credible threat to Walmart and Kroger in grocery?
Amazon Fresh (Amazon-branded grocery stores with "Just Walk Out" sensor-based checkout technology) has expanded to 40+ US stores but has not yet demonstrated the rapid scaling of Amazon's e-commerce or other retail businesses. Grocery requires local real estate density, perishable supply chain infrastructure, and consumer trust in fresh food quality -- all slower to build than Amazon's digital fulfillment advantages. Amazon's strongest grocery play is probably Whole Foods (premium organics, loyal affluent customer base) and grocery delivery through Prime, rather than Amazon Fresh competing directly with Walmart and Kroger on everyday staples. Grocery's thin margins and operational complexity have proven more daunting than Amazon anticipated, keeping the competitive threat real but not yet realized at scale.