Most investors probably don't even know this is under consideration.
If I point that out Walmart (WMT 1.12%) If I told you that Walmart is a $650 billion retail business, no one would be surprised. Everyone knows it's a huge company. But if I told you that Walmart is a $100 billion e-commerce platform, some people might be surprised. Yes, they should be surprised, because it is true that Walmart is a huge e-commerce company.
When Walmart refers to e-commerce sales, it includes products purchased online and picked up in stores. Pure E-commerce sales is probably what most people think of.
But Walmart's digital sales exceed $100 billion, which is a big number. With so many customers on its websites and apps, the company has new opportunities in digital advertising, with consumer brands willing to pay big money to get in front of its massive audience.
The great thing about digital advertising is that it's a revenue stream that costs Walmart very little extra. In other words, it's very profitable. Keep in mind that advertising was already a $3.4 billion business for the company in its fiscal 2024, which ended in January. And in the first quarter of fiscal 2025, advertising was still booming, growing 24%.
Digital advertising, with its higher profit margins, has played a key role in Walmart's recovery in operating profit, a surge that began a little over a year ago.
WMT Revenue (TTM) data from YCharts
All of this is important to Walmart shareholders. Costco Wholesale (Fee 0.24%)Warehouse club chains may be pursuing the same strategy.
Is this really a big deal?
Costco's vast store fleet is clearly the main event: They average 147,000 square feet and sell thousands of items at discounted prices to members. But it's been relatively slow growth: The company's same-store sales rose less than 7% in the third quarter of its fiscal 2024, which ended May 12. That's impressive for a company its size, but it's not high growth.
Plus, with nearly 900 stores already in operation, Costco doesn't have much opportunity to expand.
In contrast, Costco's e-commerce sales have been quietly surging: They rose nearly 21% in the third quarter, and while management wouldn't say just how high e-commerce sales are, we at least know they're growing fast.
During the company's third-quarter earnings call, Costco executives were asked about retail media. Amazon According to (a company very good at digital advertising), Retail Media is “a type of advertising platform that allows retailers to sell advertising space on their digital channels to third-party brands.” In other words, Costco can sell digital space to brands that want to advertise to its 73+ million paying members.
Costco CEO Ron Vakris didn't elaborate on his response to the retail media, but said he “sees significant upside potential.”
What are the chances? Well, this is just a guess, but Walmart's overall business is about 2.5x that of Costco. But when you compare Costco's e-commerce growth to Walmart's monetization, it's not too far-fetched to think that retail media could one day be a billion-dollar-per-year business for Costco.
That day is not tomorrow, but retail media could mean a lot for Costco. Finally.
Costco made about $2.2 billion in operating profit in the third quarter and is on pace to make about $8.5 billion for the full year, and adding another $1 billion in high-margin business would certainly help if the company pursues retail media more aggressively.
Costco stock is highly valued, a topic we don't have time to get into here, but suffice it to say that when a stock is highly valued, it either needs to fall or earnings to rise. Retail media is just one example of how Costco's earnings could rise, which could go a long way to supporting the company's stock price today. This should be encouraging for shareholders.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool's board of directors. John Quast has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
