By Dan Ferris in Extreme Value:

There's an absurd newsletter promotion going around that suggests Wal-Mart is doomed because Costco is a wonderful business.

This makes no sense whatsoever. Even though they sell some of the same products, these two businesses are completely different. Wal-Mart's customer makes about $35,000 a year, on average. Costco's customer makes about $70,000 a year.

Wal-Mart's customers crowd into the store around the middle and end of the month... when government paychecks are distributed. Wal-Mart's customers live hand-to-mouth. Costco customers, on the other hand, are running catering and convenience stores and other small businesses that use Costco as their cash-and-carry distributor. I call this the "redneck arbitrage." You go to Costco, buy a bunch of essential items, drive way out in the country, beyond even Wal-Mart's reach, and sell it all in a little corner store for twice what you paid for it.

A typical Wal-Mart sells about 100,000 different products. A typical Costco sells about 4,000 different items. The Costco items are cheaper per unit... but you must spend more on them per visit because you can only buy them in bulk. Wal-Mart's customer can't afford that. You have to wonder if he'll ever be able to afford it.

The sad truth is, most people live hand-to-mouth now, and it'll probably be that way for a long, long time. Many who don't live that way at this moment might find themselves living that way over the next few years. There'll always be a need for Wal-Mart. To be more specific, I think there'll always be a market for a business that can successfully sell itself as the simple, "everyday low cost" provider of groceries, toys, drugs, jewelry... and all the other things Wal-Mart sells more of than any other store in the world.

Costco will never replace Wal-Mart. Costco lost customers to Wal-Mart early this year, not the other way around. The idea that Costco could ever put Wal-Mart out of business isn't just wrong. It demonstrates a total lack of understanding of these two businesses. So please, don't fall for the "Wal-Mart is doomed" newsletter promotion that's going around.

Crux note: Dan Ferris is the editor of Extreme Value, and he's currently recommending a true rarity in the gold industry - a deep-value gold stock with the very real potential to return 28 times your money. If you're not already a subscriber, you owe it to yourself to click here...

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