By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panelists agree that Walmart's high-margin membership business and advertising are significant growth drivers, but they differ on the sustainability and resilience of these streams in a potential macro slowdown or downturn.
Risk: Simultaneous margin compression from advertising and membership churn in a macro weak environment (Grok), reliance on pro-cyclical ad revenue (Gemini), and potential compression of ad CPM in a softening macro (Claude)
Opportunity: Weaponizing physical footprint to subsidize a high-margin digital ecosystem (Gemini)
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Costco has a simple business model. It sells memberships, and only members can shop in its stores.
In exchange for paying $65 for a Gold membership or $130 to be an Executive member, which comes with added perks, including 2% cash back on most purchases, members get low prices.
Costco generated $5.3 billion in membership fees in fiscal 2025, according to its fourth-quarter earnings call.
"That sounds modest compared to $275 billion in total sales. But net income, what the company actually kept after all its costs, was $8.3 billion. Do the math. Membership fees accounted for roughly 64% of Costco's profits," wrote TheStreet's Aditya Raghunath.
Costco has essentially built its business around keeping its members happy at the expense of being able to sell to non-members. Walmart has figured out how to layer membership on top of a classic sales model.
That's giving Walmart a best-of-both-worlds scenario that's good for customers, shareholders, and the company.
Walmart has been working to diversify its revenue outside of just being a retail store. That strategy has been working, CEO John Furner shared during the company's first-quarter earnings call.
"For the quarter, our Advertising business grew more than 30% for each segment, including 36% for Walmart U.S. Membership fee revenue grew 17% for the enterprise, led by Walmart U.S. Together, these profit streams represented approximately one-third of operating income," he said.
That's not equal to Costco's 64% of operating income, but it's a massive pivot for a chain built on the traditional retail model. Walmart has also experienced a sales lift from members.
"Walmart+ membership fee revenue growth accelerated with net adds reaching a new Q1 high. This growth is encouraging as Walmart+ members generally spend 4x more than nonmembers overall, with 7x more eCommerce visits each year," CFO John Rainey said during the call.
More Walmart:
He also noted that members are taking advantage of some of the perks that come with joining.
"And in this period of elevated gas prices, members are tapping into their fuel savings benefits even more today, reinforcing the value of membership beyond free shipping," he added.
Related: Apple just raised its service prices without telling anyone
Four leading AI models discuss this article
"Walmart is successfully diversifying margins via membership but remains far more exposed to retail cyclicality than Costco."
The article correctly highlights Walmart's successful layering of a high-margin membership business (Walmart+, advertising) atop its traditional low-margin retail engine. Q1 data shows membership fees + ads now ~1/3 of operating income, with Walmart+ members spending 4x more and driving e-commerce traffic. This mix is accretive and diversifies away from pure retail cyclicality. However, the piece glosses over that Walmart's overall EBITDA margins remain structurally lower than Costco's (typically mid-teens vs Costco's ~4% gross but 70%+ of profit from fees). Walmart is still a volume-driven retailer; any sustained macro slowdown could pressure the 17% fee growth and member acquisition.
Costco's 64% profit-from-fees model has proven remarkably resilient through multiple recessions because members pay upfront; Walmart+'s 4x spend multiple could compress quickly in a downturn as discretionary trips are cut, leaving WMT with higher fixed costs than pure retail peers.
"Walmart is successfully transitioning from a commodity retailer to a high-margin ecosystem, reducing its reliance on razor-thin retail margins."
Walmart (WMT) is effectively weaponizing its massive physical footprint to subsidize a high-margin digital ecosystem. By layering Walmart+ and a 36% growth rate in advertising on top of its core retail volume, WMT is evolving from a low-margin grocer into a diversified platform play. While Costco (COST) relies on membership fees for 64% of profits, WMT is building a more resilient, multi-pillar model that captures both the bargain hunter and the convenience-focused digital shopper. The 4x spend multiplier for Walmart+ members suggests that the flywheel is accelerating, potentially compressing the valuation gap between traditional retail and tech-enabled commerce.
Walmart's reliance on high-margin advertising and membership growth risks decoupling its valuation from actual retail profitability, making it vulnerable to a cyclical pullback in corporate ad spending and increased customer churn if the value proposition of Walmart+ weakens.
"Walmart is building a profitable ancillary business (ads + membership) atop its core retail, but calling it 'beating Costco at its own game' misses that Costco's game depends on exclusivity, which Walmart structurally cannot replicate without cannibalizing its core model."
The article conflates two different business models without acknowledging their fundamental tension. Costco's 64% profit-from-membership works because it *restricts* access—scarcity and exclusivity drive renewal. Walmart+ at $98/year is layered atop unlimited traffic, competing directly against Amazon Prime ($139) in a market where adoption plateaus around 40-50% of households. The real story isn't 'Walmart beat Costco'—it's that Walmart is chasing advertising and financial services revenue (which grew 30%+) while membership remains a customer acquisition cost. That's different. The 4x spend lift is real but needs context: is that incremental profit or cannibalized margin from non-members?
Walmart's membership revenue growing 17% YoY sounds strong until you ask: at what CAC (customer acquisition cost) and churn rate? Costco's model works because members *must* renew or lose access entirely. Walmart+ members can shop without it anytime. That behavioral difference—optionality—is a structural headwind the article completely ignores.
"The Walmart+ and advertising upside is likely to be cyclical and margin-reducing over time, making Walmart's membership-led profit lift less Durable than the article implies."
While the piece highlights Walmart+ and ads as a growth driver, the durable profitability depends on several fragile levers. Advertising revenue momentum can decelerate, and Walmart+ incremental spend assumes members keep paying for perks while fulfillment and delivery costs rise. The fuel-savings value is gas-price sensitive; if prices normalize, the perceived value shrinks and member retention could falter. Moreover, Walmart faces deep-pocketed competition from Amazon Prime and Costco's loyalty model, and the 'one-third of operating income' from these streams could be volatile and capex-intensive, potentially compressing margins if growth stalls.
However, the drag of higher logistics costs and potential ad-market saturation could reverse the upside. If ad revenue slows and member benefits become commoditized, the supposed 'one-third of operating income' from these streams could retreat.
"Walmart's diversified high-margin streams create correlated downside risk in downturns that pure-membership models sidestep."
Claude correctly flags the optional vs mandatory renewal distinction, but underplays how Walmart's 17% membership growth still compounds atop a 4x spend multiple that Costco cannot replicate at scale. The real unmentioned risk: if macro weakens, WMT's ad revenue (now ~1/3 op income) faces simultaneous corporate budget cuts while membership churn accelerates—dual margin compression Costco largely avoids.
"Walmart's pivot to advertising introduces cyclical volatility that fundamentally undermines the stability of its traditional retail business model."
Claude and Grok are fixated on membership retention, but both ignore the real structural risk: Walmart's reliance on retail media networks (RMNs). If advertising becomes 30%+ of operating income, WMT is no longer a retailer; it is an ad-tech proxy. Unlike Costco’s stable fee-based model, ad revenue is highly pro-cyclical and sensitive to the broader digital marketing landscape. If the ad market softens, WMT’s 'high-margin' pillar evaporates, exposing the underlying retail core's thin margins.
"Walmart's RMN moat is real, but the margin cliff in a downturn depends entirely on whether brand ad spend reprices to performance metrics or disappears."
Gemini nails the ad-tech proxy risk, but misses that Walmart's RMN advantage is *defensible* precisely because of retail scale. Amazon and Costco can't match Walmart's 4,700 US stores generating first-party transaction data. The real question: does WMT's ad CPM (cost per mille) hold if macro softens and brand budgets shift to performance marketing? That's where the model breaks. Gemini assumes ad revenue evaporates; I'd argue it compresses 20-30%, not 50%+.
"RMN-driven margin is more cyclical and fragile than assumed; regulatory/privacy shifts and an ad-market downturn could erode Walmart's ad-led profitability faster than the core retail offset."
Gemini argues Walmart's ad-driven moat is durable; I’d push back that RMNs are highly cyclical and exposed to regulatory privacy shifts, performance-marketing downturns, and competition from Amazon. Even with a big store footprint and first-party data, a pro-cyclical ad market could compress margins faster than the retail core offsets, making the 36% ad growth less durable in a downturn than the panel suggests.
The panelists agree that Walmart's high-margin membership business and advertising are significant growth drivers, but they differ on the sustainability and resilience of these streams in a potential macro slowdown or downturn.
Weaponizing physical footprint to subsidize a high-margin digital ecosystem (Gemini)
Simultaneous margin compression from advertising and membership churn in a macro weak environment (Grok), reliance on pro-cyclical ad revenue (Gemini), and potential compression of ad CPM in a softening macro (Claude)