The Future of Warehouse Clubs
By Al McClain
How much growth is left for club stores? At the recent Nielsen Consumer 360 Conference, Doug Bennett of ACNielsen forecast a bright future for the channel, at least for the near term. Specifically, he noted:
- Future growth, especially likely in the central U.S.
- Room for 300+ additional clubs in the U.S.
- Growing Club penetration, but not as much as supercenters and dollar stores
- Penetration growth coming from upper income brackets
- Five to 10 percent growth in frequency of visits across all club chains
- Channel has large basket size – $83
- High-frequency categories still go to supermarkets
- Clubs do well on high-ring categories
- 42 percent of club shoppers drive 11+ miles to shop
- Club loyalty high and improving
- Perimeter departments growing at double digit pace — dairy, meat, produce
- Club consumers are evangelists — they tell their friends
Overall, the channel provides a great shopping experience, as they are experts at sampling, seasonal merchandising and the “treasure hunt.” Additional services and the Internet are driving additional growth. There are still plenty of opportunities for new locations in the U.S. and especially internationally, and holiday sales have yet to be maximized. Threats to the channel include supercenters, the aging of baby-boomers (smaller households = less need for club sizes), and a re-energized supermarket channel.
Costco is known for high quality brands at everyday value; its high-end items draw shoppers and large basket rings. They plan to build most of their new stores in existing markets and are well positioned on service due to a well-paid and content workforce, providing them with low turnover rates.
Sam’s Club is the most dispersed geographically, and the most aggressive in building new stores. Their business customers are said to spend 50 percent more than their regular customers. They offer segmented services for different member types.
BJ’s is perhaps the strongest player in food, which is up 9 percent annually. In 2005, a food concept store is planned, and they are said to be removing non-food items to be replaced by food. They have extended store hours and plan to focus on the East through 2006.
Smart & Final, exclusively on the West Coast, is a club of sorts, without membership fees. They have fewer and smaller stores, and focus on food professionals. They offer convenient locations and extended hours, and much of their growth will come from the growth of food away from home.
Moderator’s Comment: Which club company do you think has the brightest future, and why? And, what are the short and long-term prospects for the channel?
Club stores are a fun place to shop, but I wonder if that will always be the case. Department stores were once THE place to see and be seen, i.e. Macy’s,
Gimbel’s, and Bloomingdale’s in New York, and look at them now. And, once upon a time, supermarkets were a huge improvement over grocery stores. Things change, and all retailers
need to have their ears to the railroad tracks on a regular basis. –
Al McClain – Moderator
Pretty safe bet to say that club stores, including Costco, have a bright, near-term future. But, one of the great things about retailing is that the industry is constantly changing. While Costco currently does the best job in the segment of serving consumers and offering a great selection of merchandise at reasonable prices, this does not mean they will continue to be the leading company in the club store business over the long term.
Retailers, including club stores, that are able to change and adapt as consumers and the marketplace change, will be the ones that last. Being unwilling and/or unable to change in such a way has caused the department store segment problems for years. Mass merchants such as Wal-Mart, Target, and Costco could face the same problems in the future if they aren’t willing or able to change. Some of the things that have occurred with Wal-Mart in the last couple of years indicate intransigent thinking on the part of executives running the company.
There is no question it is Costco. They just reported sales up 10% with same store sales up 6%, as compared to Wal-Mart around 4% for the same period.
The reasons are evident. Their presence in the community is welcomed based on the level of jobs offered. Their instore environment is exceptional – even beyond exceptional for a warehouse club. Their spirit of item selection and dynamic change does make a visit a treasure hunt, as mentioned.
They really have a completely different business model than any other retailer. They certainly could be called a warehouse club, however, they have no real equal as a competitor. They really have done for the warehouse model what supermarkets have been unable to see as their opportunity. They’ve not only beaten up the food retailing business, but they do it better. They also spread into so many other channels as well.
We discuss Wal-Mart to such a sickening extent for all the ‘bad’ things. Costco seems to simply march on doing all of the ‘good’ things that we champion as part of our regular discussions. In the meantime, while we decry the tyrant, the other guy is silently emerging as the real leader for all of the right reasons. Imagine that.
As I travel the world, those areas that are serviced by a Costco have developed a strong and loyal consumer following. I was recently in England and I flew in from Toronto this morning, and the people I spoke with LOVE their Costco. They enjoy telling you stories of shopping experiences or of shopping and eating lunch at the same time. Peter Lynch (the famous Fidelity mutual fund manager) spoke about listening to the consumer buzz, not the rhetoric of companies. Consumer’s think Costco is a fun store to shop and, as long as they continue to create and foster that atmosphere, they will be tough to beat.
As a retail real estate professional for over 25 years, let me say that Costco does NOT move very fast. There are several markets where they have let BJ’s and Sam’s move in and take share — out-positioning Costco — and they stay asleep at the switch!
BJ’s remains the most aggressive expander and deal maker. It’s a shame because Costco, with their Kirkland brand, is head and shoulders better at retailing than any of the others.
Costco has it down right, and I see their future brightest for the same reasons others have said. But BJ’s, while far smaller, is no slouch. I’ve watched their experiments with food for some time, and my guess is they took some hard hits early on but are now doing quite well with it. They do themselves no favors with God-awful downscale rubber hot dogs and popcorn or whatever near the entryway, when they do such a fine job with quality perishables up toward the back of the store. It’s a real mixed signal. I’d be getting some of their killer perishables up front, so more people know about them. Or lease space to Starbucks or a fast feeder.
The answer is in Al’s comment — “Things change, and all retailers need to have their ears to the railroad tracks on a regular basis.” Costco has proven to be adept at changing and, for that reason, has the brightest future.
I would vote for Costco for two reasons. First they will have an easier time convincing local governments to let them build stores. They don’t get the bad press like Wal-Mart/Sam’s Club.
Second, they do much better with individuals and “at home” consumption. They cater more to higher income people, and based upon the explosive housing growth of expensive homes – this is a growing market for them.
I’m a pretty big fan of Costco, and believe they do a lot of things right — good service being at or near the top of the list. I anticipate they will thrive moving forward for all of the reasons that David mentions.
In terms of absolute growth – the key being that they’re so small to begin with – I think Smart & Final will outperform everyone else. It’s a great idea, is right in line with many demographic trends, and appeals to consumers’ desire for healthy eating – which will only increase as we age and attempt to treat ourselves with how we eat.
Costco has the edge for a number of reasons. BJ’s positions itself as more of a consumer outlet, but Costco does the best job of straddling the line between its small business constituency and its consumer base. Costco’s the best merchandiser of the lot, and while one commenter earlier questioned the chain’s speed-to-market capabilities, I think it strikes the right balance between being experimental and open to innovation and doing the due diligence to justify taking a flyer into new areas.
Costco has the brightest near-term future in the warehouse club business because it implements its program the best today. But times change, attitudes change, people change, “contemporary” changes, expectations change and thus the great world of retailing spins forever down the ringing grooves of change.
Remember when A&P was the largest supermarket chain? Or when Wanamaker’s, Food Fair, Penn Fruit were the toast of Greater Philadelphia? Or when Marshall Field’s was the epitome of department store retailing? Or when Winn-Dixie danced at the top of the grocery profit platform? Or when Kmart was bigger than Wal-Mart, or when Weingarten ruled Houston? Or when Fleming was a food wholesaling giant? Etc.
Like that great baseball player Casey, a retailer is only as good as his last time at bat. He must always keep his eye on the incoming ball.
I join the choir singing praises of Costco. What retailer wouldn’t like to be in its shoes – selling a concentrated assortment of fast-turning, high-ticket items to customers with deep enough pockets to load up their SUVs?
Costco has superb leadership, great word-of-mouth, and a nice cash flow. But its greatest strength, as Bill B. alludes, is its ability to siphon away the most desirable share-of-wallet from upscale consumers. While most conventional retailers worry about capturing the right customers, Costco focuses on capturing the right transactions.
A careful read of Sam Walton’s “Made in America” can leave one with a pretty reasonable conclusion that the whole reason “Sam’s Club” exists is as a defensive move to protect the Wal-Mart Stores from Costco. The moves made in real estate bear this out: Wal-Mart bought up retail land in markets before Costco could, and does what it can to keep Costco out.
It seems as though it hasn’t really been until just the last few years that Sam’s is trying to compete aggressively in actual retailing. There was a period of time there when it looked more like it was a real estate company first and a retailer second.
And as long as the subject is up, I have to say that I really hate the “treasure hunt” aspect of warehouse clubs. If you find a good deal, you have to buy it that day because you never know if it will still be there on the shelf next week. I’d prefer to know that the product will be there a long time and that I can buy it when I’m good and ready, and still have it be at the price that originally caught my eye.
It’s hard to pick just one player in the warehouse club business, but the prospects for the channel — particularly over the next three to five years — are very positive because so many shoppers are building visits to the warehouse club and to their regular portfolio of store visits.
These stores offer some exceptional values on a price-per-unit basis, e.g., 30-40% savings versus the identical items in supermarkets, so it’s becoming easier and more common for heavy buyers in many categories to shift more of their food business to the warehouse clubs.
This represents a fundamentally different pricing challenge for traditional retailers than they’ve faced from other discounters, and it is one that they’ll need to address.
The club who keeps evolving and changing to meet customer needs will be the winner. “Keeping their ear to the railroad tracks” is great advice.