"Cheaper by the Dozen" is not only the title of a recent Hollywood remake, it is also the mantra of shoppers who stock their pantries with products purchased at warehouse clubs.
Targeting middle-income to affluent consumers and small-business owners, Costco Wholesale Corp., Sam's Club and BJ's Wholesale all generate about 60% to 70% of their sales volumes from consumables.
A recent report by Willard Bishop Consulting, Barrington, Ill., estimated that wholesale clubs captured about 6.7% of the grocery market share in 2004 and can be expected to increase that to 7.8% by 2009 as the three largest chains continue to add stores in their core markets and increase their grocery sales within existing stores.
The warehouse clubs keep shoppers coming back with products like 20-pound packages of frozen chicken wings and 24-bottle cases of sports drinks, whether the customers are stocking up for their families or their businesses.
"Food contributes to frequency of shopping, particularly fresh food," noted Edward Weller, an analyst with ThinkEquity, San Francisco. 'They are trying to appeal to customers like small restaurants, churches, nursing homes -- those are an important category of customer that the clubs stores are marketing to."
Chuck Cerankosky, analyst, KeyBank Capital Markets, Cleveland, noted that the clubs also seek to spur impulse purchases of expensive luxury general-merchandise items such as big-screen TVs or crystal vases.
"I would describe the club strategy as getting people in there with the value-priced consumables, and enticing people every once in a whole -- especially during the holiday season -- to spend quite a bit more money than they usually do on a trip to a club," he said.
Analysts noted that clubs can mark up prices in the range of about 10% to 12% above costs on products throughout the store, including on grocery items, and augment that with membership fees, which range from $30 to $40 per year. They are also increasingly gaining better margins in the grocery categories with private-label items, analysts said.
One of the main differences between the club model and that of supermarkets, however, is that club stores can drive more sales with lower costs.
"A supermarket can turn some old lettuce into prepared salads and make even better margins on it, but Costco doesn't want to do that, because they don't want to put the labor into it," said Weller. "They just want to sell that stuff right away."
Also unlike supermarkets, which tend to carry everything consumers need to fulfill their grocery shopping trips, clubs can restrict themselves to offering only the products on which they can obtain the best deals. This "treasure hunt" merchandising strategy also helps increase visits, as customers come in just to see what's on sale, analysts pointed out.
Of the three largest warehouse-club chains, Costco generates the most sales, with about $52 billion in fiscal 2005 from 461 locations (339 in the U.S.), a smaller base of stores than Sam's Club, which generated $37.1 billion in its most recent fiscal year from 551 U.S. stores. BJ's operates from a much smaller base -- generating about $7.4 billion in sales in its most recent fiscal year from 157 locations -- although its ratio of consumables sales to total revenues is the highest of the three at about 70% or more.
Costco Strong in Perishables
Costco, Issaquah, Wash., is viewed as the strongest perishables merchandiser, however. The company seeks out high-quality offerings in both the perishables and dry-grocery departments and targets them to upscale consumers.
"One area where nobody can touch us is fresh food," said Richard Galanti, Costco's chief financial officer, during a recent conference call. "It helps when you're doing two and three times the volume of your competitors.
"We've cultivated the best members, and they're buying the best stuff," he added. "The penetration of those [product] areas is increasing -- their comps are greater than the company as a whole, and their margins have increased."
At Sam's Club, the warehouse-club division of Wal-Mart Stores, Bentonville, Ark., the company has been shifting to more private-label offerings some commodity categories such as sugar, said Jenny Ng, manager of research and analysis, Management Ventures, Cambridge, Mass.
"They can do that with the commodity products, where people don't really care that much about the brand," she said.
Sam's Club also has renewed its focus on the business customer during the past three years, with the slogan "In business for small business." That has meant a shift away from consumer-pack sizes in the grocery departments and more offerings of bulk packs for its core target audience, which includes small restaurants, convenience stores and vending-machine companies.
Natick, Mass.-based BJ's, on the other hand, has been moving in the opposite direction, with smaller pack sizes in the grocery department meant for home use.
"You can buy a single head of lettuce in BJ's, and that's something you couldn't have found in any warehouse club four years ago," Ng said.
The company has also been testing the positioning of the food offering in its stores, she said, with some stores moving certain perishables, such as fresh fruits, near the cash registers, perhaps to generate more awareness, she said.
BJ's recently opened a new prototype store to test food merchandising ideas in Cape Coral, Fla., in which the food offering is located entirely on the left of the store, Ng said, adding that the department is also "organized a lot more logically than in other clubs."
BJ's is also moving its perishables merchandising in-house, a move that the chain said is increasing quality and adding value for customers. In addition, the company is adding more private-label food items, with the current penetration of 9% expected to increase in coming years.
Costco Wholesale Corp.
Fiscal Year Ended: Aug. 28, 2005
Revenues: $52.94 billion
Net income: $1.1 billion
Profit margin: 2.1%
Comp-store sales for full year: 7%
Food and sundries sales as a % of revenues: 60%
Costco said sales for the month of September were up 13%, to $5.14 billion, and comps grew 11%. The company is getting a boost from gas price inflation, but gasoline sales also are having a negative impact on overall profit margins.
Sam's Club
Fiscal Year Ended: Jan. 31, 2005
Revenues: $37.1 billion
Net income: $1.28 billion (operating income)
Profit margin: 3.4%
Comp-store sales for full year: 5.8%
Food and sundries sales as a % of revenues: 59%
Through the first half of the current fiscal year, comps at Sam's Club were up 3.2%. In the second quarter, operating income grew 5.4% on a sales increase of 5.9%.
BJ's Wholesale
Fiscal Year Ended: Jan. 29, 2005
Revenues: $7.38 billion
Net income: $114.4 million
Profit margin: 1.6%
Comp-store sales for full year: 6%
Food and other supermarket-related items as a % of revenues: 70%
Net income for the first half of 2005 was $49.1 million, up 11.4%, on sales of $3.75 billion, an increase of 8.7% over the comparable period last year. Comps in the second quarter were 3.2%.
