Wholesale membership clubs are becoming more formidable competitors as they celebrate their 25th year of existence, industry observers told SN.
The clubs have been price-competitive with supermarkets since the first one opened in 1976, industry observers said. But as they move more confidently into fresh, and as the economy continues to sink, the clubs are likely to pick off even more business from supermarkets, observers told SN.
While retailers contacted by SN played down the threat posed by clubs, securities analysts said most of the sales increases at the nation's three major clubs -- Costco Wholesale, Sam's and BJ's -- are generally coming at the expense of supermarkets.
Lisa Cartwright, an analyst with Salomon Smith Barney, New York, said a study of consumables indicates that Costco and Sam's boosted market share over the last year at the expense of major supermarket chains in dozens of markets -- with Costco picking up 20% and Sam's Clubs picking up approximately 45% in overall share.
Cartwright said the gains were due to a combination of changing consumer habits and the declining economy.
"People may still buy most of their fresh produce and meat at the supermarket, but more are buying them at clubs," she said. "The clubs have traditionally had an edge in nonperishables, but what we're seeing now is that warehouse formats are focusing more on fresh, and that will mean more market share will be lost to the clubs."
According to Gary Giblen, executive vice president and director of research for C L King Associates, New York, "The edge for supermarkets used to be in perishables execution, but the clubs are getting close to first rate on perishables and the difference has been reduced to a very fine line.
"In fact, all retail formats are good enough on service, perishables and pricing to compete, and there's less clear segmentation. As a result, supermarkets are under pressure like never before, and that's demonstrated in the sluggish sales numbers they are reporting."
Supermarket Perspectives
While analysts said clubs appear to be winning the war in taking share away from supermarkets, supermarket retailers see it differently.
According to an executive at one major regional chain, "We would rather compete with a club store than a good supermarket operator because a good operator will impact our business more significantly than a club."
What the clubs promote, the executive said, are excitement and commitment -- "excitement because of how often they change items, though that's less true in food, and commitment because people have laid out $25 or more to join so they feel they have to get their money's worth."
Where the clubs have an edge, he pointed out, is in offering club packs and other unique packaging, plus a strong price image.
"But they're not very good at delivering on perishables, though they are improving," he said. "And there's still the convenience factor that the clubs can't ever deliver on -- it's just the nature of the shopping trip, the trade areas they're in, the hassles of parking and the fact you have to pass through the tire aisle to get to tomatoes -- and those are ongoing challenges the clubs can never overcome."
Another supermarket executive said clubs are improving their perishables offerings, "but the perishables traditionally follow a 'commissary mentality,' where it's good and it's cheap but it's never the best," he pointed out. "While that may be changing, supermarkets still do a better job, but we have to do the best job in perishables if we're going to maintain our market share against club stores.
"So we have to raise the bar and go after better quality, better variety and better service -- both in the perishables department and at the front end."
The executive said he does not believe grocery prices give clubs a particular edge "because there are a lot of onetime specials, so there's no consistency and you can't always find an item from week to week like you can at a supermarket."
Supermarkets have learned a couple of things after competing with club stores for 25 years, one executive said, including the appeal of larger pack sizes -- "the industry thought you couldn't sell giant-sized cereal, but we were wrong," he noted -- "and we also learned we needed to stay in better contact with our vendor partners."
Costco's Top Executive
Jim Sinegal, president and chief executive officer of Costco, told SN he doubts the clubs are becoming a bigger threat to supermarkets, "though many of them seem to disagree. But by adding more perishables, I think supermarkets have, to a great extent, found a niche where they're comfortable, and they will continue to offer such conveniences.
"But clubs aren't about convenience, and people accept that in our business, though they won't in the supermarket business. What they expect in our business is value, and they're not going to accept anything less."
Sinegal said he doesn't expect the clubs' food offerings to become more like those of supermarkets "because our sizes are still significantly bigger in every product category, and what we carry is probably more at the high end of the quality scale."
To stay in business for the next 25 years, clubs must remain innovative, Sinegal said, "or we won't survive." Maintaining a sense of excitement will also be necessary "because people come in for that 'treasure hunt' atmosphere, so offering something new will continue to be important in our business."
Sinegal told SN he does not believe the declining economy will give clubs a competitive edge. "People say the same thing about clubs whether the economy rises or falls," he said. "Perhaps in bad economic times like these, clubs become more attractive. But if the decline goes deep enough, our business customers will suffer, and that will hurt us."
The analysts said the big edge that price clubs have over supermarkets will help immeasurably in tough economic times.
"The entertainment has always been there, but even before the economy started to turn, consumers were becoming more conscious of the value equation," Cartwright said.
"And in a declining economy, people will certainly be looking for ways to save money, and if supermarkets charge 25% more for household cleaners or paper towels, people will shop at other formats.
"The supermarkets' approach of offering in-store service and quality perishables works in a strong economy, though supermarkets were losing share even when the economy was healthier. And while convenience is still important, as people lose their jobs or their bonuses go down, then a higher number of consumers will focus on saving pennies, and that will benefit the clubs.
"So people may not stop going to supermarkets, but there will be more people who add club visits to their weekly or monthly shopping trips, and that will put a drain on the purchase of certain items at supermarkets," Cartwright said.
Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said clubs offer "the lowest price points -- up to 10% to 20% less per unit than a supermarket -- though you have to buy larger quantities. But that price differential is an important factor in the current economy.
"Although food items at clubs may not be the be-all and end-all, consumers that have made the clubs a regular part of their shopping trip are likely to divert even more money to the clubs in the current economy and put up with the inconsistent selection in some categories," Cerankosky said.
"For instance, the club may not have a customer's favorite type of cold cereal but they're willing to buy whatever is available in multipacks because it's such a bargain."
Cerankosky said clubs have become a more formidable competitor over the years "as they've focused more on food products and grocery merchandise, particularly as the economy has been slowing. And they're opening more new locations, which enables them to take some share away from conventional food stores.
"In addition, they've refined their message over the years to household members, as opposed to small-business customers, so consumers are more prone to think of clubs as part of their regular shopping routine."
Shopping Habits
Deborah Weinswig, an analyst with Bear Stearns, New York, said the prices that clubs charge give them a decided edge. "Clubs have the lowest prices on all merchandise -- up to 25% lower than any other distribution channel -- because they are totally without frills, and especially in this economy, where people are more cost-conscious and price-driven, that difference gives clubs a huge advantage.
"A lot of food shopping is habit-driven, and if shopping at clubs becomes a stronger habit, people may tend to stick with clubs when the economy improves and use supermarkets just for fill-ins because if people feel they're getting value and not too much inconvenience, then they might change their shopping patterns."
Giblen said the economic slowdown bodes well for club stores. "When supermarket customers trade down from beef to peanut butter, as Safeway said they are doing, they are likely to buy that peanut butter at a club store," he said.
What clubs have that supermarkets don't, the analysts agreed, is excitement.
According to Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, "The clubs have done a lot of exciting things with food, and that's the major reason they are generating strong sales in a weak economy. Consumables generate up to 60% of club sales, and those categories will remain substantial until supermarkets get more innovative."
"But clubs are an evolutionary thing, and that's the beauty of the concept," Ziegler added. "They're not operating at one point in time -- they're continually rolling out new merchandising initiatives, and what sticks, they keep."
The clubs develop their initiatives by working with vendors in creative ways, he explained. "They win people over because of constant innovation. Innovation breeds excitement in clubs because people want to return to find out what's new."
Supermarkets have the same opportunity to work creatively with vendors, Ziegler said, "but they tend to promote ideas that vendors suggest rather than working to develop new ideas."
According to Cerankosky, "People shop at a supermarket because it's an efficient place to shop -- it's in stock, with the kind of merchandise they like and reasonable prices.
"But the clubs are a fun place to shop, even though people tend to shop there less often. But when they go there, they know they will buy a lot of stock-up merchandise while being enticed to the nonfoods side by TVs and other large purchases at good prices. Those prices are a great temptation to buy, but people know they're also getting a value price on the staples."
According to Weinswig, "Clubs are a fun place to shop, and they make the shopping experience fun so that people want to go there."
Supermarkets have tried to duplicate some of that fun atmosphere, she said, citing mobiles of dogs chasing cats in the pet food section of the new Albertson's prototype, for example, or multipack offerings at some West Coast Safeway stores. "But the clubs do a lot of sampling as an everyday thing, and that helps stimulate sales," Weinswig said. "Supermarkets don't do as much sampling any more."
One concern, however, is the depth of product. "There isn't a lot of choice," Weinswig noted, "but the price makes a big difference."
Supermarkets: Strut Your Stuff
How can supermarkets do a better job competing with wholesale clubs?
After 25 years of competition, the answers seem clear, at least to securities analysts questioned by SN.
Most of their suggestions were aimed at adding more excitement to the supermarket shopping experience, including the following:
Doing more in-store sampling and in-and-out promotions.
Working more aggressively with vendors to develop new or creative packages or products.
Featuring more general merchandise.
Offering more value pricing using multipacks.
Adding new products more quickly.
Emphasizing the uniqueness of private-label offerings.
Stressing the convenience of wider assortments.
Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said supermarkets could fight back by offering the same kinds of deals on multipacks that the clubs do. "As they find they're selling less bottled water or general merchandise, the supermarkets may decide they can free up space to promote more multipack sales," he said.
Cerankosky also suggested supermarkets may be able to compete better against clubs by keeping up-to-date on new product offerings "because clubs tend to be later on those items. But if a conventional retailer is first on new products, that helps.
"Private label is also a bigger part of the sales mix at food chains, so they can emphasize the better-than-national-brand quality and the unique product assortment -- offerings the clubs can't match," Cerankosky added.
There is also the convenience aspect of a supermarket, he said. "At the end of the day people like to save time, and conventional stores can benefit to the extent they are well located, with a wider assortment and a strong in-stock condition that offers consumers a more efficient shopping trip than the clubs," he explained.
According to Gary Giblen, senior vice president and director of research for C L King Associates, New York, the clubs' nonunion status and the economies of stacking merchandise on pallets give clubs an edge on price "so they can pass those savings on to consumers. Supermarkets can try to battle it out on price, though the best they can hope to do is narrow the gap because it's unlikely they can beat the club price."
One way for supermarkets to win customers back from the clubs, Giblen suggested, is to stress value-added food-service items, "which enable supermarkets to achieve good margins that more than make up for any lost sales in the center store."
On the other hand, while some consumers will not give up their desire for convenience, "people who are unemployed will certainly be willing to substitute self-preparation for more expensive items," Giblen added.
What supermarkets need to do is find the right balance of service and value, Giblen said. "The best operators can find the right balance of attributes for every town -- more emphasis on service and less on price in an upscale neighborhood, and the opposite in a less affluent area -- which is where the supermarkets' neighborhood marketing approach comes to the fore," he explained.
"Service, price and perishables quality are variables you have to work with, and supermarkets need to strike the ideal formula for each location."
Lisa Cartwright, an analyst with Salomon Smith Barney, New York, said supermarkets tend to avoid dealing with the loss of sales to clubs, particularly center-store sales, "because of their unwillingness or inability to meet club prices on certain items. Supermarkets are still relying on service and high-quality perishables to attract customers."
Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, said supermarkets could work more creatively with vendors. "The clubs work with vendors to develop new merchandising initiatives, and it's that constant innovation that wins people over," he said.
"In addition, supermarkets could do more in-store sampling to promote more excitement in the stores. And they could do more road shows -- in-and-out promotions such as crab on ice for a week.
"Maybe more category management is one key, or maybe bringing in more general merchandise. None of these ideas is beyond their expertise."
