On the season premiere of "The Apprentice" last week, Donald Trump's young executive wannabes wrestled with a question that, at times, has perplexed the world's largest retailer: What precisely is Sam's Club, and how is it best promoted?
Challenged to sign up the most new members, the winning team used free manicures and a handsome salesman, while a contestant who failed to reach new business customers - a key constituency for Sam's Club - found herself fired by The Donald. The real winner, of course, was Wal-Mart, recipient of a 60-minute, prime-time commercial beamed to millions, even if the sales pitch from its Trumped-up spokespeople wasn't exactly consistent.
But that's reality. Despite turning around its sales in recent years, and operating by far the most stores in the warehouse club industry, Sam's Club is still a distant second in sales and productivity to Costco - an unusual position for the Bentonville, Ark.-based retail giant. Sam's is also the smallest, slowest-growing and perhaps least understood of Wal-Mart Stores' various divisions.
"Some people have gone so far as to call Sam's Club a 'stepchild' - the warehouse club is obviously not Wal-Mart's core business," Edward Weller, an analyst with ThinkEquity Partners, San Francisco, told SN. "But at the same time, it's a $40 billion business, and that's nothing to sneeze at."
Sam's Club, whose executives declined to be interviewed for this story, has a history marked by frequent leadership changes and seeming shifts in philosophy and emphasis from its corporate parent. With 567 stores as of Jan. 31, it's the largest club banner in terms of number of stores, and with $38.8 billion in sales last year, the second largest to Costco in sales. But unlike Wal-Mart's discount and grocery divisions, Sam's Club has never managed to dominate its field.
The first Sam's Club store opened near Oklahoma City in 1983 and was named after company founder Sam Walton - an admirer of Price Club stores, the warehouse chain founded in Southern California in 1976. Price Club, which eventually was purchased by Costco, placed a strong emphasis on the business customer: More than half of all sales came from businesses - which, while fewer in number than consumers, bought more products, more often.
Sam's Club grew via acquisitions and new-store builds for the next decade. "There was a point of time when it seemed like warehouse clubs were growing so quickly they looked like they would be the next real alternative format, a real breakthrough," said Jim Hertel, senior vice president of consulting firm Willard Bishop, Barrington, Ill.
But there were problems along the way. Sam's Club acquired 91 former Pace warehouse stores from Kmart in 1993, but their digestion was slow and difficult, sources said, with Wal-Mart causing an uproar among Pace's suppliers by demanding payments to continue supply contracts.
In the meantime, Wal-Mart found the supercenter concept to be a superior vehicle for growth and profits, and directed the majority of the company's resources toward building that division through new development and conversions of discount stores. Today, Sam's Club accounts for less than 13% of all Wal-Mart sales, and the number seems likely to continue to shrink as international expansion and domestic supercenters provide better growth potential and stronger operating profits. In fiscal 2001, Sam's provided 14.4% of Wal-Mart's revenues.
Growth in club membership is also approaching its limits, Hertel said, putting pressure on warehouse clubs to generate larger baskets and more frequent shopping trips to sustain the rapid growth of the industry's early years. "Today there are maybe 1,200 warehouse club stores overall," Hertel told SN. "When you stop and think about how fast they got to 800, you realize how they've plateaued in the last 10 or 12 years. It's been only a small net gain since then."
Being part of a slower-growing industry and having a faster-growing sibling was not kind to Sam's Club, which, according to Weller, might have been larger but never sharper than its contemporaries. "Even in the early days Sam's Club was never able to get all that much business-to-business sales, and not because they were doing a better job with consumers - but because they just weren't doing as well with businesses as Price Club and Costco."
As a result, he said, Sam's drifted away from its original B2B vision as it expanded, only to find that in the battle for consumers it had an unbeatable opponent in Costco, Issaquah, Wash. Costco targeted a higher-spending demographic and offered items that were perceived as being of better quality than Sam's, observers said. By the mid-1990s Costco was whipping Sam's in sales per store and sales per square foot, even as it trailed in the number of outlets. Costco surpassed Sam's in overall U.S. club market share more than five years ago, and has opened up ground since, according to a recent report from Retail Forward, Columbus, Ohio.
For Sam's Club, the low point came in fiscal 2003, when operating earnings at the division were flat, and same-store sales crawled to 2.3%. "Those weren't typical Wal-Mart numbers," Hertel said.
New Focus on Business
Wal-Mart then set out to refocus the business, this time behind a new emphasis on B2B sales, and to build back profitability through expense cuts and more efficient buying. It combined buying functions with Wal-Mart, offered a slew of new business services like payroll and office supplies, and adopted the slogan, "We're in business for small business." It also set out to beat Costco on price.
Sales numbers indicate the changes are working. Sales at Sam's Clubs have increased by 8.9% in fiscal 2004, by 7.5% in fiscal 2005 and by 7.2% in 2006 (the fiscal years ended Jan. 31 each year). Profits grew faster than sales in each of the last three years, a trend the retailer said it would continue to focus on this year. "The important thing to look at with Sam's is same-store sales, which are up in the middle fives again, which indicate to me they've turned the ship around and they're on a better trajectory," Hertel said.
"I think Wal-Mart is more satisfied with Sam's Club than they were a few years ago," said Sandy Skrovan, vice president, Retail Forward, and author of the firm's study on the club industry. "Before they refocused their energies on what they wanted Sam's to be, they were trying to be too much like a Costco and going after the consumer rather than the business member, and it was looking, perhaps, like it would compete against Wal-Mart's own discount stores and supercenters.
"So the decision to refocus on the business member seemed to turn around their comps. It was a good decision where to position Sam's vis-a-vis their own portfolio and the competition."
That Sam's Club has been successful with the new offerings took some by surprise.
"When they first announced the whole change in strategy, I didn't think that was going to make any difference whatsoever," said James Degen, president of JM Degen & Co., a Templeton, Calif.-based consultancy. "The concept of focusing on the business customer started in the 1970s, and the general feeling was there just wasn't enough revenue coming out of the business customer, even though they spent more per visit. There just wasn't enough of them in terms of raw count."
But Wal-Mart has been creative in finding additional avenues for the business customer, such as office supplies and services like payroll, retirement planning and insurance, said Skrovan, adding that pursuit of these extras mirrors Wal-Mart's recent effort at supercenters to broaden its customer base and sell more items like fashion-forward apparel.
According to Wal-Mart, Sam's attracts its target audience by inviting business owners in targeted industries to stores, where items and services designed to save businesses time and money are showcased. Restaurants, convenience stores, contractors, child care and learning centers, beauty shops, vending businesses and motels are targeted specifically.
Once inside the store, these customers will notice some changes from the Sam's of a few years back, and points of difference from rival Costco, Degen said.
"One major change they made was to designate around 1,500 SKUs that were stable, that didn't rotate in and out so frequently," he said. "I thought that was a smart move because it makes the club a much more predictable shopping experience. Costco, by contrast, is trying to reduce the number of SKUs - they want to stick right around 4,000 because they think it makes it easier to cruise the club and make each department stand out."
Sam's Club didn't abandon its individual members, but rather reached out to them by positioning Sam's as the price leader among warehouse clubs, and has featured more "treasure hunt" items to excite shoppers - including, last year, a few pieces of diamond jewelry selling for more than $500,000. Observers expressed mixed reviews of this strategy. Burt P. Flickinger III, managing director of Strategic Resource Group, New York, said the move to claim price leadership has victimized some suppliers and is not serving the best needs of shoppers.
"A lot of the suppliers I've spoken with said Sam's Club buyers had moved from aggressive to abusive buying practices," Flickinger said. "They're demanding concessions that have no basis in retail reality. They're overly focused on buying and not selling."
Degen said he sees the treasure hunt as a "gimmick," but mentioned that other areas of merchandising, including food at Sam's, have experienced an upgrade in quality and selection in recent years.
The food, along with offerings like cookware, have improved to better meet the needs of restaurant professionals who shop there, Weller said. "In the last two years there's been an upgrade in the quality of the merchandise at Sam's," he said. "But it's still a cut below Costco when it comes to things like olive oils. That's part of Wal-Mart's biases. It has always believed the price is of critical importance, and if they can take away a little quality but offer it for a much lower price, that's what they'll do."
More Work to Be Done
The changes have helped define a wholesale club industry with each of the three major players focusing on a specific niche, observers said. Costco dominates with the upscale club shopper; BJ's Wholesale Club, Natick, Mass., has shifted its focus to families; and Sam's Club aims primarily for the business member. That may help differentiate the players in areas like Atlanta, where all three operate, but Costco has traditionally been the first pick of developers. "Sam's Club has become the convenience store of club stores," Flickinger said, saying its proximity to Wal-Mart Supercenters has been its one major advantage. "They get a lot of spillover shoppers who shop first at Wal-Mart."
Sam's still has plenty of room to improve its private-label offering, Degen said. "One major difference between Sam's and Costco is that Costco has done a super job merchandising its Kirkland label - a private label as powerful as anything else in the whole club. Compared to that, Sam's has done nothing. I believe they've talked about developing a better private-label program, but it will be years before they have a brand that can do what Kirkland is doing for Costco."
A Retail Forward study last year showed that 62% of shoppers perceived Costco's Kirkland brand foods to be as good or better than national brands; Sam's Club's Members Mark label rated 47% in the same question.
Clubs are also differing in geographic reach, with Costco strongest in the Western U.S. and Canada; Sam's Club strongest in middle America and Mexico; and BJ's focused on the East Coast, observers said. And while club store growth has picked up again after slowing in the late 1990s, "how many stores they can open in given U.S. metro markets has got to be in the back in their minds," Skrovan said.
As growth opportunities slow - Retail Forward projects total warehouse club unit growth of 3.1% between 2004 and 2009 as opposed to 5.5% between 1999 and 2004 - Costco and BJ's have begun experiments with new formats. Costco Home features home furnishings, and ProFoods, a food-service concept from BJ's, is currently testing in two locations.
"I think [Sam's] will have to start looking at whether they can downsize the club store for smaller markets, because the metro markets are getting crowded," Skrovan said.
As its role on the "The Apprentice" indicated, Sam's also appears to be open to creatively reaching out like never before - a strategy observers said made sense given its change in positioning. Flickinger and Weller mentioned that they noticed Sam's Club made a stronger advertising effort over the recent holiday season.
"I think they want Sam's to become more of an entertainment center, and they ran an inspired campaign through the holiday season and all the way to the Super Bowl promoting Sam's as a great place to buy a big-screen TV, party platters and big packs to entertain friends and family," Flickinger said. "I think they got a real sales surge out of that."
Is Wal-Mart satisfied? "I don't think Wal-Mart is ever satisfied," said Degen. "In terms of alternative formats, I think Sam's is doing pretty well in the last year or two, perhaps not as well as Costco. But in terms of meeting their members' needs, they've done a pretty good job."
"They're not in a position to rest on their laurels," added Skrovan. "They can still make their stores more productive and get members to buy more."
Sales Per Store ($ millions)
Costco $115; Sam's Club $68; BJ's $51
Average Store Size (Thousand Square Feet)
Costco 137; Sam's Club 128; BJ's 112
Sales per Square Foot
Costco $900; Sam's Club $535; BJ's $454
Note: Figures are based on average store count and average square footage during the fiscal year that ended: Aug. 29, 2004, for Costco; Jan. 1, 2005, for Sam's Club; and Jan. 29, 2005, for BJ's.