BAKERY CHANGES NEAR AT SAM'S, PRICE/COSTCO

RUPERT CHISHOLM

Changes are on the horizon for the bakery departments of Sam's Club and Price/Costco, the country's two leading wholesale clubs.

Sam's is adopting an increasing number of bake-off products while Price/Costco is implementing scratch production throughout its entire network of Price Club stores, according to industry observers. These changes come at a time when both Sam's and Price/Costco are de-emphasizing unit expansion and focusing instead on fine-tuning operations with an eye toward long-term profits. Costco, which formally merged with Price last October, practiced scratch baking exclusively while Price relied on bake-off products.

Price/Costco's preference for Costco's scratch bakeries in place of Price's existing bake-off program, for instance, reflects the chain's confidence in its ability to generate profits through these more expensive operations, it was said.

"Scratch bakeries require much more overhead because they require more space, more equipment and higher labor costs," said a Price/Costco insider, "and controlling your overhead is crucial because there are always lots of markdowns and disposals in any bakery operation."

Despite these higher costs, Price Club locations built since the merger with Costco have been equipped with scratch bakeries, and all remaining Price locations will be refitted with similar facilities "in the near future," the company insider said. Price/Costco, Kirkland, Wash., declined comment.

The reported switch conforms with the expectations of many trade observers, who have long

ranked Costco's fresh food programs ahead of Price's.

"There's no doubt in my mind that the Price Club system will adopt substantial portions of Costco's fresh food program -- including bakery," said a supplier familiar with Price/Costco's fresh food operation. "Costco seems to be calling all the shots in fresh foods."

Originally developed by Costco, the centrally controlled scratch bakery program being rolled out to Price locations emphasizes a relatively limited selection of high-quality staple products.

"We try not to go too high on the number of SKUs and keep assortments relatively simple," the insider said. "The assortments are determined in Kirkland, so the selection and price points are pretty much the same nationwide."

Strict centralization for planning, which has long benefited Costco bakeries by standardizing quality, appearance, assortments and profit margins companywide, is now expected to improve the profitability of the Price bakeries.

"This approach should really help at the Price clubs," said the insider. Although Sam's Club also established a highly centralized scratch bakery program, Costco is said to have a superior grasp of bakery operations, which apparently has given Price/Costco a clear-cut advantage.

Sam's was said to have spent two-and-a-half times Costco's amount for initial equipment costs, largely because Costco bakeries usually house three integrated equipment stations whereas the typical Sam's uses five or six machines.

"Both are run pretty well from a managerial standpoint," said an observer familiar with club bakery operations, "but Sam's doesn't have the expertise that Costco does when it comes to running the bakery program like a stand-alone business."

Others were less kind.

"Sam's is the only retailer in the world that can run a $40,000-a-week bakery and lose money," said one trade observer.

Sam's, Bentonville, Ark., a subsidiary of Wal-Mart Stores, apparently is experimenting with bake-off products in a number of clubs, and many observers expect Sam's to abandon much or all of its scratch program in favor of bake-off items. Sam's has decided to preserve bake-off operations in the 91 units it bought from Pace Membership Warehouse rather than use its scratch program.

"Sam's has been looking at bake-off products for almost a year now," said a bakery broker who asked not to be named. "And it looks like the way that they're going to keep going."

A Wal-Mart official said that Sam's would conduct both bake-off and scratch operations, but the company declined to elaborate on its plans or to comment on the profitability of its bakery operations.

Should Sam's decide to junk all or part of its scratch program, its decision will probably be eased by equipment manufacturers' habit of controlling prices by reacquiring used pieces at what industry observers refer to as "very nice premiums." As a result, Sam's could lose less of its initial equipment investment than some might anticipate.

Longer term, observers said, Sam's could realize substantial savings -- and presumably increased profits -- from reduced labor costs. While club bake-off programs rarely employ more than three workers at any one time, scratch operations can require up to 10 people at peak times. Moreover, scratch bakeries are run by more skilled employees who command salaries that are typically 30% to 45% higher than bake-off workers.

"The labor factor is the big thing," said another broker. "You need more people working at higher wages for longer hours to make a product from scratch."

In addition to these savings, bake-off programs usually provide larger assortments than scratch bakeries. "Aside from lower operational costs," the broker said, "bake-off operations allow an operator to provide a lot more variety into its product offering."

In the past, the wider variety of products available through bake-off programs has enabled operators to maximize profits through broad, yet carefully selected, assortments.

"These clubs have done a lot of research that's really helped them find the combination of products that enables them to turn a profit," said another bakery broker. While bake-off operations depend upon basic bread lines and muffins to attract members, profits are largely generated by finished goods that require no on-site labor.