Costco’s New Club Spree Could Crowd Sam’s

Costco Wholesale this week is cutting the ribbon on three new clubs in as many days—an expansion sources say could bring new pressures on Walmart’s competing Sam’s Club division, which happens to be a neighbor of all three.

Costco’s grand openings are scheduled for Murfreesboro, Tenn., on July 20; Little Rock, Ark., on July 21; and Moore, Okla., on July 22. Each one of the new locations is fewer than four miles from an existing Sam’s Club, with Costco’s outlet in Little Rock representing its very first club in Walmart’s home state.

Additional Costco openings are scheduled later this year in two other traditional Sam’s Club strongholds—San Antonio and Springfield, Mo.—as well as Naperville, Ill. They indicate Issaquah, Wash.-based Costco sees the opportunity to gain stronger footing in the middle-America markets where Sam’s Club is strongest, particularly following a 63-club “rightsizing” in 2018, where Sam’s retreated from several regions in which it looked up to Costco’s share.

That announcement, which Walmart officials framed as a move preparing Sam’s for internal initiatives based on strengthening its member experience and operations and reducing density in places where it cannibalized its own sales, is also proving to be something of a catalyst for expansion-minded competitors, sources say. BJ’s Wholesale, for example, has since expanded to metro Detroit and is eying new stores in adjacent regions such as Indianapolis, Pittsburgh and Nashville. As for Costco, “They have historically dominated the Eastern Seaboard, Western Seaboard and the densely populated markets, but this shows they want to be unbeatable where they have a void in the Midwest,” Burt P. Flickinger, managing director for Strategic Resource Group, told WGB in an interview this week. “It’s a strategic decision to go up against Sam’s Club.”

The club channel generally has benefitted from pandemic-related sales trends and the reopening of the economy, with the expectation that coming inflation could drive still more shoppers to the channel. That could mean clubs wouldn’t necessarily need to devastate one another’s membership rolls for success, but have the most to gain from other channels of trade.

But according to Flickinger, Sam’s closures—and Walmart’s accompanying slowdown in new-store builds as it addresses e-commerce ambitions at its existing fleet—may have also signaled a “vulnerability.”

Sam’s Club officials might disagree. Under new CEO Kathryn McLay, Sam’s is focused on improving its experience for members, with about half the chain receiving new decor package this year, and its stores are continuing to integrate technologies making them easier to shop and more efficient to run. These include a big move curbside pickup, mobile shopping options such as Scan & Go and a newly launched cousin, Scan & Ship, that can arrange home delivery for items in-store. Membership renewal rates are improving, and the chain’s Net Promoter Score is at an all-time high, McLay said during a presentation for investors earlier this year.

Costco’s arrival will bring its strengths in quality food assortment and pricing to its new markets, including what Flickinger described as big edges over Sam’s in the areas of meat, organic produce and gasoline.

Mark Sjoboen, a 29-year veteran of Costco who today operates Seattle-based Retail Club Services Consulting, in an interview said he felt Costco could prevail head-to-head with Sam’s, citing strengths in creating a better “treasure hunt” atmosphere, and experience in places such as Anchorage, Ala., where a Costco-challenged Sam’s Club departed as part of its 2018 downsizing. He acknowledged, however, that with tight selections (Costco generally limits assortment to around 3,800 items) plenty of opportunity exists for competitors to differentiate.

“Costco has a maximum markup of 14% and the average is about 11% and they've very efficient—everything comes in full-pallet and all they have to do is take off the shrink wrap and put a sign up on it, so it’s very tough to compete with them on cost,” Sjoboen said. “The one advantage is that a grocery store has is that it carries so many more items, and you pretty much can’t shop only at Costco. That gives competitors the opportunity to focus on the things that Costco doesn’t have. They just have to show value with them.”

Flickinger maintains there remains plenty of room for growth among wholesale clubs, particularly with product-price inflation on the rise and consumer appetite for “better” food still going strong.

“With the highest food inflation in 13 years and the highest gas inflation in seven and a half years, Costco is going to be a clear winner on food and fuel at a time when consumers are desperate to save, and at a time where other areas of their monthly budget expenditures—transportation, insurance, tuition, debt and housing—are all reaching record-breaking proportions,” he said. “For Costco and BJ’s, this could be the best time to history be opening new stores.”