Report: Club stores absorbing grocery market share from supermarkets

Warehouse club retailers are in an expansion phase and, in the process, siphoning grocery market share from traditional supermarkets, according to a report by CFRA Research analyst Arun Sundaram.

Strong sales and customer gains, new locations and business model advantages (notably paid memberships and one-stop shopping) have positioned the “big three” club chains—Costco Wholesale, Sam’s Club and BJ’s Wholesale Club—as more formidable grocery retail competitors, with a better growth outlook than conventional grocers, Sundaram wrote in his “Club Stores: Prepare for a New Era of Expansion” analysis, released late last month.

“We believe the warehouse club channel is taking market share away from traditional grocery channels (e.g. Kroger and Albertsons). Club stores have experienced significant growth in same-store sales over the past few years, driven by robust membership growth, strong traffic and overall higher prices,” Sundaram said in his report. “Although traditional grocery stores may outperform club stores in 2023 as consumers cut back on discretionary spending and prioritize food and staples, we believe that warehouse clubs will continue to experience stronger growth over the long term. This is because the membership model at warehouse clubs fosters strong customer loyalty, which is challenging for traditional grocers to replicate when competing with numerous other traditional grocers in the same area.”

CFRA’s research pegs U.S. warehouse club channel growth at a 6% compound annual rate since 2007, reflecting not just new club openings but also rising club memberships—namely high-tier options—plus expanded product and service offerings and increased digital sales. All three of the big club chains also have revved up brick-and-mortar expansion starting this year, led by Costco with 24 planned openings (14 in the United States, 10 internationally). Sundaram noted that Walmart subsidiary Sam’s Club is embarking on its first major expansion since the mid-2010s, while BJ’s is eyeing 11 or 12 new clubs in fiscal 2023—including entering its 20th state, Alabama—and aims to open around 10 annually going forward.

Source: CFRA Research, “Club Stores: Prepare for a New Era of Expansion” report, Arun Sundaram.

Currently, Sam’s leads in the U.S. with 600 clubs, followed by Costco at 585 (but 850 overall including international locations) and BJ’s at 237. CFRA reported U.S. warehouse club market share at 62% for Costco, 31% for Sam’s and 7% for BJ’s. Based on most recently completed fiscal years, Costco leads by far with annual sales of $222.7 billion, compared with $84.3 billion for Sam’s and $18.9 billion for BJ’s.

“Sam’s Club, Costco and BJ’s Wholesale are all ramping up the pace of new club openings over the next several years. Sam’s Club and Costco are the only two warehouse club operators with a nationwide presence. BJ’s Wholesale is currently concentrated on the East Coast (roughly 20% of BJ’s annual sales are in the New York metro area) but slowly expanding towards the Midwest,” Sundaram explained.

“Historically, Costco has been the most consistent in its growth strategy, aiming to open approximately 15 new clubs annually. BJ’s Wholesale has historically been slower to grow new units but is now accelerating its growth strategy by targeting about 10 new clubs a year, which compares to 10 cumulative new clubs from 2016 to 2020,” he said in the report. “In contrast, Sam’s Club has been sitting on about 600 total clubs since 2018, when it abruptly closed about 63 locations nationwide [converting some to e-commerce fulfillment centers]. However, Sam’s Club recently announced plans to open over 30 new clubs across the U.S. over the next several years.”

The inflationary environment, too, has spotlighted pricing advantages that club stores offer consumers versus supermarkets in terms of bulk-size purchases, everyday lower prices and store brands. Sundaram pointed out that club retailers also sweeten the deal with a range of rewards.

Source: CFRA Research, “Club Stores: Prepare for a New Era of Expansion” report, Arun Sundaram.

“Warehouse clubs are often considered a low-cost alternative to traditional supermarkets, not only because of the savings from bulk purchases but also due to the convenience of one-stop shopping and the perk of fuel and in-store rewards,” he wrote. “For instance, BJ’s asserts that its members can save approximately 25% on grocery purchases compared to traditional supermarkets. Members can also earn rewards and points by using their rewards card or co-branded credit card. BJ’s recently revamped its rewards program and co-branded credit card by switching from ADS to Capital One. We think BJ’s now offers more compelling rewards and discounts, especially as it relates to fuel savings.

“Costco and Walmart also have compelling rewards,” he added. “For example, Executive members at Costco can receive an annual 2% reward, up to $1,000, on purchases made at Costco. Costco Anywhere Visa Card members can receive cash back on eligible purchases, such as 4% on gasoline, 3% on restaurants and eligible travel, 2% on eligible purchases from Costco and 1% on all other purchases.”

The three club rivals differentiate themselves in various ways as well with their “own unique go-to-market strategy,” Sundaram said. BJ’s takes a grocery focus that includes a full-service deli, a wider assortment of center-store and perishable items, and smaller pack sizes in perishables. Meanwhile, Costco boasts one of retail’s strongest private brands in Kirkland, and the retailer balances its consumables offering with strong general merchandise and services (such as optical, tires and travel). He noted that Sam’s typically offers a bigger national-brand product selection than its club cohorts.

“Club stores have witnessed a surge in new members since the onset of the pandemic. In the early days of COVID-19, shoppers flocked to club stores to stock up on groceries and household staples like toilet paper. Even now, these shoppers continue to return as membership renewal rates remain exceptionally high,” Sundaram said. “In fact, just about every club store operator is experiencing record renewal rates, likely due to shifting consumer shopping habits amidst elevated inflation. For instance, when gas prices surged to around $5 per gallon during the summer of 2022, a record number of people were observed filling up at club stores, where they could save more than 20 cents per gallon compared to regular gas stations.”

Source: CFRA Research, “Club Stores: Prepare for a New Era of Expansion” report, Arun Sundaram.

Costco’s member renewal rates in the U.S. and Canada rose to 92.6%—a record high—as of its fiscal 2023 second quarter, and BJ’s tenured renewal rate hit 90% as of 2022, marking growth of 3 percentage points since 2018, CFRA reported. During Walmart’s recent investor day event, Sam’s Club CEO Kathryn McLay said the chain’s tenured membership renewal rate stands in the low 90s and that its membership has grown nearly 30% over the past three years.

Costco has signaled plans to raise its annual membership fee—following recent increases by Sam’s and Amazon, with its Prime membership—while BJ’s likely won’t do so this year, Sundaram wrote.

“Membership fees remain vital for every club operator, as they typically account for the majority of operating income. Membership fees essentially have 100% margins attached to them unless the warehouse club operator chooses to reinvest some or all of the proceeds,” he said. “Membership fees typically comprise the majority of operating income, with some years’ membership fees making up over 70% to 80% of operating income. Club operators can increase this revenue stream not only by raising membership fees but also by encouraging members to upgrade to higher-tier membership levels, which can foster even greater loyalty as well as result in higher revenue and operating profit.”

Membership income is just one of various factors in the club model that give it an edge over supermarkets and other mass retailers, according to Sundaram. Others include the warehouse shopping environment, operations and labor, and robust customer data.

Source: CFRA Research, “Club Stores: Prepare for a New Era of Expansion” report, Arun Sundaram.

“We believe the warehouse club model offers structural advantages that you can’t find elsewhere in retail,” he explained in his analysis. “Warehouse clubs run with great efficiency by limiting the number of SKUs and displaying products on the sales floor in full-pallet format, as they would look unloaded from a truck. This approach allows club operators to avoid the need for individual units to be placed on shelves, resulting in significantly reduced labor hours compared to traditional retail. This is particularly advantageous in today’s tight labor market.

“Additionally, club operators employ a membership model that fosters loyalty among members, while also providing them with comprehensive member data,” he said. “This model, combined with the efficiencies achieved through its simplified supply chain, enables club operators to offer lower prices than those found at mass merchants and conventional grocery stores.”

On the labor front, club retailers by and large employ nonunion workers and are less vulnerable to the strikes versus traditional grocers, Sundaram noted. Sam’s Club and BJ’s workers aren’t unionized, and fewer than 10% of Costco associates are represented by a union, he reported.

“This compares to traditional grocery stores like Kroger and Albertsons, which have a workforce that is mostly represented by a union. Unionized workforces typically have stronger bargaining power when it comes to wage and benefit negotiations. As a result, we’ve seen labor strikes in the past at conventional grocery stores around the country,” Sundaram said. “We think this difference in unionization is a contributing factor to why Kroger and Albertsons are currently pursuing a merger, as they believe that nonunionized competitors like Walmart, Amazon and Costco hold a competitive advantage.”