BJ'S BEEFS UP FOOD OFFERING AS COMPETITIVE WEAPON 2004-07-12 (1)

KATHERINE BOWERS

TAUNTON, Mass. -- "Here's the difference," said Ed Giles, executive vice president of club operations for BJ's Wholesale Club, holding up two packages of Danish during a recent store tour with analysts.

One box featured nine regular-sized pastries. The other contained six jumbo-sized versions, which were roughly 30% bigger, more decoratively glazed, and nestled in a window box reminiscent of a specialty bakery. "These are bigger and better presented because we're really highlighting our Wellesley Farms brand. That's the direction we're going with a lot of our products."

The bakery tutorial was just one stop in a store tour BJ's top management gave last month at the club here to give analysts a touch, taste and feel of the company's new food-centric direction. BJ's hopes this new direction will allow it to compete aggressively with supermarkets instead of fighting with two larger competitors: Costco and Sam's Club. Broadly, Natick, Mass.-based BJ's is trying to upgrade its assortment, whether that's in larger pork chops or pricier gas grills, where $179 models have been jettisoned in favor of those ranging from $400 to $800.

"Our win is to grow the warehouse club pie by taking share from other people. And right in our crosshairs is the supermarket industry," explained Michael Wedge, president and chief executive officer, during a slide presentation at the Holiday Inn here preceding the store tour. BJ's prices are generally 30% lower than those of a traditional supermarket, Wedge said.

In a sentiment not often expressed in retail, BJ's CEO said he considered the supercenters of Wal-Mart Stores, Bentonville, Ark., to be an "ally."

"They are putting so much pressure on the food operators," he said. "There will be a tremendous amount of consolidation, and we're thrilled that much market share will be up for grabs."

Of their annual food budget, BJ's customers spend $500 in the club and $1,500 at supermarkets, the company revealed.

At 115,000 square feet, the Taunton club has most of the features of the company's 2004 prototype, although those stores will open at 119,000 square feet. Taunton is the highest-volume club BJ's opened last year, Wedge said.

Taunton includes aisle signs in the style of supermarkets, and food destinations like a cafe, rotisserie chicken, a lobster tank (which will be rolled out to other clubs next year) and 44 linear feet of refrigerated, heat-and-eat meals. A 2-pound serving of chicken Parmesan was priced $9.99.

Produce is still the "missing link" for the club to effectively compete with supermarkets, said Wedge. He said BJ's executive vice president of merchandising, former A&P executive Karen Stout, who reports to work July 26, will focus on the category as a top priority. It will begin directly sourcing produce starting in 26 clubs this month.

As part its move to broaden the assortment to 7,000 to 7,500 stockkeeping units, BJ's is using half-pallets, meaning vendors supply goods stacked half as high. It allows a forklift to stock two SKUs per shelf, rather than one and, in general, provides a day-and-a-half's worth of inventory on high-turn items, Giles said.

BJ's pioneered the stocking technique with its core suppliers, including Procter & Gamble. The $6.6 billion regional club store chain is P&G's ninth-largest customer, according to Frank Forward, chief financial officer, BJ's.

The company is working to determine where it can and should compete with Wal-Mart's Sam's Club division and Costco, Issaquah, Wash., and what categories it will leave for its giant competitors to wrangle over. BJ's is deriving those insights from new technology initiatives that have allowed it to analyze its historical sales data for the first time.

Sales of cigarettes, for instance, will be phased out. Margins are a meager 1% and BJ's data show customers who buy cigarettes purchase many packages at a time and buy very little else. Adding in the special service needed for those consumers, it nets to a money-losing proposition.

"We'll let Sam's and Costco have those customers," Wedge said.

In contrast, BJ's is pressing forward with items its direct competitors don't carry or offer: magazines, greeting cards, a broad selection of disposable diapers (BJ's stocks five as opposed to two kinds), and a greater variety of payment options. BJ's accepts Visa, MasterCard and American Express, while Costco accepts only American Express; Sam's Club allows credit purchases using its own card or Discover. All clubs accept cash and checks.

"We believe this represents the beginnings of a significant and differentiated offering for consumers to help us stand apart from the competition," Wedge said.

Scan data have also helped BJ's quantify the benefits of its Kids Club indoor playground: a brightly colored jungle gym/daycare testing at its Kissimmee, Fla., concept club. Shoppers check in with their membership card, drop off their kids, and receive a pager to be contacted if there are any questions or problems. Shoppers using the amenity visit far more frequently, Wedge observed. Overall, sales are up 30% at the Kissimmee club vs. BJ's other Orlando-area clubs, despite competition from supercenters and other club stores.

"We're still testing, but it looks promising," he said. "It's an example of how we're moving from being product-centric to customer-centric."