Welcome to the Club
In the US, the warehouse club sector is the second largest non-traditional format behind supercentres. Just three players, Costco, Wal-Mart’s Sam’ Club and BJ’s, account for the bulk of warehouse club revenues. In an effort to boost results, the clubs are looking for new areas of sales and profit such as online sales, targeting younger shoppers and expansion abroad.
Elsevier Food International, Vol. 10, Number 2, May 2007
Len Lewis
Warehouse clubs have carved out a significant portion of the US grocery market. But smaller cash and carry operations with a focus on business customers remain the dominant force in European markets.
In the US, the warehouse club sector is the second largest non-traditional format behind supercentres. Just three players, Costco, Wal-Mart’s Sam’ Club and BJ’s, account for the bulk of warehouse club revenues. In an effort to boost results, the clubs are looking for new areas of sales and profit such as online sales, targeting younger shoppers and expansion abroad.
It has been called the Costco effect – the consumer’s propensity for mixing necessities and luxuries when shopping at warehouse clubs – stocking up on everything from pickles and industrial size cans of tuna to plasma televisions and diamond jewellery – an eclectic mix that has resulted in the segment’s steady growth in sales and profits – much of it coming from traditional retail channels.
But whether growth will continue at historical rates hinges on how close the segment is to reaching its saturation point in the US where just three players, Costco, Wal-Mart’s Sam’ Club and BJ’s, account for the bulk of warehouse club revenues.
On first blush, the greatest potential lies in international expansion, particularly for Costco and Sam’s. However, warehouse clubs have made little headway compared with the smaller, rapidly growing cash and carry operations by such retailers as Metro, Tesco, Rewe, Migros and Carrefour in emerging markets within Europe, Russia and Asia.
Lumbering giants
The warehouse club sector, sometimes derided as a lumbering giant in the world of retailing, is chalking up annual sales in excess of US$60 billion. This represents an estimated 7.1 per cent of grocery sales in the US and the second largest non-traditional format behind supercentres, according to Willard Bishop Consulting, which also said that the clubs are averaging 135,000 square feet with about 5,500 SKUs.
Industry sources expect the clubs to experience somewhat modest sales growth over the next several years with volume reaching about US$74 billion. This represents a compound annual sales growth rate of 4.8 per cent between 2005 and 2010, far below the double-digit rate anticipated for limited assortment stores, supercentres and dollar stores. However, it is nearly twice the growth expected for drug, mass and superstores and far above projected inflation rates of 1.9 per cent.
Although the number of monthly club shoppers has declined, Retail Forward, Columbus, Ohio-based consultancy, said real sales growth has been 9.0 per cent annually for the past five years. However, growth is to drop to 6.5 per cent annually over the next five years, with the number of US clubs reaching a peak of 1,225 units by 2010.
London-based Planet Retail is a bit more optimistic. At present, the US has about 1,367 warehouse clubs, with the number rising to 1,657 stores by 2012. During this period, Sam’s is expected to add some 120 units with Costco and Smart & Final adding between 50 and 60 each.
Consumer appetites
“I don’t want to make predictions about the saturation point at this time,” said Bryan Roberts, senior analyst at Planet Retail. “Everything depends on the appetite for the channel. But Costco’s same store sales indicate that shoppers and small businesses are more than happy to divert some of their grocery spending away from traditional channels and as long as same-store sales and profitability increase more stores will open,” he said. “Any talk of saturation assumes they are not going to attract any more shoppers and that’s not the case.”
Richard George, professor of food marketing at St. Joseph’s University, Philadelphia, agrees. “I haven’t seen any evidence of saturation. In fact, the clubs have eschewed some of the larger urban markets which, assuming retail space is somewhat affordable, have potential for growth.”
Although Wal-Mart’s Sam’s Club has far more stores than any other player, Costco remains the clear leader in sales and market share, with nearly 50 per cent of the market, according to Retail Forward. On average, the company’s stores are generating sales of about US$124 million per unit, which is 75 per cent higher than the average Sam’s Club. Additionally, sales per square foot of US$948 is 71 per cent higher than Sam’s.
Several factors have contributed to Costco’s success, including higher end merchandise, a more affluent member base, the highly successful Kirkland private label programme and a very positive corporate image among consumers and employees, whose compensation and benefits package is far higher than most other retailers, much to the dismay of Wall Street analysts who regularly berate company CEO Jim Sinegal for what they see as excessive spending.
However, this has served to enhance the company’s reputation among customers, some of which overspend because the company treats workers so well. In fact, the company recently reached a tentative accord with the International Brotherhood of Teamsters which provides for annual wage increases and semi-annual bonuses for 13,000 employees in California, the scene of protracted strikes and contentious labour negotiations between unions and supermarket retailers. The most recent contract with Costco also increases retirement packages, while keeping employee contributions for healthcare and pensions at current levels.
Sam’s sales dip
Sam’s Club, was the leading warehouse club just five years ago, operates about 567 stores in the US and holds a 42 per cent share of the market, reported same-store sales growth of 5.0 per cent in 2005, versus 5.8 per cent a year earlier, and preliminary reports indicated that sales will be up a rather anaemic 3.0 per cent this year, the result of high fuel prices, according to the company.
At present, the 129,000-square-foot stores have average annual sales of US$71 million each, with sales per square foot coming in at US$552, according to Retail Forward. However, due to improved expense control, operating income increased 8.2 per cent in 2005 and was on track for a similar increase in 2006.
However, Sam’s is positioning itself to significantly bolster business. In February, company officials announced that their goal for 2007 was to boost sales by targeting more individual shoppers, particularly more affluent shoppers and mothers. “If we are to expand Sam’s Club at the rate we expect, we are going to have to broaden our appeal beyond small business owners,” said Greg Spragg, president.
BJ’s Wholesale Club holds an 8.8 per cent share with total sales of about US$7.95 billion. The stores are relatively small, averaging about 112,000 square feet with average sales per of about US$48 million and sales per square foot of US$466. After an increase to 8.5 per cent last year, gross margins at BJs are starting to decline, registering 7.7 per cent for the first half of 2006, according to Retail Forward, which said that store traffic was being hurt by higher fuel prices.
Gross margins at Costco dipped to 10.5 per cent in 2006, compared with 10.6 per cent-10.7 per cent for the past five years. The decline, however slight, is reportedly due to higher returns in consumer electronics and increased markdowns in furniture, a category that is being expanded in regular Costco stores.
“Everyone’s getting squeezed on margins and the clubs are no exception,” said Rich George, who denied this is having any impact on the clubs’ merchandise mix. “Costco may sell cheap wine but they also sell very expensive cuts of meat. The merchandise mix is a function of the market and cost. If they want to buy a product but are priced out of a particular brand they’ll buy another brand in the same category. That’s why you go in the clubs and see the same price every week and what fluctuates is the brand carried,” he said, noting that the opposite is true of supermarkets which carry the same brands all the time but where prices fluctuate.
Meanwhile, in an effort to boost results, the clubs are looking for new areas of sales and profit. Costco is focusing attention on online sales office products through its national Business Supplies Program, many of which are under the Office Impressions private label line. Meanwhile, Sam’s is targeting younger shoppers with special events such as those geared to baby products including formula, diapers and wipes.
As the warehouse club concept continues to mature in the US, expansion overseas has been limited. Sam’s Club has entered Canada and is trying to make inroads against Loblaw’s Real Canadian Wholesale Club as well as its cash and carry stores. Sam’s, Costco and a few local operators are expanding in Mexico. But a third factor, PriceSmart pulled out of Mexico as well as the Philippines about a year ago and is only running clubs in China on a licensee basis.
“PriceSmart is now mainly in the Caribbean and a few Central American markets,” said Roberts, noting that plans call for one club this year in Trinidad or Jamaica. “Most markets there can support four or five warehouse clubs. But they are also facing the prospect of Wal-Mart going into Central America,” he said. “PriceSmart is still fairly strong in terms of sales but in the scheme of things they are a small operation with less than US$1 billion in sales.
Smart & Final, based in California, made some overtures in Mexico. However, the company’s plans are uncertain. It recently launched a review of its business and is exploring possible options including the sale of the company.
Drawing the line
Whether clubs can develop in Europe remains to be seen. “It depends on where you draw the fine line between warehouse clubs and cash and carry operations which have deeper penetration across Europe,” said Roberts. The best example is Metro Group’s Makro stores which operate in 23 countries, with expansion focused on emerging markets. One of Metro Group’s most aggressive moves will be in Russia, where the company plans to open seven stores this year and has long-term plans for 50-55 units.
At the moment, Costco is only present in the UK but there have been persistent rumours about expansion into Spain and Ireland. The latter may be sooner rather than later now that IKEA, the Swedish furniture and houseware retailer, received a favourable ruling from the government on opening big box stores along with new urban renewal plans. “I also believe Costco is primed to explore new markets in eastern Europe and Asia even though their experiences have not been entirely positive,” said Roberts. “They’ve been stuck on five stores in Japan and three or four in Taiwan.”
Other strong club retailers include Getro which is focusing on Croatia, while Eurocash concentrates operations in Poland. In Russia, Lenta styles itself as a warehouse club business and at 8,000 square metres has the size to support the concept. The company has about ten stores but significant growth potential having received backing from the European Bank of Reconstruction and Development. In fact, Lenta is planning to expand its warehouse club network to around 50 outlets by late 2009.
Warehouse clubs have carved out a significant portion of the US grocery market. But smaller cash and carry operations with a focus on business customers remain the dominant force in European markets.
In the US, the warehouse club sector is the second largest non-traditional format behind supercentres. Just three players, Costco, Wal-Mart’s Sam’ Club and BJ’s, account for the bulk of warehouse club revenues. In an effort to boost results, the clubs are looking for new areas of sales and profit such as online sales, targeting younger shoppers and expansion abroad.
It has been called the Costco effect – the consumer’s propensity for mixing necessities and luxuries when shopping at warehouse clubs – stocking up on everything from pickles and industrial size cans of tuna to plasma televisions and diamond jewellery – an eclectic mix that has resulted in the segment’s steady growth in sales and profits – much of it coming from traditional retail channels. But whether growth will continue at historical rates hinges on how close the segment is to reaching its saturation point in the US where just three players, Costco, Wal-Mart’s Sam’ Club and BJ’s, account for the bulk of warehouse club revenues.
On first blush, the greatest potential lies in international expansion, particularly for Costco and Sam’s. However, warehouse clubs have made little headway compared with the smaller, rapidly growing cash and carry operations by such retailers as Metro, Tesco, Rewe, Migros and Carrefour in emerging markets within Europe, Russia and Asia.
Lumbering giants
The warehouse club sector, sometimes derided as a lumbering giant in the world of retailing, is chalking up annual sales in excess of US$60 billion. This represents an estimated 7.1 per cent of grocery sales in the US and the second largest non-traditional format behind supercentres, according to Willard Bishop Consulting, which also said that the clubs are averaging 135,000 square feet with about 5,500 SKUs.
Industry sources expect the clubs to experience somewhat modest sales growth over the next several years with volume reaching about US$74 billion. This represents a compound annual sales growth rate of 4.8 per cent between 2005 and 2010, far below the double-digit rate anticipated for limited assortment stores, supercentres and dollar stores. However, it is nearly twice the growth expected for drug, mass and superstores and far above projected inflation rates of 1.9 per cent.
Although the number of monthly club shoppers has declined, Retail Forward, Columbus, Ohio-based consultancy, said real sales growth has been 9.0 per cent annually for the past five years. However, growth is to drop to 6.5 per cent annually over the next five years, with the number of US clubs reaching a peak of 1,225 units by 2010.
London-based Planet Retail is a bit more optimistic. At present, the US has about 1,367 warehouse clubs, with the number rising to 1,657 stores by 2012. During this period, Sam’s is expected to add some 120 units with Costco and Smart & Final adding between 50 and 60 each.
Consumer appetites
“I don’t want to make predictions about the saturation point at this time,” said Bryan Roberts, senior analyst at Planet Retail. “Everything depends on the appetite for the channel. But Costco’s same store sales indicate that shoppers and small businesses are more than happy to divert some of their grocery spending away from traditional channels and as long as same-store sales and profitability increase more stores will open,” he said. “Any talk of saturation assumes they are not going to attract any more shoppers and that’s not the case.” Richard George, professor of food marketing at St. Joseph’s University, Philadelphia, agrees. “I haven’t seen any evidence of saturation. In fact, the clubs have eschewed some of the larger urban markets which, assuming retail space is somewhat affordable, have potential for growth.”
Although Wal-Mart’s Sam’s Club has far more stores than any other player, Costco remains the clear leader in sales and market share, with nearly 50 per cent of the market, according to Retail Forward. On average, the company’s stores are generating sales of about US$124 million per unit, which is 75 per cent higher than the average Sam’s Club. Additionally, sales per square foot of US$948 is 71 per cent higher than Sam’s.
Several factors have contributed to Costco’s success, including higher end merchandise, a more affluent member base, the highly successful Kirkland private label programme and a very positive corporate image among consumers and employees, whose compensation and benefits package is far higher than most other retailers, much to the dismay of Wall Street analysts who regularly berate company CEO Jim Sinegal for what they see as excessive spending.
However, this has served to enhance the company’s reputation among customers, some of which overspend because the company treats workers so well. In fact, the company recently reached a tentative accord with the International Brotherhood of Teamsters which provides for annual wage increases and semi-annual bonuses for 13,000 employees in California, the scene of protracted strikes and contentious labour negotiations between unions and supermarket retailers. The most recent contract with Costco also increases retirement packages, while keeping employee contributions for healthcare and pensions at current levels.
Sam’s sales dip
Sam’s Club, was the leading warehouse club just five years ago, operates about 567 stores in the US and holds a 42 per cent share of the market, reported same-store sales growth of 5.0 per cent in 2005, versus 5.8 per cent a year earlier, and preliminary reports indicated that sales will be up a rather anaemic 3.0 per cent this year, the result of high fuel prices, according to the company.
At present, the 129,000-square-foot stores have average annual sales of US$71 million each, with sales per square foot coming in at US$552, according to Retail Forward. However, due to improved expense control, operating income increased 8.2 per cent in 2005 and was on track for a similar increase in 2006.
However, Sam’s is positioning itself to significantly bolster business. In February, company officials announced that their goal for 2007 was to boost sales by targeting more individual shoppers, particularly more affluent shoppers and mothers. “If we are to expand Sam’s Club at the rate we expect, we are going to have to broaden our appeal beyond small business owners,” said Greg Spragg, president.
BJ’s Wholesale Club holds an 8.8 per cent share with total sales of about US$7.95 billion. The stores are relatively small, averaging about 112,000 square feet with average sales per of about US$48 million and sales per square foot of US$466. After an increase to 8.5 per cent last year, gross margins at BJs are starting to decline, registering 7.7 per cent for the first half of 2006, according to Retail Forward, which said that store traffic was being hurt by higher fuel prices.
Gross margins at Costco dipped to 10.5 per cent in 2006, compared with 10.6 per cent-10.7 per cent for the past five years. The decline, however slight, is reportedly due to higher returns in consumer electronics and increased markdowns in furniture, a category that is being expanded in regular Costco stores.
“Everyone’s getting squeezed on margins and the clubs are no exception,” said Rich George, who denied this is having any impact on the clubs’ merchandise mix. “Costco may sell cheap wine but they also sell very expensive cuts of meat. The merchandise mix is a function of the market and cost. If they want to buy a product but are priced out of a particular brand they’ll buy another brand in the same category. That’s why you go in the clubs and see the same price every week and what fluctuates is the brand carried,” he said, noting that the opposite is true of supermarkets which carry the same brands all the time but where prices fluctuate.
Meanwhile, in an effort to boost results, the clubs are looking for new areas of sales and profit. Costco is focusing attention on online sales office products through its national Business Supplies Program, many of which are under the Office Impressions private label line. Meanwhile, Sam’s is targeting younger shoppers with special events such as those geared to baby products including formula, diapers and wipes.
As the warehouse club concept continues to mature in the US, expansion overseas has been limited. Sam’s Club has entered Canada and is trying to make inroads against Loblaw’s Real Canadian Wholesale Club as well as its cash and carry stores. Sam’s, Costco and a few local operators are expanding in Mexico. But a third factor, PriceSmart pulled out of Mexico as well as the Philippines about a year ago and is only running clubs in China on a licensee basis.
“PriceSmart is now mainly in the Caribbean and a few Central American markets,” said Roberts, noting that plans call for one club this year in Trinidad or Jamaica. “Most markets there can support four or five warehouse clubs. But they are also facing the prospect of Wal-Mart going into Central America,” he said. “PriceSmart is still fairly strong in terms of sales but in the scheme of things they are a small operation with less than US$1 billion in sales.
Smart & Final, based in California, made some overtures in Mexico. However, the company’s plans are uncertain. It recently launched a review of its business and is exploring possible options including the sale of the company.
Drawing the line
Whether clubs can develop in Europe remains to be seen. “It depends on where you draw the fine line between warehouse clubs and cash and carry operations which have deeper penetration across Europe,” said Roberts. The best example is Metro Group’s Makro stores which operate in 23 countries, with expansion focused on emerging markets. One of Metro Group’s most aggressive moves will be in Russia, where the company plans to open seven stores this year and has long-term plans for 50-55 units.
At the moment, Costco is only present in the UK but there have been persistent rumours about expansion into Spain and Ireland. The latter may be sooner rather than later now that IKEA, the Swedish furniture and houseware retailer, received a favourable ruling from the government on opening big box stores along with new urban renewal plans. “I also believe Costco is primed to explore new markets in eastern Europe and Asia even though their experiences have not been entirely positive,” said Roberts. “They’ve been stuck on five stores in Japan and three or four in Taiwan.”
Other strong club retailers include Getro which is focusing on Croatia, while Eurocash concentrates operations in Poland. In Russia, Lenta styles itself as a warehouse club business and at 8,000 square metres has the size to support the concept. The company has about ten stores but significant growth potential having received backing from the European Bank of Reconstruction and Development. In fact, Lenta is planning to expand its warehouse club network to around 50 outlets by late 2009.
.jpg)
