September 21, 2015
Have warehouse clubs been more disruptive than e-commerce sites?
Despite all the attention paid to how e-commerce has shaken up the retail landscape, warehouse clubs have had a "greater effect on retail than e-commerce" over the past 15 to 20 years, according to a university study.
In the study, Ali Hortacsu and Chad Syverson of the University of Chicago focused on hard numbers, comparing the relative size and growth trajectories of warehouse clubs versus e-commerce sites.
Using Census Bureau data, researchers found that e-commerce — including catalog sales — vaulted nearly tenfold, from $35 billion in sales in 1992 to $348 billion in 2013. By comparison, the warehouse club industry grew from $40 billion to $420 billion, a 10.5-fold increase.
Further illustrating their point by highlighting the respective channel leaders, the researchers noted that Amazon grew its U.S. sales by $38 billion from 2000 to 2013 while Costco, now the third-largest U.S. retailer, saw U.S. sales grow $50 billion over the same period. Sam’s Club expanded by $32 billion in that time frame.
Finally, the study found the four top warehouse clubs accounted for eight percent of retail sales in 2012, exactly 50 percent more than all e-commerce retail sales in that year.
Photo: Sam’s Club
The study concluded that the vibrancy of warehouse clubs over the years was a positive sign for all physical retailing. Researchers wrote, "The current scale and influence of this single sector of physical retail relative to all of e-commerce suggests that while physical retail is likely to continue evolving in the coming years, it is unlikely to meet its demise soon."
Researchers added that, while online "will surely continue to be a force shaping the sector going forward and may yet emerge as the dominant mode of commerce in the retail sector, its time for supremacy has not yet arrived."
The first Costco was opened in 1983 in Seattle while the first Sam’s Club opened in Midwest City, OK in the same year. Amazon.com launched in 1995.
- The Ongoing Evolution of US Retail: A Format Tug-of-War – National Bureau of Economic Research
- A case that Costco and other warehouse clubs have transformed retail more than Amazon – The Washington Post (tiered sub.)
- In Our View: Lots in Store for Shoppers – Columbian
- Costco Soaring And Captivating The Retail Industry Exceeding Amazon – OutsourcingGazette
- What’s the biggest change in retailing today? – CBS News
Discussion Questions
Have warehouse clubs been more transformative to the retail industry than online selling over the past two decades? What changes have clubs brought that will continue to strongly influence retail in the years ahead?
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I disagree. Warehouse clubs are “new” formats to retail, but are still your basic brick-and-mortar. There’s nothing all that truly transformative about them. Barriers to entry for new club store companies are high, while anybody with a computer and internet connection can start their own business. To me, this is an apples to oranges comparison. In 20 years, ask this same question again and the answer will be ludicrously obvious.
Warehouse clubs have been less transformative despite their larger sales volume. There are many simple reasons. Warehouse clubs require a membership. They are not ubiquitous (although it may seem so). They still require the shopper to go to a brick-and-mortar location. They do not have access to every item and carry a limited albeit broad selection.
Online selling doesn’t have any of these restrictions. True you do need access to the web but between smartphones and tablets, laptops, desktops, etc., a very larger portion of the population has it. You don’t have to leave your house to shop. I have yet to find (although I am sure there must be one) an item I wanted to research/buy that I couldn’t find online.
Given the time frame, yes. Warehouse clubs brought value and excitement to retail. They became shopping destinations for consumers seeking the thrill of the hunt. As such, they did much to change the dull, predictable environment characteristic of more traditional retailers.
However, going forward, I believe online will be more transformative. In food alone, online food shopping is projected to reach $100 billion in 2019 and account for 12 percent of all grocery spending. In my research on Millennials, 32 percent shopped for groceries in a club store during the past 30 days, while 24 percent shopped for groceries online during the past 30 days.
If you combine the two formats it could represent an interesting model for an omnichannel approach: the excitement of a club store with the selection, convenience and price transparency that are hallmarks of Amazon and others.
Not sure if we can classify if one is better than the other — but it is true that a huge amount of the shopper’s wallet went to the warehouse and not to other physical sites or to the web. The warehouse plays a key role within my family, being the source for electronics, major frozen foods and most wines.
Most of what we get at the club we would not buy online. Amazon cannot match many of the categories at Costco — in price or in service levels. In addition, being a premium club member we end up with a substantial amount of cash back each year — sometimes two checks from our favorite retailer. Also, Amazon does not have good pizza!
Since the inception of “clubs,” they have experienced their fair share of trials and tribulations, but through it all have always been an agent for change in the retail industry. In the early days they prompted traditional retailers to add “club aisles” and “club pack” products to avoid further loss of customer transactions to this new channel. Over time, however, they have found a niche in selling not just frequently-purchased staple items, but have also extended their reach into perishables. Now shoppers have carved out a place for clubs when they purchase commodity items like paper products, bottled water, soft drinks, detergent and selected perishables.
Going forward, clubs likely provide the best venue for keeping the brick-and-mortar stores relevant. They tend to keep shoppers interested through new items and “in and out” deals. And of course the perceived savings that shoppers enjoy at the clubs (real or not) are compelling to many. Traditional food retailers should take note.
As e-commerce expands, clubs will need to find their niche in that space as well. That is particularly true as Amazon continues to sell more of the same commodity items online, delivered to your door step, based upon a consumption schedule. Clubs must respond to Amazon with their own “pickup and delivery” programs. Much of the future success in competing with Amazon and other e-commerce players lies in the realm of improved use of customer data. Thus far Amazon is way out in front in that area and if they keep that edge, clubs will continue to lose share.
Most definitely! Warehouse clubs are the best example of a loyalty program having buy-in from their members. In addition, warehouse clubs have aggressively recruited new members in multiple physical touch points from corporate office lobbies to fairs/business expos. Plus we are witnessing warehouse clubs building near mixed-development locations and shopping malls for better positioning to high traffic areas.
Warehouse clubs may not have one-click or qr code mobile apps but they have big data to optimize membership, inventory and growth strategies and the results speaks for themselves.
Brilliant. But public perception is the opposite — because the online onslaught was backed by a huge PR and communication campaign designed to make it appear far more disruptive. Also, the digerati love the idea of disruption and make it a mantra (although it happens far less often than claimed).
So we return to what I’m told is a JFK quote I modified: “where there’s smoke, there’s venture funding.” And that explains why the perception is that digital has been far, far more disruptive. But these numbers are key. It has had an impact. But not as big an impact as clubs.
“More transformative”? Right now, we know roughly that ~80% of all retail is transacted in a store AND ~80% of all shopping begins online. Of course this is highly variable based upon consumer and category.
Costco certainly has disrupted existing brick and mortar category shares. The timing of the Great Recession fostered “bargain hunting” behavior which allowed Costco to become the #1 fresh fish and wine retailer in the US. Seems evolutionary to me.
Clubs will endure the tyranny of comps as all retailers face. While macro trends suggest the economy will remain soft for awhile, Clubs will struggle with growth and then sooner or later will look like any other BIG box. Sams challenges prove that meaningful differentiation is key in this sector as in any other.
Alternatively “online selling” has enabled consumers to choose when/where/how they want to shop in a revolutionary way. Those changes in behavior are increasingly accepted. As technology evolves, the options brought by online selling will continue to transform the retail industry. Is there an end to “Moore’s Law”?
So like a good politician, the answer is “Yes”! Both have been transformative.
In the long term? Costco and Amazon will merge.
Both warehouse clubs and online selling have been quite transformative, but in different ways. Having spent 7 years at the Costco table, and another 4 working at Sam’s Club HQ, I have been fortunate to have a bird’s eye view of retail transformations brought on by the warehouse club business model:
Now, as we move past the 30 years in business mark for both Costco and Sam’s Club, it will be interesting to watch just how they both deal with that continued convergence of physical store and web, etc. Most particularly, the growing buying power of technology enabled “always connected” Millennials. Will the warehouse clubs continue to be retail transformers (beyond their more free spending Baby Boomer base)? Or victims of new retail transformations?
The comparison is too narrow. The impact of online isn’t just the dollar revenues that went to that online channel, but also all of the shopping that was impacted by online. The impact in terms of the ability to research product, check pricing and promotion, gather opinions and reviews about product as part of the justification on the path to purchase has transformed retail well beyond where the final revenue dollars were booked.
IM Retail is quite right with the post that noted that up to 80% of purchases start online. Whatever the % really is, it’s a far greater and transformational impact than the warehouse clubs.
If your measurement of transformative is dollar volume, warehouse clubs probably did move bigger numbers because the channel has a more mature model and it includes B2B small business as well as B2C retail (effectively double counting a bit). From an innovation perspective, e-commerce had a much bigger impact in terms of new processes and channels to retailing than warehouse clubs.
What a bizarre comparison—what impacted medicine more, antibiotics or the automobile? But I agree with what others here have said: the answer is very dependent on how you measure “transformative” and what timeframe you’re talking about.
Ultimately, I’ll cast my vote for “online” since I don’t think warehouse clubs really “transformed” anything. As Warren notes, it may be a different store you’re shopping at, but experience is the same, and if simple sales volume is your measure (as it seem to have been here), then long term, online will pull ahead. But it’s always good to see people bringing sanity to the “everything is different” hysteria.
It would be interesting to find out what percentage of Costco’s sales is from online since they have an online presence as well.
The convenience of warehouse retail is incredibly attractive, especially to small business owners. Obviously, combine convenience with a subscription program and great prices and you have a winner!
What notcom said.
Before I chimed in on this, I did some price checking on Amazon for grocery products, and outside of a few zingers, the overall pricing is nowhere near a Costco, let alone a well run supermarket, and the selection of fresh is not very extensive in terms of Amazon Fresh. For now, the warehouse clubs have had more impact, as mentioned above, and online will continue to grow.
In spite of what consumers may believe about free shipping, it simply isn’t going to happen without increasing the price of the products or adding on a fee of some sort. There will be plenty of consumers who will be happy to pay the extra, as higher income brackets are more time starved then short of cash.
The deal hunters, and a whole bunch of others still like the sensory experience of shopping for food, especially the perimeter of the stores, and if you aren’t prepared to dazzle them, than expect to be pushed to the curb.
Things are changing rapidly and online will gain strength, so it is going to be fun for some and a nightmare for others as the pie is only so big.
I’m not certain we can compare club stores to online stores since at the core, they target different customers.
I do think that club stores provide an alternative channel to new product introductions since it relies heavily on sampling and customers are more apt to try new products if they perceive a value.
I expect more manufacturers to utilize club stores as a launch channel. There are brands at traditional brick & mortar stores that once relied heavily on club stores—think of Vizio.