March 7, 2008
Consumers Stocking Up in Warehouse Clubs
There’s no doubt that many American consumers and businesses are going through a rough patch at the moment. For warehouse clubs, however, the weak economy has proven to be something of a boon as savings minded consumers look for the low unit prices that come with buying in bulk.
Georges Yared, of Yared Investment Research, may have stated the obvious when he told BusinessWeek that warehouse clubs “become more attractive [as] consumers become more price-sensitive.”
Costco, Sam’s Club and BJ’s all reported strong sales and profit results this week.
Costco saw same-store sales climb seven percent last month while BJ’s experienced a 5.9 percent increase. Sam’s same-store sales were up 2.8 percent.
The high cost of gas has worked in favor of the clubs that sell fuel, critics contend, at loss leader rates. Offering low prices at the pump brings consumers to warehouse club lots and eventually inside the stores to shop for food and other items.
Costco’s and BJ’s numbers indicate that consumers are looking to buy the basics and are staying away from more extravagant purchases. Both chains indicated that consumer spending was down in categories such as housewares, appliances, furniture and jewelry.
Discussion Questions: Do you expect that warehouse clubs will continue to perform well should the economic conditions stay the same or worsen? Will consumers continue to shift their dollars to warehouse clubs after the economy has rebounded? What do you see as the relative strengths/weaknesses of the three warehouse club chains during a down economy?
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This is a perfect time for Costco and BJs to strengthen their positioning and market share. Costco will do particularly well, as they have developed the reputation as a place for the affluent to shop with no embarrassment. They will shift dollars away from categories that aren’t experiencing strong demand, to more basics, but otherwise I expect them to thrive during this period and even after a recovery sets in.
Anyone who already uses this channel will continue to do so and those that try it because they feel they need to will love the experience and make it a part of their shopping habits.
The proliferation of the fairly new (last 20 years) phenomenon of Warehouse Clubs, Dollar Stores, deep discounters, and of course, the behemoth Wal-Mart, sure has changed the outlook for most consumers in that it doesn’t take much to stock up on necessities anymore. Anything can be purchased now (in some variation) for a very reasonable price.
At one point in the recent past, it seemed that the deflation caused by low prices and their subsequent effect on the average wage (basically not moving) was a negative.
Doesn’t seem that way now, does it?
People who buy in bulk have money to buy in bulk. So the economy is fine for them. My grandfather did quite well during the Great Depression selling carded merchandise of small quantities of aspirin, razor blades, etc., because people could not afford to buy in bulk. I think warehouse clubs will do poorly during a weak economy. Perhaps the dollar stores will do better instead.
If consumers are discovering warehouse stores for the first time as part of the trading-down process, they might be surprised by what they find–especially at Costco. If they’re satisfied with the shopping experience, merchandise content and quality of food and commodities, they will become habitual shoppers even when the economy rebounds. Long-term, it’s reflective of the same search for value that has favored share gains at discounters for many years.
Costco, the 4th largest retailer in the nation, is growing well. All of the other warehouse clubs are also doing the same as they seek to match the very successful warehouse model. This will continue to occur because their model is still maturing and appealing to more people. Go into any club store and the prices, product quality and choice tell the entire story. The entire experience is complete and rewarding to any shopper. No music, obnoxious shelf tags or extravagant merchandising (that the consumer ends up paying for anyway).
The clubs drive value back to the basics and their growth represents consumer sentiment. This will continue to occur until the category has attracted more competitors and becomes more mature.
Growth of Costco at rates that they have currently posted has been their consistent history long before there was any question of economic difficulty. BJ’s has not had as strong of same store sales increases as I recall, but has been of late. Sam’s, well, their numbers tell the difference. That is 2.8 versus seven percent for Costco.
This happens to be one area where the company from Bentonville is clearly not the leader. Costco may not have the top line battle won against them yet, but they will.
Customer experiences at Costco and BJ’s are far superior to Sam’s and their growth in same store sales indicate that will continue, but they aren’t out of the norm in the past.
Consumers are simply not trading down at Costco. In many cases, they are trading up in experience and value.
We often forget at times that consumers–whether or not in good economic times–always make a value decision, not simply a price decision. Value consists of many factors, but there is a definable equation of which price is neither the top factor nor the only factor.
Costco has been experiencing exceptional growth for a long period of time. A slowing economy might make that even better, but it’s been there regardless. It’s proof that you can compete in the industry and compete successfully against even Bentonville. You can also do it with a completely different business model that also includes valuing your employees. In a large part, that has been Costco’s advantage. They’ve proven that you don’t have to be minimum wage, no benefits, poor treatment to provide a valued offering to the consumer.
A lot can be learned from their model, yet I doubt it can be successfully duplicated. There are however, great learnings far from the conventional wisdom currently dominating retail.
Clubs should do fine, unless the economy gets extremely bad, and very few people can afford to buy in bulk.
I just ran a focus group about Wegmans up in Rochester, NY, this week, and shoppers reported they love Wegmans but are doing a little more of their shopping of commodity products in club stores and Wal-Mart. Some of them said they were surprised by the quality of products at the clubs, which was better than they had imagined, not having shopped the clubs much before. But they said they were turned off by the lack of service from store personnel at the clubs, and that Wegmans did so many things right that they would remain loyal — for the most part — to that chain.
My gut instinct is that this is a period of opportunity for the clubs to grab share, some of which they will keep if/when times return to “normal.” But they’ll blow it if they cut back further on service or cut corners on PL quality.
The Clubs will do well in this economy when they continue to lure in more families worried about their funds. Most people who start the habit of shopping in these stores get hooked, regardless of their on-going finances.
I agree with Warren Thayer and the others who think clubs have an opportunity with first-time shoppers. But I think a bigger gain is coming–probably now–from experienced clubbers. These folks already shop in multiple locations, especially those who are watching a budget. They are more likely to throw more business toward the clubs because they already understand both the per-unit economics and know how to budget their expenditures so they can buy in bulk. Newbies will need to develop both of these habits, possibly from scratch.
Warehouse clubs will continue to show nice comp sales increases because very few are being built. There are only 3 major USA competitors: BJ’s, Costco, and Sam’s Club. None of the three is in a major location expansion mode. The comps would collapse if a fourth major competitor entered the market or if one of the current 3 started building a lot of new stores.
Warehouse clubs rock, especially COSTCO. These people really seem to spend a lot of time and effort to insure that the products they sell provide maximum value as opposed to just low price. At COSTCO, I generally find that frozen foods (especially entrees) are better than anything I can find in the grocery store. The pharmacy is also great as COSTCO caps markup on every item in the store. Many drugs are typically sold with massive markups, but not at COSTCO.
Sorry, I didn’t mean this to turn into a commercial.
I believe others have hit the crucial point. Clubs sell in bulk, or they sell in limited assortments and with limited availability. The bulk aspect actually requires more current available cash than buying over time does, and as the economy weakens, this available cash simply won’t exist for some consumers.
Bulk buying doesn’t work for everyone…it’s what helps to cap the growth of clubs in the first place.
The merchandising at clubs, while much improved, is still almost a treasure hunt mentality. I recently went into Costco in SoCal in an attempt to buy a jacket or sweatshirt. It’s still winter out here, and the weather was dismal. No men’s sweatshirts, sweaters or coats. None. OK…no big deal. But it illustrates the limitations to shopping at clubs. Which in turn illustrates the upside limitations for clubs.
The economy certainly motivates intentional savings purchasing behavior, and clubs fit that mold. However, the limited assortment, bulk quantities, and scarcity of location will still act to limit the upside potential.
Consumers love the value tag that is associated with warehouse clubs. When the brain goes into recession mode, that value tag blinks in neon! The thinking is: if I buy this 12 gallon barrel of mustard now, I won’t need any until 2019 so I’m not shelling out any more cash for mustard. Hence the value proposition.
As long as the chains can maintain their margins in the staple categories, they should be able to skate through. Higher priced categories such as plasma TVs, computers and other such items will soften if the psychology of a recession continues but our bounce back is supposed to be quick so those categories could quickly recover to double digit gains.
Everyone loves HD TV and super fast laptops so the desire to purchase will return as soon as someone tells the public that the recession is over.