BENTONVILLE, Ark. -- The threat to the supermarket industry posed by Sam's Club may be shifting as Wal-Mart Stores here, the operator of Sam's, moves to put more emphasis on its Supercenter format.
Wal-Mart's goal is to make its two formats complementary, not competitive, with the Supercenters marketing primarily to the individual consumer and Sam's primarily to business clients.
Wal-Mart declined to comment for this article, although company executives spoke to these issues during Wal-Mart's recent annual meeting.
One sign of Wal-Mart's intention to differentiate its two powerhouse formats is the increasing emphasis Sam's is placing on the needs of its business members. Sam's operates a chain of 430 membership warehouse clubs.
This tendency for Sam's to favor business customers has become much more pronounced as the Wal-Mart Supercenter roll-out has gathered steam. About 149 Wal-Mart Supercenters are expected to be operating by year-end.
In recent months, Sam's assortments have been pared across the board, almost always at the expense of consumer-friendly items. Pack sizes are larger than ever. And all of Sam's most significant marketing initiatives are aimed squarely at businesses -- including Club Direct, a procurement service targeting large corporations and institutions. These decisions have reportedly cost Sam's in terms of lost sales to individual consumers. Many trade observers say this is a penalty that Wal-Mart is willing to pay. The company is betting that increased business member volume at Sam's and the growth of Wal-Mart Supercenters will more than make up the difference. Dean Sanders, president and chief executive officer of Sam's Club, said he envisions Sam's Clubs and Wal-Mart Supercenters functioning in the same markets and even on the same property.
"There is definitely room for both," Sanders said at Wal-Mart's annual shareholders meeting here in June. "We'll have to merchandise a little bit differently. We may not carry some of the commodity items in a Sam's that are the subject of price wars in traditional grocery stores. We can really focus on small businesses. Sam's is a good comple-ment. It draws traffic in from a lot of different areas. Customers will go to both a Wal-Mart Supercenter and a Sam's." Avoiding a head-on collision with a 190,000-square-foot building loaded with food and nonfood products isn't easy for a 120,000-square-foot membership club that represents many of the same categories. Sam's strategy is to wean itself from consumer sales and become the wholesaler of choice for small businesses -- maybe even going so far as to exclude consumers for most of the week. "Some high-level executives at Sam's think the clubs should only be open to the public three days a week: Friday, Saturday and Sunday," said a Wal-Mart insider. "They really want to become more like a conventional wholesale cash-and-carry operation. They have a firm idea of what they want to do, but less of an idea of how to do it." The pricing power of a Wal-Mart Supercenter -- overhead is typically 15% of sales vs. 20% for an average supermarket -- and its reliance on food as a consumer draw poses a problem for any competing format, wholesale clubs included. A new 190,000-square-foot Supercenter dedicates between 50,000 and 55,000 square feet to food, or as much space as a typical warehouse club. Like Sam's, the Supercenter carries the Sam's Choice premium private-label line and offers a full range of fresh foods, including deli, bakery and fresh meat.
On top of the 149 Supercenters planned by year-end, Wal-Mart expects to develop another 70 in each of the next two years. By 1997, Wal-Mart Supercenters could reach $30 billion in annual sales, about 40% of which would be in food, according to Pat McCormack, a securities analyst at Dean Witter, New York. "Sam's and the Supercenters are clearly competing formats because they overlap in food," McCormack said. "Supercenters are in rural markets only now but, in the future, many will be located in metropolitan areas near Sam's Clubs."
"There's no question that there is some cannibalization between a Sam's and a Supercenter," added Don Spindel, an analyst with A.G. Edwards, St. Louis. "But the feeling at Wal-Mart is the two are such huge draws that they benefit more when the units are next to each other rather than a few miles apart. To maximize performance, Wal-Mart will differentiate assortments and eliminate overlap."
Wal-Mart already is studying the impact of a Supercenter on a Sam's Club at several locations where the two formats stand side-by-side. In its own analysis, Wal-Mart is finding that the fresh food business at Sam's gets hit the hardest when a club is located next to a Supercenter, a trade observer said.
"When Wal-Mart puts a Supercenter next to a Sam's, they might even take milk out of the club because otherwise they would have to sell it at a loss," the observer said. "Elsewhere in fresh food, price differentials between the two formats are narrow. In any case, fresh food is a category where selection beats price differential every time."
One problem for Wal-Mart, though, is that consumers still flock to Sam's. The club operator does not disclose membership figures, but individual consumers are still said to be a large part of the base. At Wal-Mart's annual meeting, David Glass, chairman and chief executive officer, said Sam's Club's Advantage membership for individual consumers is up 4% from year-ago levels, with business membership up 6%. The renewal rate of Advantage memberships is 70% this year, against 71% last year. Glass didn't give the business membership renewal rate. "Sam's is not really interested in the retail customer, but they've been very inconsistent about that," commented one longtime supplier. "They rationalize carrying a lot of consumer-oriented product by saying it's a convenience for business members. But the reality is at-home use or consumption still accounts for a huge share of Sam's sales volume." Still, in category after category, consumer-friendly stockkeeping units have been replaced with larger pack sizes or, more often, simply eliminated. The typical Sam's now carries 3,600 SKUs, down from more than 5,000 last year, according to one trade source.
This transformation, however necessary, has often carried with it a sales volume penalty for Sam's. For instance, in appliances, which were a year ago dominated by consumer-oriented products, Sam's eliminated numerous small kitchen electrics and replaced them with higher priced, albeit slower moving, institutional food service products.
"Sam's executives asked Glass, 'How are we going to replace $500 million in sales volume?' " recounted the Wal-Mart insider. "He said, 'I don't know, but figure it out.' They've gotten some of the volume back, but not all of it."
Sam's desire to avoid SKU overlap with Supercenters has led to some friction with suppliers, some of whom criticize the trend toward larger pack sizes. "What we have in terms of consumer information and what Sam's carries doesn't mesh," said a Sam's general merchandise supplier. "Our product is a consumer product, and the pack size we provide Sam's is too large. We've tried to convince them to carry a multipack of smaller pack sizes, but Sam's doesn't want to go that route because it would involve a standard size which they carry in the Supercenter. We think a multipack would satisfy consumers and have resale value, but Sam's wants a larger pack size that is unique to Sam's."
"When so much of your volume is based for home use, you should build on that," added a supplier of nonfood products to Sam's. "Sam's is cutting back on consumer-oriented SKUs too quickly. They understood they would take a volume hit, but it's probably turning out to be bigger than they thought." Indeed, same-store sales at Sam's have declined for 11 consecutive months, and the trend doesn't seem to be getting any better. In May, same-store sales fell 6.2%, the sharpest decrease this calendar year. At the Wal-Mart shareholders' meeting, Glass attributed last year's 3% drop in same-store sales at Sam's to the consolidation in the wholesale club industry and competition, citing the East Coast market in particular. In addition, he said Sam's has suffered from "cannibalization" when a second Sam's has opened in a market where one has already existed. Glass also cited increased inventory in private label as another reason for Sam's Club's lower-than-normal same-store sales performance last year. "Private label is what the business members tells us they want to buy. They don't need to buy a brand. They want high quality, but they want the lowest price they can get," Glass said. "You sell the same number of units, but what happens to your sales? They go south. You're giving a better value, but the dollars aren't there.
"We simply need to get through the transition period," Glass told shareholders. "I would predict a bright future for the wholesale club industry." Part of this optimism is grounded in new marketing initiatives, such as Club Direct, which, understandably, have yet to bear fruit. According to observers, Club Direct, Sam's institutional procurement program, has not been a success with large corporations, but governments and other institutions have responded positively. In one noteworthy success, six post offices in one market agreed to buy janitorial products via Club Direct. Word of the savings associated with Club Direct quickly reached other post offices in the area, and soon another 50 post offices signed up for the same offer. On the other hand, many suppliers have been given literature about Club Direct. How many will show interest remains to be seen.
"It's hard to imagine my company sending a truck out to Sam's for supplies," said an executive of a New York-based Fortune 500 company. "If we need copy paper or any basic office supplies, we can pick up the phone and have it delivered for not much more than Sam's would charge without the service."
"Club Direct has not done well with big corporations," said one observer. "Governments, school districts and civic organizations probably represent the best opportunity for Club Direct, but Sam's would like to see more business coming from corporations. The truth is that it's hard to administer business with not-for-profit organizations. There's a lot of red tape, so things happen slowly."
Each Sam's Club has a business development manager who is responsible for generating Club Direct sales. In addition, many high-volume club have a food service sales agent who calls on local food service operators. The food service effort is supported by an order book of food service items not available at Sam's. In meat alone, there are between 250 and 350 extra SKUs, said one observer familiar with the program. In addition, Fresh America Inc., Sam's primary produce supplier, has written in its prospectus that it is developing a specialty foods catalog for Sam's.
Not surprisingly, Sam's food service prices are said to be very aggressive. Markups average "around 5%," or less than half of the typical Sam's markup. "Sam's is going after the independent restaurateur, and they've had some successes" said a fresh foods manufacturer. "One club sells 10,000 pounds of baloney per week to a barbecue house. Asian restaurants are another area of focus. The smaller restaurants like the fact that Sam's doesn't impose a minimum order size." Wall Street observers are generally encouraged by Sam's strategic focus on business members. "Longer term, Wal-Mart is pursuing the proper course for Sam's," said McCormack. "Clubs have to carve out a niche to differentiate themselves from Supercenters, supermarkets, discount stores and category killers. Selling four different kinds of toasters is not the business the warehouse clubs are meant to be in."
McCormack added that Sam's possesses a number of strengths. Heading the list is an extraordinary ability to keep costs low. Payroll costs account for two-thirds of total selling, general and administrative costs, and Sam's, which has a nonunionized work force, operates in a number of low-cost labor markets, notes McCormack.
"They can run at $50 million annual sales per club and do fine, whereas Price/Costco needs to generate $70 million per club," he said.
On a slightly more skeptical note, Michael Exstein, an analyst at Kidder, Peabody & Co., New York, said Sam's current approach is reminiscent of Price Club in the mid- and late-70s.
"Price Club back then was a business-only operation, but the economics did not work -- that's why the general public was eventually let in," said Exstein.