Aiming at smaller market yields bigger results

DSN Retailing Today, Feb 28, 2005 by Debbie Howell

The infectious enthusiasm of associates cheering customers entering a new Sam's Club in Norman, Okla., in January seemed especially fitting at this juncture for the 22-year-old Wal-Mart retail division, which rededicated itself two years ago to serving small business members and is finally reporting some stellar results to prove its strategy is working.

There's no doubt the Sam's group has plenty to cheer about. Through the first three quarters, comparable-store sales for the division were up 7.2%, beating the Wal-Mart stores division comp of 3.4%, while Sams' operating profit rose 18.1% during the period. Over the past two-and-a-half years, Sam's has made significant changes to ensure it has the products business members need, along with convenient services such as early-opening hours for businesspeople, checkouts for flat carts and a preordering and quick pickup system by fax or Web. Such changes have yielded consistent growth in the number of new business members and a "material" increase in the average ticket, Doug McMillon, evp of merchandising and replenishment for Sam's, told DSN Retailing Today.

"We want people to know we are trying to serve small business better than anyone," McMillon explained while walking DSN through the new store in Norman, less than 20 miles from the Oklahoma City suburb of Midwest City where the first Sam's opened.

This new Sam's Club of 135,000 square feet doesn't vary from the design of the latest clubs, though tweaks were apparent. For example, the layout was adjusted to move office supplies, furniture and books to the center front aisles, pushing apparel behind these sections. McMillon said this reinforces the Sam's Club business-focused approach, while throughout other aisles signage calls out products in high demand by businesses such as silverware and plastic ketchup bottles targeting food service operators.

McMillon said club managers try to spend more time on the floor interacting with business members to make sure they are in tune with these shoppers' needs. Sam's has also been diligent about conducting focus groups among its nine targeted business segments to make sure it has the right high-demand products, he added.

"Small business owners are busy and hardworking," McMillon said. "They also have above-average incomes, so they're also aspirational."

But while these members shop more often and spend more than the consumer member, one challenge is getting this time-crunched group to browse and buy more on impulse, McMillon added. That's why special attention is given to having hot items on end-aisle displays or upon entry in the cart rail alley, which changes every two weeks.

Sam's has also worked to move more upscale and offer consistency in its merchandise offering to appeal to the more affluent business member. In fine jewelry, for example, lower-priced items have been cut back while emphasizing diamonds costing up to $25,000.

"We've eliminated the lower-price-point product to move up what we're offering. If we put a $100 jewelry item next to a $2,598 Sony big-screen TV--that's a disconnect," McMillon explained.

In electronics, the assortment has shifted to emphasize the major brands rather than second-and third-tier suppliers, McMillon added.

Although rival Costco is often considered by analysts as the top club operator in food, McMillon said Sam's has made significant progress at growing sales in this key category. He characterized Sam's performance in its biggest sales category of food as "phenomenal," aided through initiatives such as the hiring of a wine specialist and upgraded fresh offerings in produce, bakery and meat.

"Costco is terrific and I don't take that as anything other than motivation to get better. We're competitive now," McMillon said. "It's not about them. It's about getting better."

Keeping up this progress will be Sam's mission as it continues to grow. The Norman store opening brought Sam's domestic store count to 553. Thirty to 40 domestic clubs are slated to open this year, about 20 of which will be relocations or expansions of existing clubs.

Sam's may be the largest U.S. club operator, followed by Costco with 333 domestic units, but the division has never come close to matching Costco in average store sales. Costco's U.S. clubs generated $39.4 billion for the fiscal year ended in August compared to Sam's domestic revenue of $34.5 billion last year and $36.9 billion through January.

But with a strategy that differs somewhat from Costco, which has gone more aggressively after the affluent consumer member, Sam's appears to be carving out a differentiated niche that works best with its target customer group, the small business member.