Clubs face a new phase of growth - Warehouse Club Closeup

Discount Store News, March 1, 1993 by Arthur Markowitz

The booming membership warehouse industry is entering a new growth stage in response to two factors: * Maturing businesses of the major pacesetting wholesale clubs and the saturation of markets where they have stores, which has caused these companies to seek growth through new merchandising services, expansion into smaller communities and even launching ventures in Europe. * Increased competition from new entries into the industry and from supermarkets acting to protect their share of the food market from what these traditional food retailers view as a major threat to their business.

The maturing of the industry is evident from the smaller gains in revenues and increases in per-club sales for sale Club. All five reported revenue gains that were anywhere from 9.4% to 66.9% less than their increases in 1991. At the same time, same-club volume for these chains ranged from declines at Price Club and Costco to flat at Pace and BJ's t6 a small increase at Sam's Club.

These five companies still dominate the membership warehouse business, accounting for $32.557 billion or 95% of the industry's $34.167 billion revenues in 1992 from the 14 clubs tracked by DSN. That share remained flat as the five accounted for $26.553 billion or 95.5% of the industry's $27.816 billion volume in 1991, when four of the companies didn't operate any stores.

DSN projects the 14 chains will generate about $42 billion in revenues in 1993, with the top five players accounting for about $40 billion in revenues.

Another sign of the maturing of the industry is the growth in stores. While these five chains will open 143 clubs to reach 923 stores by year-end, this is only an 18.3% increase, slightly under the 19.8% gain from 129 clubs opened in |92. Sam's Club - which has about one third of the industry's stores - will again open about 50 clubs and continue to account for the major share of the growth in units.

Up to now, companies have concentrated on opening clubs in many areas that already had membership warehouses, with California, Florida and the Northeast prime examples of markets where four or five major wholesale clubs as well as some of the other operators had stores. Going forward, membership warehouses are eyeing smaller markets where opening one or two units will be enough to ward off entry by competitors.

Sam's Club has long pursued smaller markets and David Glass, president of Wal-Mart Stores, parent of that wholesale club, said the chain hasn't yet found a market too small for a club. The Price Co. chairman Robert Price said the company was considering developing a different club to serve smaller markets. The Wholesale Depot already focuses on smaller markets using a 64,000-sq.-ft. unit, while Smart & Final and Mega Warehouse Foods, both nonmembership food-oriented warehouse chains, deploy smaller stores in multi-unit coverage in urban and suburban communities.

As head-to-head competition among the clubs grows, each chain tries to differentiate itself by offering new services. In the past this effort has included in-store bakeries and fresh products, pharmacies, optical departments, low-cost telephone services, auto buying services and travel services. As soon as one club launched a service, it was imitated by competitors.

The new services now being probed by membership warehouses include a home improvement department test as well as large counts for bakery products at Costco Wholesale, elelctronic kiosk to order selected items for home delivery, next day delivery service an loose pick perishables at the Price Club and low-cost personal and business cheeks at Sam's Club.

Despite the various moves membership warehouses are making to boost revenues, a number of companies recognize that competition from other clubs, new entries and supermarkets seeking to guard their business means that sustained future growth will have to include foreign expansion.

The Price Club and Costco Wholesale have had clubs in Canada for a number of years. The Price Co. and Wal-Mart Stores in 1991 formed joint ventures with Mexican retailers to open membership warehouses in that country.

Club Aurrera, modeled on Sam's Club, debuted at the end of 1991, and is reportedly generating a higher sales per square foot ratio than any U. S. Sam's Club. Price Club de Mexico opened last year.

This year, Costco Wholesale plans to oven its own clubs in the United-Kingdom, while the Price Co., in a joint venture with a Spanish retailer, will test a club in Spain and then in Portugal. Long term, the Price Co. sees Latin America and the Far East as expansion markets, while Sam's Club is reported to be eyeing Europe and Canada.

Two companies entered the membership warehouse business in 1992, reversing a consolidation trend that had been rampant through 1991. Meijer's launched SourceClub in Michigan to try to retain its food and general merchandise market share in the Wolverine State where Sam's Club and Pace already have stores. Big V Supermarkets, meanwhile, tested Price Rite as a mini-wholesale club to counter membership warehouses to be opened by Sam's Club and BJ's Wholesale in the Mid-Hudson Valley market in New York State.