Membership Wholesale Clubs: a Low-Price Alternative
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The Food Industry: Changing With the Times Membership Wholesale Clubs: A Low-Price Alternative Walter Epps and Judy Putnam (202) 786-1866 ffered the choice of paying $3.29 or posted wholesale prices, about 5 percent in O $2.79 for a 12-pack case of 12-ounce 1985. Pepsi's, obviously most buyers would Most wholesale clubs stock 4,000 to choose the lower price. This price appeal 6,000 items. This compares with up to goes a long way toward explaining the 25,000 items offered by conventional super meteoric ·rise of wholesale clubs-fully com markets and 30,000 to 50,000 items stocked puterized "no-frills" operations offering a by traditional discount stores. However, a limited selection of first quality, name-brand club's range of items is broad-from micro merchandise to smalJ businesses and select wave ovens to plastic trash bags. Within ed groups of consumers. any product category, clubs stock only a Today's clubs trace their lineage to the couple of fast-moving, welJ-known brands. cash-and-carry operations started more than Grocery items account for 40 to 60 percent 50 years ago by wholesale food distributors of clubs' sales, with general merchandise to serve their smalJ business customers who making up the remainder. couldn't buy in large quantities. As the Included in their food lines are canned name implies, customers pay cash at these peas, trout fillets, and frozen french fries. outlets and assume responsibility for receipt In short, there is the range of products, and delivery of their order, thus avoiding though not the variety of brands and sizes distributor service charges. found in supermarkets. Also offered are The wholesale club was born in 1976, brooms, soap, paper towels, light bulbs, when the San Diego-based Price Company and similar products typically found in added a new twist to the cash-and-carry in grocery stores. dustry by opening a member-only ware Clubs' food lines are geared primarily to house where businesses and individuals supply restaurants and other foodservice were allowed to shop. Since then, 17 other With no frills and limited variety, low prices operations. Therefore, their lines include in companies have started operations patterned largely explain the meteoric rise of wholesale stitutional sizes and packs, such as No. 10 after the Price Company outlets, creating a clubs. cans of string beans (108 ounces) and pre booming mini-industry. pared trays for quick heating and service. In 1985, membership wholesale clubs did larger businesses that ordered merchandise Clubs' general merchandise lines include an estimated $4.4 billion worth of business, in bulk. hardware, appliances, auto supplies, con roughly double that of 1984. In l 986, sales The clubs have two classes of members: sumer electronics, clothing, and furniture. will likely exceed $8 billion. By December wholesale and group. Wholesale members 1986 (table 1), there will be close to 230 include retail grocers; restaurants; profes Warehouse Clubs in Profile wholesale clubs, compared with 80 at the sional service providers, such as accoun Whether a business or consumer, mem end of 1984. The industry has attracted tants and lawyers; and other business bers of wholesale clubs will usually find such heavyweights as Zayre, Wal-Mart, establishments. Normally, these firms use everyday prices below those charged by any Kroger, and Pay ''n Save, who have their the purchases in their businesses and view other type of retailer and, oftentimes, by own versions. Clubs can now be found in clubs essentially as their wholesale suppli many wholesalers and distributors. The most of the I 00 largest U.S. metropolitan ers. Members pay an annual fee to buy products are almost always purchased markets. products at posted wholesale prices. In directly from the manufacturer, often at dis 1985, the fee averaged $25.00. counted prices, and sold to the membership A New Type of Store Group members are individuals whose from the warehouse floor. Clubs do not Clearly different from the conventional employment by banks, credit unions, public guarantee daily availability of any item. supermarket or discount store, the wholesale utilities, government agencies, or any other Many of the "frills" that would other club is more accurately described as a re organization designated by the club qualifies wise raise overhead costs are absent in tail/wholesale hybrid. These membership them for membership. These customers wholesale clubs. Gone are the use of adver only distributors straddle the line between usually buy food and other products for tising; catalogs; fancy showrooms or fix wholesaling and retailing by offering dis home use. The inclusion of these group tures; credit cards sales; sales help; bagging counted prices previously available only to members, in particular, has enlarged the groceries; delivery service for large appli customer base of wholesale clubs over that ances, such as refrigerators and washing of traditional food distributor cash and car machines; and after-sale service. The authors are agricultural economists wirh the Food ries. Some clubs charge group members an Although clubs lack many amenities, one Markering and Consumption Economics Branch. annual fee. Those that don't usually require central feature of all clubs is the widespread that members pay a stated percentage above use of computers in all phases of their oper- 16 National Food Review The Food Industry: Changing With the Times ations, from preparing data bases of mem- Sophisticated computer technology, the efficiency. Price Company, the industry bership sales and demographics to tracking "bare-bones" format, and large sales leader, generates annual sales of around inventory and checkout scanning. volume form the core of clubs' operating $1,000 per square foot, but the typical club Table 1. Membership Wholesale Clubs Growing Operating as of July 1986 Expected by Company By region1 Dec. Dec. NE s NC w Total 19862 1987 Sam's Wholesale Club (Wal-mart Stores, Inc.), Bentonville, AR 31 4 2 37 45 The Price Company, San Diego, CA 3 22 25 30 40 Costco Wholesale Club, Seattle, WA 5 2 14 214 35 50 PACE Membership Warehouse, Denver, CO 13 2 4 20 25 35-39 Super Saver Wholesale Warehouse Club, (A. Howard Wholesale), Monroe, LA 13 14 21 36 BJ's Wholesale Club (Zayre Corp.), Natick, MA 8 3 12 15 25-27 The Warehouse Club (Pay 'N Save Corp.), Skokie, IL 9 9 14 19-21 The Wholesale Club, Indianapolis, IN 6 6 11 18-20 Value Club (Southwest Merchandising), San Antonio, TX 6 6 6 6 Price Saver's Wholesale Club (The Kroger (Co.), Salt Lake City, UT 5 5 9 3 Makro Self-Service Wholesale (SHV Holding), Cincinnati, OH 2 4 4 Buyer's Club, Aurora, CO 2 2 3 12 Club Wholesale (Elixir Industries), Boise, ID 2 2 2 5 D-Mart Wholesale Club, Salt Lake City, UT 2 2 2 Member$ Warehouse, Winston-Salem, NC 2 2 3 7 Wholesale Plus, Plantation, FL American Wholesale Club, Richardson, TX Save Club, Concord, CA Total 10 78 28 54 170 228 3 •NE = Northeast; S = South; NC = North Central; W = West. 2Company estimate as of July 1986. 3No estimate available. •Costco operates two clubs in Canada, one in Alberta and one in British Columbia. NFR-35 17 The Food Industry: Changing With the Times Figure 1. Typical Membership Warehouse Layout 280 feet Receiving area Soft drinks Soft drinks Pet food and supplies "' Plants, potting soil, pots t5 Tires :::, Cleaning supplies, a. foils and wraps, plastic cups Household/office furniture Automotive supplies Deli case, milk, eggs, cheese, butter, meat Office supplies Hand/power tools, I Frozen foods/baked goods I painting supplies, hardware I Books C: � Seasonal items Seasonal items, 1ii camping/sporting goods, 1i5 Dry groceries: I exercise equipment, 2 .!:: I chips/snacks 0 � Linens toys (0 i= coffee, tea, spices C') baking products, jellies I I,I' cereals, cooking oils sauces, soups, dressings Gifts, housewares, canned meats Clothing luggage, dinnerware, pasta and rice glassware tomato products condiments I I stuffings, potato products Baby products/furniture canned fruits, juices Cookingware and C: chili, canned vegetables small household/ -� candy, gum, snacks Health and beauty aids personal appliances a. 0 Electronics: '<if Tobacco/cigarettes vacuums, telephones, � stereos, radios, T.V.'s, microwave ovens, calculators, typewriters 25 checkout registers Watches Photo Carts processing Entrance.,.......------�--; Liquor Member Warehouse ship offices Maifte!)trahce desk 18 National Food Review The Food Industry: Changing With the Times averages between $400 and $600. supplies needed in professional offices. .. And in the Decade Ahead Clubs' labor costs average 5 percent of Considering the economy and accessibility The success of wholesale clubs lies with sales, compared with around IO percent in of wholesale clubs, it is not surprising that their targeting a market that is not served or conventional supermarkets. However, some small retailers, restaurateurs, and other bus only partly served by existing businesses. clubs achieve a labor cost average of only inesses are the main customers, accounting Some industry observers estimate wholesale 2.5 to 3 percent. for over 50 percent of all clubs' sales. club sales at $24 to $29 billion by 1991, at Labor-saving steps permeate every phase For some consumers, the discount prices least three times the 1986 level. of operations. For example, clubs specify offset the limited variety, drab decor, and However, certain limitations could slow shipments on wooden pallets where possi out-of-the way locations. Clubs generally growth. Market saturation is one potential ble, so that goods may be placed directly on offer 20 to 40 percent lower prices than drag on wholesale club expansion. The the sales floor with minimum handling. traditional establishments. For example, in population needed to support a club is esti Bulky items are displayed close to receiving the Washington, D.C., area in mid-1986, mated at 400,000.