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: '

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. Thus, even areas with docks. Restocking, a primary task of store an 8.5-ounce package of Stouffer's Lean high population concentrations can support labor, is accomplished using forklifts that Cuisine glazed chicken with vegetables cost only a limited number of clubs. pass up and down wide aisles. $3.29 at a large supermarket chain, but Yet another possible brake on wholesale Operating efficiencies are reflected in a $2.39 at Pace Warehouse Club. Of course, clubs' expansion is the competition from minimal gross margin, resulting in prices customers' savings depend on the products traditional wholesale establishments, super­ that are hard to beat. The gross margin, or they buy. market chains, specialty stores, and other markup, is the difference between what the retail outlets that handle the same kinds of retailer pays for a product and its retail The Industry Now ... products. These firms can be expected to price. For a typical discount store, the mar­ Still in its infancy, the wholesale club in­ offer competitive prices where wholesale kup is equal to about 30 percent of what the dustry is highly concentrated, with just four clubs encroach on their markets. Thus, manufacturer charges for the product. Mar­ firms accounting for 75 percent of all sales. these other outlets' lower prices, coupled kups for conventional supermarkets are Price Company captured 41 percent of all with attractive decor, delivery, bagging, and close to 20 percent, while those for depart­ club sales in 1985, Sam's accounted for 16 other services, may limit the growth of ment stores are 40. For wholesale clubs, on percent, Costco 11 percent, and Pace 7 wholesale clubs. the other hand, the overall gross margins percent. Profitability in a low-margin operation range from 8 and 11 percent, depending on Although sales concentration is high, the greatly depends on economies achieved the club's efficiency of operation and industry continues to be very competitive. through rapid inventory turnover and huge volume of sales. Margins on groceries Fueling the competition is rapid expansion sales volumes. Faced with increased compe­ range from 6 to 9 percent. by existing firms and entry by new firms. tition, both among themselves and from For example, all of the leaders scheduled their more traditional counterparts, whole­ Customer Appeal-Low Prices new openings for the latter half of 1986, sale clubs may be tempted to loosen mem­ Wholesale clubs operating profitably on ranging from five locations for the Pace bership requirements, expand variety, low margins have created a niche that ap­ Membership Warehouse firm to 14 for the upgrade decor, and add services to increase peals to a legion of small businesses who Costco Wholesale Club. unit volume. The risk is that such devia­ use the clubs to stock their own outlets and The geographical dispersion of the clubs tions from the wholesale club format could who typically view the club as a wholesale also may figure prominently in shaping increase the cost of operations, thereby supplier. For example, a small restaurant competition. Early in their development, negating their greatest strength-low prices. operator can buy one case of ketchup or clubs were concentrated on the West Coast. For all of their similarities, clubs strive to even one bottle at a wholesale club. A full­ In 1983, that distribution changed substan­ differentiate themselves from each other. service, general-line wholesale distributor, tially. The South now has 80 clubs, nearly For example, Makro offers greater variety in contrast, requires larger minimum orders half of the units operating in mid-1986. One within product lines than its competitors. because of the high cost of servicing small result of this geographic expansion is direct Sam's mails seasonal flyers to its members accounts. However, there are some higher competition among clubs. For example, the and is opening stores in smaller cities. costs for the small business buyer-for ex­ Makro Company was the sole firm operat­ Differentiation will assume greater impor­ ample, the expense of picking up the goods ing in the Washington, D.C., area until tance as firms expand and find themselves from the club. Usually the large wholesale Pace's entry in 1985. in direct competition with each other and distributors deliver. Equally important in determining the state with traditional retailers. D Clubs are also economical suppliers of of competition in th� industry is the entry stationery, filing cabinets, and other office of new firms. In the first half of 1986 alone, four new firms opened six clubs. Continuation of this trend will mean lower concentration in the future.

NFR-35 19