Supermarket Strategic Responses to Alternative Retail Formats: The Case of Wholesale Club Stores In New York and New Jersey by Gerard F. Hawkes Extension Associate Food Industry Management Program Department of Agricultural Economics Cornell University Ithaca, New York Edward W. McLaughlin Associate Professor Food Industry Management Program Department of Agricultural Economics Cornell University Ithaca, New York Introduction store formats: the wholesale club store.l Whole- sale clubs have been called “a revolution that is Over the past decade several significant shaking traditional notions about the distribution developments in U.S. food store formats--limited of goods and blurring the distinction between assortment stores, warehouse stores, super ware- wholesaling and retailing” (Business Horizons, house stores, hypermarkets, etc.--have threatened MarchL4pril 1987). Although still representing a traditional supermarkets. In general, supermar- very small share (about 4%) of total food sales, kets responded to these competitors by adapting wholesale clubs began experiencing explosive their operations to thwart the advantage each new growth in the late 1980s and appeared by 1992 to format presented. These alternate formats initially be formidable and likely permanent competitors followed strategies of appealing to limited seg- for supermarkets.2 ments of consumers but ultimately were victims of “the wheel of retailing. ” That is, by succumbing The states of New York and New Jersey to the temptation to add more features, they have recently become hotbeds for wholesale club diluted their original strategy, compromising, in expansion. Although the first club stores opened the process much of their competitive advantage. in the two state area over seven years ago, club store penetration of New York and New Jersey The end of the 1980s, however, marked the was very limited until aggressive, rapid expansion expansion of still another in the parade of retail by the larger national firms in the past two years, Journal of Food Distribution Research February 931page167 The strategic responses of New York and New New Jersey, and Pennsylvania registered the Jersey supermarket operators to wholesale club second fastest growth rates in wholtxwle club expansion have major implications for the future stores (31%) and sales (35%) between 1990 and economics and dynamics of the food distribution 1991, Even higher growth rates for both club system in the region. Although supermarket stores and sales would result if figures for operators in other parts of the country have had Pennsylvania were disaggregated from these calcu- 15 years experience competing with wholesale lations. club stores, there is no guarantee that strategies successful elsewhere will be as effective in the While still in its growth stage, the whole- New York/New Jersey region, given the many sale club industry has already experienced consid- unique aspects of the two state area. erable consolidation. The industry is highly con- centrated with four major firms controlling over Methodology 93 percent of industry sales (Table 3). As recently as 1985, there were at least 16 major The research for this study consisted of the players in the industry; by 1992, however, there following distinct but interrelated phases: were just seven (Progretwive Grocer, May 92). Despite this very high level of “concentration,” 1) A review of existing research, trade literature, entry of new firms continues and appears to be consulting and newsletter publications. constrained primarily by the availability of suit- able store sites. 2) A survey questionnaire was mailed to every retail company and every wholesale company The share of market for New York/New serving independent supermarkets in New Jersey is dramatically different than the national York and New Jersey. The purpose of the distribution, reflecting the recent expansion of the questionnaire was to gauge current and antici- four largest wholesale club operators into the New pated strategies adopted by retailers in York/New Jersey area. BJ’s Wholesale Club, response to the emergence and expansion of based in Massachusetts, has operated club stores wholesale clubs in New York and New in the two state area for over seven years and Jersey. currently has the most stores and largest market share. It is likely though, given the expansion 3) Personal interviews with New York and New objectives of the other four major club operators, Jersey supermarket industry executives were that the current market share picture for the New undertaken to assist in the interpretation of the York/New Jersey area will resemble the national written survey and trade information. This market share picture before the end of the decade. interaction served to reinforce and validate the trends, challenges and suggestions that Future Prospects emerged from other components of the study. Considering their population base, the The Wholesale Club Industry: Middle Atlantic states appear to represent the United States vs. New York/New Jersey greatest potential market area for further whole- sale club expansion. When population per whole- Nationwide, the largest number of whole- sale club is examined, for example, the Middle sale club stores have been developed on the West Atlantic states have by far the fewest wholesale Coast where the format was first developed in the clubs per capita of any region in the United States 1970s (Table 1). The New England states expe- (Table 4). In 1991, Middle Atlantic states aver- rienced the highest growth rates in wholesale club aged over 1 million residents per wholesale club stores and sales in 1991 (Table 2). Still, the 1991 while Pacific states averaged just over 389,000 growth rates in the Middle Atlantic states for both people per club location. In other words, the sales and stores were more than double the aver- Pacific states had about three times as many age rates for the other seven regions of the coun- wholesale clubs per capita in 1991 as did the try. The Middle Atlantic states of New York, Middle Atlantic states. February 931page168 Journal of Food Distribution Research TABLE 1 Wholesale Club Growth by Region, 1988-1991 NO. OF STORES SALES ($ BIL.) REGION 1991 1990 1989 1988 1991 1990 1989 1988 New England 26 16 10 8 1.3 0.7 0.5 0.3 Middle Atlantic 38 29 20 17 2.0 1,5 0.9 0.7 East North Central 78 67 59 41 3.3 2,7 2.1 1.2 West North Central 27 23 24 16 1.2 1.0 0.9 0.5 South Atlantic 85 74 64 56 4.5 4.1 3.1 2.6 East South Central 21 19 18 19 1.0 0.8 0.7 0.7 West South Central 62 52 51 51 2,8 2,3 2.0 1.9 Mountain 33 30 25 26 2,0 1.9 1.5 1.4 Pacific 105 97 86 79 7.1 6.8 5.8 4.7 TABLE 2 Wholesale Club Growth Rates by Region, 1991 NO. OF REGION STORES SALES SOUARE FEET % % % Total United States +17 +16 +21 New England +63 +84 +64 Middle Atlantic +31 +35 +38 Average of other Regions +14 +15 +19 ?lource: The Discount Merchandiser, June 1992 TABLE 3 Wholesale Club Total Sales and Market Share, United States vs. New York/New Jersey. 1991 Unitefl States* N.Y.IN.J.** TOTAL SALES (in billions) $27.8 $1.6 Firms: Percent Sam’s (Wal-Mart) 34.1 17.1 Price Club 23,7 21.5 Costco 20.1 12.5 Pace (K-Mart) 15.4 10.5 B.J.’s 5.3 37.1 Other 1.4 1.3 TOTAL 100.0% 100.0% Source: *James M. Degsn & Co., Inc., 1992 and **Cornell Study, 1992 (estimates). Journal of Food Distribution Research February 93/page 169 TABLE 4 Population Per Wholesale Club (000s), by Region, 1991 REGION POPULATION PER CLUB (000s) West 392 south 586 North Central 601 Middle Atlantic 1,011 New England 514 TOTAL United States 534 rogresswe Grocer, Aprd 19 *Projected TABLE 5 Ten Year Growth Projections for Wholesale Clubs 1991 2001* % INCREASE UNITED STATES 450 950 + 111% No. of Stores Grocery related sales $11 bil. $39 bil. + 255% NEW YORK7NEW JERSEY No. of stores 30 152 + 407% Grocery related sales $574 roil. $5.9 bil. + 935% *Projected markets in the United States will reach the level of In its recent report on alternative retail food the current most saturated markets: about 1 club formats, the Food Marketing Institute (FMI) pro- store for every 150,000 to 175,000 people. jected approximately 950 wholesale clubs by the Applying this standard to the combined population end of the decade (Table 5). While forecasting of New York and New Jersey results in an esti- more than double the current number of clubs, the mated maximum of 152 club stores possible for FMI report also predicts that grocery related sales the two state area. Compared with Cornell’s will more than triple. These predictions reflect estimate of 30 wholesale clubs in operating during both anticipated increases in wholesale club sales 1991 in New York and New Jersey, 152 club and a greater emphasis on grocery related prod- stores by the year 2001 represents an increase of ucts in the wholesale club product mix, 407 percent. FMI’s projection of 950 wholesale clubs by Our estimate of 1991 New York/New the year 2001 is based on the assumption that Jersey grocery-related wholesale club sales is wholesale club penetration across all major metro derived by multiplying the average sales per store February 931page170 Journal of Food Distribution Research times the number of stores for each company cery sales is considerably higher than that given operating in the two states. Applying the ratio by the New York/New Jersey retailers in this (from the FMI study) of wholesale club sales study (9.5 % vs.