Debate emerges (again) on spinning off Sam’s Club

by The City Wire staff (info@thecitywire.com) 29 views 

Sam’s Club has operated in the shadow of big brother Wal-Mart Stores for 30 years, but some analysts and a former Sam’s Club exec say that perhaps the warehouse club and its big box relative would be better served independently.

Wal-Mart Stores has recorded $465.9 billion in sales through three quarters of this year. And while Sam’s Club comprises 12% or $42.48 billion of the total sales, it only contributes 7% to the company’s bottom line profits.

Meanwhile, Wal-Mart continues to report sluggish traffic patterns and weak comparable sales overall, with forecasts into next year much the same. Other competitors like Costco have fared much better with recent comp sales of 6%.

Brian Sozzi, CEO of Belus Capital Advisors offers this prescription: “Get rid of Sam’s Club. … It doesn’t belong in the company especially when the focus in clearly on investing online and winning internationally.”

Sozzi made these remarks in May during an interview with Jeff Mackle at Yahoo! Finance Breakout. He said under the umbrella of Wal-Mart, Sam’s Club, arguably the 8th largest retailer in the U.S., can easily get lost in the shuffle.

THE RUMOR CYCLE
Carol Spieckerman, CEO of New Market Builders in Bentonville, said rumors of a Sam’s Club spin off have sparked over the years only to die down and then spark up again.

“It is interesting that the buzz has increased recently given that Sam’s and Wal-Mart have never had a more synergistic relationship. I can see how a spin-off would be more likely, and potentially beneficial, these days if only because WalmartLabs is an empowered entity that both banners can draw from,” Spieckerman said. “Pulling from Wal-Mart’s buying power and supplier relationships is one thing, but harnessing the digital-forward strategies coming out of WalmartLabs while developing a separate identity is another. It could be more compelling in the end.”

Sozzi told Breakout that a spinoff is something the next CEO of Wal-Mart should strongly consider, because as the two remain hitched there is brand confusion and there is no way Sam’s can fulfill its potential of becoming Costco’s biggest nightmare.

REQUEST TO MOVE SAM’S HQ
Robb Voss, a retired executive and one of the original team members to found Sam’s Club, told The City Wire he begged Wal-Mart co-founder Sam Walton several times between 1983 and 1990 to move Sam’s headquarters out of Bentonville. He said around 1995 he called a meeting at Sam’s Club and told the corporate buyers that Wal-Mart was spinning off the division, just to get a feel for how the internal staff would react.

“They were shocked until I told them I was only kidding, but this was needed to help us regroup and consciously work on Sam’s Club’s own identity, not just a cousin or brother to Wal-Mart,” Voss said.

The secret to running a successful warehouse club is and always has been stellar merchandising, finding unique products that aren’t also sold at Wal-Mart, according to Voss. He said being located in Bentonville, aka Wal-Mart supplier central, comes with pressure to take certain items.

SUPPLIER ISSUES
The close supplier relationships between Wal-Mart and Sam’s Club are sometimes seen as advantageous, but Voss doesn’t believe that is universally true.

“I always felt Sam’s Club merchants should go after the one-of-kind products and higher-end merchandise that consumers want whether that is potato chips or polo shirts,” Voss said.

He said Costco has always been run by a merchant, and though they have had a few setbacks through the years, they are winning in comp sales, higher tickets and increased traffic.

“You don’t find Frito-Lay or Coca Cola in a Costco, because those products are available everywhere else,” Voss added.

Voss said he dearly love’s Sam’s Club, but he is captivated by the merchandise he can find only at Costco.

Sozzi classified Sam’s Club as akin to a low-end Wal-Mart with an annual membership fee, but it were to act alone it could aspire to be much more.

MARKET, BRAND OVERLAPS
Jason Long, CEO of Shift Marketing Group, agreed that Sam’s Club’s full potential is held back as long as it tethered to Wal-Mart. Reaching the growth and cachet of a Costco is doubtful, he said, especially with the higher income demographic that frequents club stores.

“Spinning Sam’s Club away from Wal-Mart would provide them the opportunity to better-position their brand and to focus their energies on growing their business instead of fighting for internal resources,” Long said.

Other shared resources like logistics, data processing and satellite feeds are beneficial to Sam’s Club as long as its hitched to Wal-Mart.

But at the same time, Wal-Mart continues to go after Sam’s Club market with events like the recent “Stock-up and Save” campaign, where the suppliers parked large trailers in Wal-Mart supercenter parking lots to sell bulk packages of consumer goods.

And then there is the constant threat of cannibalization, which is always an issue for multi-banner and multi-format retailers like Wal-Mart, according to Spieckerman. She said Wal-Mart is managing the dilution, but a bigger issue is price transparency, as shoppers do the math between the two retailers.

“Sam’s Club members expect more than nominal value in exchange for membership fees. I don’t see how a spin-off would solve for this concern since the two brands are closely identified,” Spieckerman said.

GOOD ENOUGH
Long said Sam’s Club is “good” and will likely remain so as long it operates under Wal-Mart. 

“But if the retailers aspire to be best-in-class and delight the consumer they should give serious consideration to separating Sam’s Club from Wal-Mart,” Long said.

He said at the very least, the retailers need to look for ways to better carve out a unique brand identity and story for Sam’s Club.

“They could look to other companies including Aldi,” which has successfully differentiated its Aldi and Trader Joe’s formats, he said.

Voss also doesn’t expect Wal-Mart to cut the ties, but said Sam’s can still follow the essential rules for warehouse clubs — be a merchandiser first, find unique products that consumers want and can’t buy anywhere else, then offer them at a value proposition.

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