Sam’s Club Leads Wholesale Boom

After a lull in the wholesale club business for more than a decade, the industry is again showing double-digit sales increases, and Sam’s Club is leading the way.

Sam’s Club, a division of Wal-Mart Stores Inc., is coming off its best year since opening its first store in 1983.

For the fiscal year ended Jan. 31, Sam’s Club had an 11 percent sales increase and a 15 percent increase in operating profit. And the division showed similar percentage increases for the first quarter of 1999.

Celia Swanson, vice president for membership, marketing and administration for Sam’s Club, says the increases can be attributed primarily to growth in consumer confidence and memberships.

Although the price of memberships increased by $5 last year (to $35 per year for business members and $30 for individuals), the number of memberships sold increased by 11 percent during the same period.

Now, more than 38 million Americans have Sam’s Club membership cards. That’s almost one in three U.S. households, Swanson says.

“We’re able to show them that the $35 membership will save them more than that in a year,” Swanson says. “Based upon the successful year we’ve had, we’ve really turned Sam’s Club into a viable growth vehicle.”

Wal-Mart plans to open 15 new Sam’s Clubs within the next year and remodel more than 100.

Although those numbers pale in comparison to the growth of Wal-Mart Supercenters (with 150 planned for the next year), Sam’s Club has firmly established itself as the leader in wholesale clubs nationwide.

Sam’s has 253 clubs, all of which are in the United States. No. 2 in the wholesale club business is Costco Cos. with about 275 clubs. In 1998, Sam’s Club had $22.9 billion in sales, and Costco had $18.2 billion. Third in the ranking is B.J.’s Wholesale Club (mainly on the East Coast and Florida) with $3.5 billion in sales.

Total operating income for Sam’s Club was $707 million in 1998, up 15 percent from $616 million in 1997.

Total operating income includes income before taxes, interest expense and allocated corporate overhead. Net income can’t be reported for Sam’s Club because it is a division of Wal-Mart and uses Wal-Mart’s infrastructure.

Brian Nagel, a retail analyst with A.G. Edwards & Sons in St. Louis, says Wal-Mart had some trouble digesting Pace Membership Warehouse, a chain of 110 wholesale clubs that it acquired in 1993 from Kmart Corp.

Nagel thinks last year’s sales increase at Sam’s Club indicates the assimilation of Pace has been accomplished. (Swanson worked for Pace from 1989 to 1993, when it was acquired by Wal-Mart.)

Nagel predicts no indigestion for Sam’s Club in the near future.

He says there might have been a time, a few years ago, when Wal-Mart would have considered spinning off Sam’s Club to another company. But that time has passed.

“Sam’s Club is still growing at a decent clip,” Nagel says. “But the company itself is distancing itself from Sam’s Club in sales. … The wholesale industry itself is not growing as fast as the rest of retail. It’s in a mature phase.”

The “mature phase” is the result of a couple of mergers in the mid-1990s: Sam’s Club with Pace, and Costco with Price Club. The mergers helped narrow the field of competitors.

John Lawrence, an analyst with Morgan Keegan & Co. of Memphis, says the increase in sales indicates Sam’s is “straightening out” its merchandise mix and taking advantage of Wal-Mart’s distribution network.

Lawrence says Sam’s Club had been using a third party to handle its produce distribution, but now produce is distributed to the wholesale clubs through Wal-Mart’s distributors.

“They’re leveraging off existing assets,” Lawrence says. “There was a time when they were trying to keep all of that separate.”

Swanson says Sam’s Club is now using Wal-Mart’s nine regional distribution centers in the United States.

“The company has returned to a higher level of productivity under the direction of Lee Scott and Tom Coughlin,” Lawrence says of changes implemented last year by Wal-Mart Stores Inc.

Wholesale upturn

The 11 percent increase in sales as Sam’s Club mirrored the industry increase, Nagel says.

Wholesale clubs were invented by Sol Price in the 1970s (Price Club stores) and enjoyed early success.

“It was a new and exciting retail concept,” Nagel says, “so it grew rapidly.”

During the 1980s and most of the 1990s, however, lots of retailers got into the game and the wholesale industry “lost its initial vibrance,” Nagel says. But it is again on the upswing.

Between 1993 and 1997, the industry showed minor sales increases – from a low of 2.2 percent in 1994 to a high of 6.8 percent in 1996. But the industry as a whole had an 11 percent increase in sales in 1998.

Although Sam’s Club posted record sales increases for the year, the division still lagged behind the rest of Wal-Mart Stores Inc.

For the fiscal year ended Jan. 31, the Wal-Mart stores division had $95.3 billion in sales, a 14 percent increase over $83.2 billion in the previous fiscal year. The company as a whole had $137.6 billion in sales (a 17 percent increase over the previous year) and a net income of $4.4 billion (or $1.98 earnings per share) up 26 percent from $3.5 billion (or $1.56 earnings per share) a year ago.

For the most recent fiscal year, Wal-Mart’s international division posted a 63 percent increase in sales, from $7.5 billion to $12.2 billion. Most of that increase can be attributed to the opening of 114 new stores in countries outside the United States.

During 1998, Wal-Mart:

• Opened 37 discount stores, closed one, and relocated or expanded two additional stores.

• Opened 123 Supercenters (including 88 discount store replacements).

• Opened or acquired 114 international units – Argentina (four), Brazil (six), Canada (nine), China (two), Germany (74), Korea (four), Mexico (14), and Puerto Rico (one).

• Opened eight new Sam’s Clubs, and relocated or expanded five additional clubs.

• Opened two regional and one food distribution centers.

For the quarter ended April 30, Wal-Mart Stores Inc. had sales of $35.6 billion, up 15.9 percent from $30.7 billion in the same period of 1998. For the same 13-week period, Sam’s Club had sales of $5.7 billion, up 10.2 percent from $5.2 billion in the comparable period of 1998.

Same-store, more sales

Many retail analysts believe same store sales is the best way to gauge the health of a company. Same-store sales are sales of stores open for at least a year.

Same-store sales for Wal-Mart stores and Sam’s Clubs have increased steadily during the 1990s (see graphic this page).

Wal-Mart same-store sales increased from 5 percent to 8.9 percent between 1995 and 1998. That compares to a decrease for Kmart from 5.6 percent to 4.8 percent in 1998.

Sam’s Club same-store sales went from a 1 percent increase in 1995 to a 9.3 percent between 1997 and 1998.

Between 1993 and 1998, Costco’s same-store sales have also increased but by a lesser percentage – from 3 percent to 8 percent per year.

Everyday low prices

Lawrence says Wal-Mart and Sam’s Club are healthier because of basic good business sense – lower pricing, better traffic, less markdowns and higher gross margins.

“All of that feeds on itself,” he says.

Swanson says Sam’s Clubs used a direct mail campaign to ask members what they wanted. That information has been included in new programs at Sam’s Club.

Sam’s Club now offers auto-buying programs, travel services, long-distance telephone rates and its own in-store brand – Member’s Mark.

Swanson says Member’s Mark was introduced in 1998 to provide “a unique assortment of merchandise at a good price.” She’s particularly proud of the Member’s Mark Tropical Trail Mix and Mountain Trail Mix, products she sponsors as a Sam’s Club employee.

Swanson says the incentive bonus plan for Sam’s Club’s 78,000 employees has increased employee confidence in the company. Turnover is down, and the incentive bonus payout increased by 121 percent last year, she notes.

Sam’s Club is in the process of remodeling more than 100 stores this year to make them more comfortable and convenient for shoppers.