From Bibles to Boop, Sam?s Thinks Small

Vegas playing cards, Betty Boop calendars and a dozen different Bible covers line one shelf of the Sam’s Club warehouse store in Springdale.

A couple of aisles away, the restaurant supply section sells everything from 35-pound tubs of shortening to 2,000-count boxes of plastic cups.

It’s all part of Wal-Mart Stores Inc.’s latest gamble on its warehouse division: shoot for small businesses — everything from beauty shops to churches — in addition to families.

The change in focus began in 2002, the year Kevin Turner was named CEO and president of Sam’s Club and one year after Costco Warehouse Corp. of Issaquah, Wash., shoved Sam’s off its throne as the nation’s No. 1 wholesale chain.

But Sam’s seems to be on the rebound.

Sam’s sales increased for the first six months of this year (fiscal 2005) by 10.3 percent to $18.1 billion. Operating income jumped 20.7 percent to $619 million. Comparable-store sales hit 8.8 percent.

For all 12 months of fiscal 2004, which ended Jan. 31, Sam’s had sales of $34.5 billion, an 8.9 percent increase over $31.7 billion the previous year. Sam’s Club accounted for 13.5 percent of Wal-Mart’s $256 billion in sales last year. Operating income at Sam’s increased 10 percent to $1.13 billion in fiscal 2004. For the year, same-store sales were 5.3 percent.

Costco Crunch

But that’s still lagging behind Sam’s arch rival Costco, which clocked sales of $47.2 billion for its fiscal year that ended Aug. 29, up 13 percent from fiscal 2003. Costco’s comps jumped 10 percent in the most recent fiscal year. Net income for fiscal 2004 increased 22 percent to $882.4 million from $721 million during fiscal 2003. Costco has 442 stores worldwide.

Sam’s Club doesn’t count its 88 international stores in the Sam’s division sales numbers, so a more appropriate comparison would be to Costco’s U.S. stores only. But Costco still leads in that comparison.

Through its 327 U.S. stores, Costco had sales of $38.6 billion in sales last year, excluding revenue from membership fees. Costco’s sales were 11.9 percent ahead of Sam’s Club’s $34.5 billion. In the previous year, Costco was ahead $34.4 billion to Sam’s $31.7 billion in U.S. sales.

Because Sam’s and Costco have fiscal years that end several months apart, Richard Galanti, Costco’s chief financial officer, calculated annualized gross sales to get an apples-to-apples, estimated calendar year comparison (see chart at right).

Galanti said Costco passed Sam’s in sales for the first time in calendar 2001. Costco had an estimated $29.3 billion in sales that year, compared to $29.2 billion for Sam’s. Costco has been in the lead ever since.

Store for store, Costco rang up 66.5 percent more revenue than Sam’s last year. The average Costco store brought in $106.8 million, compared to $64.1 million for the average U.S. Sam’s Club.

Five years ago, the story was very different.

In fiscal 1999, with 253 stores and $22.9 billion in annual sales, Sam’s was the No. 1 wholesaler in the country. Costco was No. 2 with 275 clubs and $18.2 billion in sales.

But things were about to change. Between fiscal 1999 and 2003, Wal-Mart almost doubled the number of Sam’s Club stores, but revenue only increased by 38 percent. Costco, on the other hand, opened 119 stores (an increase of about 43 percent) but more than doubled its companywide sales.

The Sam’s Club unit has been growing at a steady pace despite huge increases in Wal-Mart’s International Division. Sam’s went from 426 U.S. stores in 1995 to 538 last year, but it’s percentage of overall Wal-Mart Stores Inc. sales decreased during that time from 22.9 to 13.5. The International Division went from 226 stores in 1996 to 1,355 last year, accounting for 18.5 precent ($47.6 billion) of total company sales.

With $256 billion in annual sales, Wal-Mart appears on the verge of taking over retail worldwide. But Costco is still beating Sam’s Club on the concrete floors of its warehouse stores.

Costco Edge?

So what’s giving Costco the edge in its battle against Sam’s?

Some people say it’s because Costco is entrenched with an old-time five-and-dime culture that prides itself on ethics. “We have a live Sam Walton,” the Costco folks say of charismatic CEO and President James D. Sinegal, who still answers his own telephone if he happens to be sitting at his desk when it rings.

Costo is also more upscale than Sam’s. It’s the nation’s leading seller of fine wines, accounting for about $600 million a year in sales. The late chef Julia Child used to buy meat at Costco.

According to one study, the average household income of Costco customers is between $50,000 and $60,000. For Sam’s Club, it’s about $40,000, meaning those families are more affected by fluctuations in things like gasoline prices.

“Our view is, for 25 years, we’ve cultivated an upscale customer, be it an upscale business customer or whatever, and have marketed accordingly,” said Galanti, who noted that Costco doesn’t have a public relations department.

But some analysts think the difference boils down to customer service, and that may be a direct reflection of employee pay.

“Costco’s performance is far superior to that of Sam’s Club,” wrote Anthony Chukumba for the Web site Morningstar.com on Oct. 13. “Costco’s stores generate more than 50 percent more annual sales on average than Sam’s Club stores, and its comps usually outpace its peers’. How does Costco do it? By matching Sam’s Club on price, while offering far superior customer service.

“Costco store employees earn much higher wages and have better benefits than their Sam’s Club counterparts, which leads to a more motivated employee base and lower turnover — both of which directly lead to a better customer experience in the stores. For example, Costco cashiers start out making $10 per hour, and within four or five years, can make $40,000 a year or more — compensation levels that most Sam’s Club staffers can only dream about.”

With no prior experience, an entry-level cashier at the Sam’s Club in Springdale would start at $7.90 per hour, but that starting salary could be higher at Sam’s Clubs in other parts of the country.

“Our lowest starting wage in the United States, for any job, is $10 per hour,” Galanti said. “After five years, they can be making twice that. Our average hourly wage is $15.97. We’ve always paid the same in Missoula, Mont., as we have in Los Angeles. If you pay a better-than-average wage and provide better-than-average heath-care benefits, you’ll get a better-than-average employee.”

Jolanda Stewart, a Sam’s Club spokeswoman, disagreed with Chukumba’s assessment of the Sam’s/Costco war. She said the Costco comparisons being circulated were “inaccurate and unfair,” adding that Sam’s provides exceptional benefits to its employees, including health care.

“This year, we are projecting that our company will spend approximately $4.3 billion on benefits we provide our associates,” Stewart said via e-mail, referring to all of Wal-Mart Stores Inc. and its employees. “This includes benefit plans like health care, dental, profit sharing, stock purchase, and 401(k). This is an impressive figure for a company that earned just under $9 billion last year.”

And Wal-Mart’s culture is rife with stories about people who have worked their way up from cashier to a lofty perch at the home office in Bentonville. Turner, who replaced Tom Grimm as CEO and president of Sam’s Club in 2002, is one of those success stories.

Wal-Mart has been criticized in the past few years for what is perceived as a culture of low pay and unpaid overtime work.

Aware of the image problem, Wal-Mart CEO Lee Scott said in June that the company is addressing several of those issues, including new salary scales and cash registers that shut down automatically if a casher doesn’t take a scheduled break.

Boomers and Business

Sam’s Club began a shift in focus to small business in 1998, but with Baby Boomer families still very much in mind, that picture remained a bit fuzzy for the next four years.

“I think we were trying to serve the masses instead of small businesses,” said Celia Swanson, executive vice-president of membership, marketing and administration for Sam’s Club. “Small businesses are really the key driver of the economy.”

Swanson said it boiled down to “a lack of understanding who the membership was that we were serving.”

After a couple of management changes and brainstorming sessions in 2002, Sam’s Club execs hammered out a list of small businesses that the stores would focus on. It included:

• Restaurants and food service

• Offices

• Convenience stores and retail

• Vending

• Contractors, maintenance and repair

• Child care and schools

• Churches and religious organizations

• Beauty shops

• Motels, bed-and-breakfast inns

But Sam’s hasn’t abandoned families, which is obvious from a stroll through the Springdale store. Christmas trees and lawn decorations were on display before Halloween. Aisles were clogged with items for kids, like $298 air hockey tables and $188 basketball goals. But the center court was rimmed with staples for small businesses — cleaning supplies, paper products and consumables for customers.

Sam’s vs. Costco
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Sam’s Stats
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Sam’s FY 2005 Sales
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