Sam’s Club faces heightened competition (updated)

It’s been more than 14 months since Rosalind Brewer, CEO of Sam’s Club, took the reins at the warehouse club and began shifting focus back toward small business members.

Analysts with Kantar Retail say this fundamental shift was necessary because the Sam’s Club higher-income individual members have been courted away by big brother Wal-Mart who in many markets share a common parking lot.

In Brewer’s first year, Sam’s Club posted net sales of $56.4 billion, up 4.83%, but noticeably softer than the annual gains of 8.68% a full year before she took control.

During the same time the overall economy has continued to improve but competition has also heated up from multiple retail players now working to invade the once niche club market share.

WAL-MART ENCROACHMENT
Sara Al-Tukhaim, clubs analyst with Kantar, said Sam’s performance last year was decent, but management is dealing with encroachment issues from Wal-Mart on very tight price comparisons and larger pack sizes.

Kantar conducted a basket price comparison study in January between Sam’s Club and Wal-Mart and found the stores tied on 38% of the 16 items in the cart. On a per-item basis 10 of the 16 products were cheaper at Sam’s, but the price gap was just 1-cent on five of those items.

Sam’s Club’s basket generally maintained lower prices per unit and larger pack sizes but Al-Tukhaim said Wal-Mart’s basket was competitive, encroaching on Sam’s Club position. But when comparing the shelf prices of bulk items, Wal-Mart was notably lower on 81% of the items in the basket.

Al-Tukhaim says this raises concern for potential impact to member acquisition and retention for Sam’s Club.

“While big families or small businesses looking for very large quantities may appreciate the value of Sam’s Club’s total basket proposition, empty­-nest Baby Boomers or smaller Gen Y families may find Wal-Mart’s comparative price per unit offers and lower price points compelling, especially without a membership fee,” she said.

Kantar notes the competition between Sam’s Club and Wal-Mart is not new, but does think it is intensifying as they each go after greater market share among consumers’ stock-up trips.

OVERLAPPING GEOGRAPHY
As Wal-Mart expands with 125 super centers this year, filling in markets with this “stock-up” format, it will become more crucial for Sam’s to differentiate itself, analysts say.

Wal-Mart has made no bones about its decision to cannibalize its own stores rather than lose out to competitors. In fact, Sam Walton himself thought nothing of opening competing stores on opposite sides of the Fayetteville Square in his early days of retail.

Wal-Mart and Sam’s Club do share an overlapping target audience in many areas across the country. Over the past year Wal-Mart has placed a renewed emphasis on price-­sensitive, higher­ income shoppers, who are likely to cross ­shop between Wal-Mart and warehouse clubs.

During January, 59% of Costco shoppers also did business at Wal-Mart, according to Kantar. Roughly 53% of Wal-Mart shoppers crossed over and also shopped at Target during the same four-week period.

Analysts conclude that Wal-Mart is using its super centers and club formats to compete with its two largest brick and mortar challengers..

HEIGHTENED COMPETITION
Sam’s Club’s shift back to the small business member is in keeping with the company’s core mission, but analysts say the competition for this target audience has never been greater.

“The business-to-business space is quite crowded these days, with AmazonSupply doing a great job gaining some traction now that they have passed the one-year mark. We also have the merger of Office Depot and Office Max that will be focusing intensely on customer retention. Staples has also been very aggressive with loyalty programs. Even Dollar Tree is going after the business customer with its online store Dollar Tree Direct,” said Carol Spieckerman, CEO of New Market Builders in Bentonville.

She says these players are racing to win the hearts and minds of the business customer in hopes of gaining loyalty which means membership renewal income for club warehouses and continued premium subscription rates such as Amazon Prime.

Spieckerman says the lines that once separated warehouse clubs into a niche channel have become blurred in this age of omni-channel retail.

Omni-channel retailers are playing for keeps, she said. Once they can hook a consumer who’s willing to pay a premium for delivery or membership fees they will do their best to retain them and keep them within their ecosystem.

For instance, a business customer who shops AmazonSupply for file folders one time could be converted to an Amazon Prime member with free delivery for just about any product needed.

Al-Tukhaim says Sam’s is going head­-to-­head in the physical club space with Costco, fighting for business members’ share of spending. As Sam’s Club positions itself as a greater resource for small businesses, the question remains as to how much growth this segment offers given the continued national economic uncertainty.

She wonders what risk this shift in focus poses in attracting and retaining individual consumer members, notably Gen Y. Al-Tukhaim doesn’t believe the small business membership alone is enough to support Sam’s Club membership growth and top­line sales objectives.

Membership income increased just 1.8% last year and projections remain flat through fiscal 2014.

Brewer said in February comp sales are expected to be flat to 2% in the first quarter ending April 26.

SEEKING OPPORTUNITIES
Analysts say better merchandising is key if Sam’s Club hopes to set itself apart from a plethora of competitors.

“Their focus on ‘Fresh’ (food) has been great. And I think it was very smart for Sam’s to continue its relationship with Apple, after Costco did not, that is paying off,” Spieckerman said.

The analysts agree the “value proposition” recognized in Sam’s health care screenings is something that could help to attract and retain small business members.

“I found it particularly interesting the way consumers had to maneuver around high-margin inventory to get back to area where the screenings were taking place,” Spieckerman added.

Al-Tukhaim says Sam’s is doing a better job than Costco in its e-commerce initiative. Spieckerman agreed, saying Sam’s has the advantage of leveraging its physical clubs and e-commerce store, while also tapping into the expertise of Wal-Mart Labs for innovative technology applications such as the Scan 'n' Go.

Sam’s Club has been testing its own version of “Scan ‘n’ Go”,  found on the Sam’s Club Smartphone app, in its two Northwest Arkansas clubs since late last October.

“We have used this time to listen to our members and improve on experience-based inefficiencies and technological issues in a living, breathing, Scanning learning lab. Member response has been extremely positive. A survey of several members who used Scan ‘n’ Go at Sam’s Club resulted in more than 90% saying that they liked it, that it saved them time and that they’d use it again. While meant to ensure fast and efficient checkout service, we also heard from our members that the process was a great source of engagement and fun for the whole family,” said Carrie Foster, Sam's Club spokeswoman.

By next month, Sam;‘s says it plans to expand the pilot program to approximately 30 more U.S. clubs and is optimistic that Scan ‘n ‘Go will be available at 150 Sam’s Club locations by year’s end. 

Spieckerman says Wal-Mart’s delivery programs might also be attractive perks for Sam’s Club members who are already paying a membership fee for the privilege of shopping.

Analysts expect to see Sam’s Club using more innovative techniques in the future as they work to protect the membership base from constant competition in the ever-changing world of retail.