Former Sam’s Club Execs Talk Club History

Sam’s Club operates in the shadow Wal-Mart Stores Inc., but if it were a stand-alone business, the warehouse club that posted $56.4 billion in revenue last year would be the eighth largest U.S. retailer.

That’s more than the Gap, J.C. Penney and Kohl’s rang up cumulatively in 2012. Sam’s major warehouse club competitor, Costco posted $97 billion in sales last year and continues to lead the club retail category.

Though it trails competitor Costco in total sales volume, Sam’ Club has 620 locations with a total of 82.65 million square feet of space with plans to add eight more clubs this year.

Sam’s Club, which now employs more than 110,000 workers, recently celebrated 30 years as a division of Wal-Mart. Each club location averages more than $80 million in sales annually with a membership of 47 million and growing.

Sam’s also is the third largest grocer in the country, with grocery and consumables accounting for 55% of the clubs’ $56.4 billion in net sales.

BORROWED IDEA
Sol Price, founder of Price Club and FedMart, is considered the pioneer of the “warehouse store” retail model. He opened his first warehouse club in San Diego, Calif., in 1976. The warehouse club concept involved selling high volumes of a small variety of goods, at supposedly wholesale-level-low prices, to a select group of customers — who pay a membership fee in exchange for the right to shop there.

Legend has it that Sam Walton dined with Price in California and a few months later (April 1983) he opened the first Sam’s Club. A retail pioneer himself, Walton would never shy away from borrowing the ideas of others.

“Sam considered borrowing good ideas a form of flattery. But he had one stipulation on borrowing: It was mandatory that we do it better,” said Tom Coughlin, a retail consultant and retired executive of Sam’s Club and Wal-Mart Stores.

Coughlin said the early team who got Sam’s Club off the ground were mavericks and incredibly dedicated to this new concept, which was very different from the Wal-Mart model.

He said the warehouse club segment quickly gathered steam throughout the mid 1980s.

A protege of Price, Jim Sinegal, launched Costco in September 1983, five months after the first Sam’s Club debuted in Midwest City, Okla., and years later Sinegal bought out Price Club giving Costco more locations in densely populated coastal cities. Just as Costco absorbed Price Club, Sam’s swallowed up 80 Pace Clubs from K-Mart in 1994.

Other retailers staked claims throughout the country such as Pace Clubs of Denver. B.J.’s began on the east coast and Club Wholesale got underway in Boise, Idaho.

Sam’s Club focused on cities throughout the southern central U.S. in towns like Springdale, Lawton, Okla., and Tyler, Texas.

GETTING SAM’S STARTED
“I’ll always admire the four guys who got the first Sam’s unit up and running. They did it very quietly behind the scenes, with very little, or no, computer system support from the company, “ said Ron Loveless, Sam’s first president.

He said the merchandise mix, with multiple-item packaging and larger sizes, differed considerably from that of Wal-Mart, so the sourcing and distribution power behind the parent company wasn’t much help to those few on the front lines at Sam’s Club.

Rob Voss led the merchandising effort, Dick Palmer was over operations while Mike Villines and Clyde Hulett assisted with merchandising and set-up. (This maverick group, though mostly retired today, remains in contact and recently gathered in Branson to celebrate the 30th birthday of Sam’s Club. The event was hosted by Voss, who was Walton’s choice as head merchandiser for the new venture in 1983.)

In that first year Sam’s lean crew worked to get the merchandise mix and operations off to a good start. They had to overcome obstacles such as leaking roofs and cracked concrete floors in the cheap-rent industrial building that was home to Sam’s Club No. 1 near Oklahoma City.

Loveless said the profit margin for the first warehouse clubs were essentially the membership income as operating revenue from sales went to cover labor and cost of merchandise.

“The low priced goods would nearly sell themselves, our biggest challenge was figuring out the best way to market the memberships. Our gross margins were very low in hopes of pushing through more volume, but members were the key to profitability,” Loveless said.

By the end of the first year, Walton had agreed to open two more clubs, one outside of Kansas City and one on Garland Road in Dallas.

CLUB MERCHANDISING
A typical Wal-Mart store has between 100,000 to 120,000 stock items, but Sam’s Club had under 5,000 items that could be sold in high volume.

Jim Branam joined Sam’s Club in August 1983 after he closed his apparel store in Rogers. Branam was responsible for the apparel, home goods and office supplies as senior merchant for Sam’s Club. One of the biggest challenges Branam faced was getting apparel suppliers to recognize that Sam’s Club was not Wal-Mart.

“We wanted to carry more exclusive brands at Sam’s and convincing the suppliers their products would not end up on the shelves at Wal-Mart was a constant issue. But my years as a buyer for Sam’s were some of the most fun in my career. I would go to market and have the best time scoping out all the trendy items for the coming season. Because we did not carry a full line of apparel, I could pick and choose those items I felt would fly off the shelf, and they did,” Branam said.

Sam’s was in the grocery business several years before Wal-Mart as a supplier to small restaurants and food service businesses.

Stan Moore and Larry King developed the grocery division of Sam’s Club, after the first club or two basically mirrored Price Club, Loveless said. Moore joined the merchandising team in April 1984 and set out to convince food suppliers to add Sam’s as a foodservice customer. Moore said it was a tough sell.

“It was a foreign concept for them to treat us, a retail club, like they would restaurants or foodservice units of schools or hospitals. We also worked to get suppliers to ship in pallets directly to the club and design product in multi-packs so we could sell in bulk.” Moore said.

General Mills came on board early selling Cheerios in large bags designed for restaurants. Kellogg’s did not want to accommodate Sam’s multi-pack requirements for years, according to Moore, who said Sam’s had about 200 clubs before Kellogg’s would agree to the requirements.

“At one point we were selling so many units of Cheerios, General Mills told us we were destroying their own sales to foodservice so they discontinued the large bag sales to Sam’s but they did provide us with large multi-packs to sell instead,” Moore said.

In the first several years, Moore and Branam said they worked at a fast pace as a lean crew of six ordering all the merchandise and visiting clubs to look for interesting items and unusual packaging that offered the greatest values for club members.

Moore said ordering took hours with a handheld calculator and crude inventory spreadsheets that were used to forecast demand.

“The last thing you would want was for a club to be out of a key item that its business customers needed. We worked hard to make sure that didn’t happen. We had some suppliers delivering everyday to our clubs back then,” he said.

‘STRAPPED TO A ROCKET’
Moore said those early years at Sam’s involved hard work, but no one seemed to notice because of the fun they were having as the new adventure constantly inspired creative merchandising.

“We would put chocolate covered peanuts or pistachio nuts or almonds in large clear gallon-size plastic containers and these items were fast movers stacked beautifully on pallet displays. We used to joke that we could sell horse manure in those plastic jars,” Moore said.

The 12 years Moore worked at Sam’s Club he said “were like being strapped to a rocket,” as the company exploded with growth adding 340 clubs in a little more than a decade.

“My last year at Sam’s – 1996 – we did $1 billion in candy sales,” Moore said. “We transformed the businesses of several regional suppliers because of the massive volumes our clubs sell.”

Loveless said the club chains that did not survive concentrated heavily on membership, but failed to differentiate their merchandise from typical retailer offerings.

“There was a reason Sam’s didn’t carry Crest toothpaste – because we could never sell it cheaper than Wal-Mart. We focused on those items that could be sold in bulk and toothpaste was not one of them,” Loveless said.

CULTURE BREEDS SUCCESS
Coughlin said the culture at Sam’s Club was unique and preserving it has been key to the company’s success throughout the past three decades amid top management turnover.

Wal-Mart has had four CEOs in its 51-year history. Sam’s Club has had 12. Al Johnson held the role two different times making for 13 management changes in the past 30 years.

In contrast, Jim Sinegal ran Costco and served as CEO from 1983, until stepping down a few months ago. He is still board chairman.

Coughlin said there have been key individuals throughout the years who embodied the essence of Sam’s corporate culture, which was face-to-face, know and serve your customer. He credits Johnson with contributions toward Sam’s success, saying he was a student of the warehouse club model.

“Even in his retirement Al spent six months traveling and studying the club business inside and out and bringing those insights back to Sam’s,” Coughlin said.

Kenny Folk joined Sam’s in 1986 when there were 20 clubs. According to Coughlin and others, Folk was also a keeper of the culture.

“I took a pay cut to join Sam’s Club as an assistant manager and saw first-hand how top executives at Wal-Mart, like David Glass and Jack Shewmaker and of course Mr. Sam took a keen interest in the warehouse club model,” Folk said.

Despite a competitive landscape, Folk who had worked for Jim Sinegal before joining Sam’s Club, said the key to Sam’s success was its focus on the business customer.

“As someone who worked out in the clubs, I can tell you we knew our business customers’ names and continually strived to get them values and services like early-hour shopping, which was something our competitors didn’t do,” Folk said.

He said club employees from cart pushers to merchandisers were constantly asked to share ideas with top management which fostered a sense of pride and ownership throughout the workforce which has also been key to Sam’s success. Folk retired three years ago after rising to the senior vice president ranks at Sam’s Club and Walmart U.S.

While Sam’s never gets the media attention of a Costco or Wal-Mart, and the CEO lifespan is only about 2.5 years, the former Sam’s executives interviewed by The City Wire agreed that mom and pop restaurants, local insurance offices and school athletic boosters understand the value a warehouse club gives.

They said the small business members are the primary reason for the Sam’s Club growth and is a reason the club has proved a stepping stone for key retail management throughout the years.

And while the business-to-business retail model is as crowded as ever, it continues to be the bread and butter and best hope for continued success.