Higher fees and coupons to boost Sam’s Club profits

Sam’s Club, often seen as a hidden gem inside the Wal-Mart Stores Inc. mega corporation, is working fast and furious to raise revenue amid a competitive warehouse club channel that rakes in about $140 billion annually.

The warehouse club has turned to a fee increase and coupon strategy to help boost revenue during an unpredictable business climate.

With a total revenue of $56.4 billion last year, Sam’s execs see growth potential to capture marketshare from two of its main competitors, Costco and B.J.’s, while also wooing new members like young mom’s and cost-conscious millennials.

Last month Sam’s Club raised its memberships fees as company management said the previous rates were undervalued given there had been no increase since January 2006. Business members saw their annual rate increase from $35 to $45, while Advantage membership rates rose $5 to $45 per year. Sam’s Plus membership rate stood steady at $100.

Former company insiders said Sam’s membership comprises about 80% of the company’s total revenue on an annual basis. The City Wire estimates this fee bump has the potential to raise membership revenue by as much as $5 billion this year, if membership retention remains stable.

In the first quarter of this year Sam’s reported net membership income grew 2.4% driven by Advantage member growth, offsetting slight declines from business members.

“This fee increase has the potential to raise Sam’s overall revenue it the club can use this to grow the percentage of operating profit from membership and lower margins. In effect, tighten its adherence to the club model. I think this would position it well for longer-term success,” said Sara Altukhaim, analyst with Kantar Retail.

She also cautioned that the small business sector remains under stress and yet saw the largest increase among Sam’s membership rate hike, which could hinder retention efforts as the year progresses.

Michael Dastugue, chief financial officer for Sam’s Club, said nearly half of the club membership revenue comes from business members and half comes from advantage savings members. He said there has been very little pushback from this recent fee increase. Dastugue spoke last week to investors at a Jeffries & Co. conference in Nantucket, Mass.

OUTSIDE THE BOX
Sam’s recently took a play out of Costco’s operation’s manual to offer a coupon booklet to its membership as the fee increase was announced. The instant savings book offered $3,500 in savings coupons across all product categories, in-store and online. These coupons had to be redeemed between May 15 and June 9.

Dastugue said 50% of members who shopped during this period purchased something from the book, a clear indication he said that membership appreciates instant savings. He said one interesting aspect of the coupon initiative was that it drove awareness of certain products among the entire membership.

“We sold more office chairs in a two-day period, than in the previous three months as our members redeemed the four coupons offering savings ranging between $19 and $26,” he said.

“I think it was a smart move to coincide the launch of its ‘Instant Savings’ book with its membership fee hike (to drive more perceived value) and I wouldn’t be surprised that they are generating positive results and continue to do this regularly as a result," Altukhaim said.

She also said there are some cautions to couponing in clubs that are worth pointing out. First, the concept of a club membership implies that you’re automatically supposed to be getting the best value. After all, that is what you’re paying a membership for; so throwing coupons in the mix does somewhat conflict with the fundamental club model. Second, regularly distributing coupon books can backfire to the extent that it “trains” shoppers or members to wait for the coupons before they make their next club trip.

On the flip side, she said coupons can serve clubs well by drawing members’ awareness to products and offers in the club (or online) that they wouldn’t otherwise know were there.

“One thing’s for sure, you can bet Costco is keeping a close eye on this latest move from Sam’s Club given Costco’s own efforts to push toward more ‘Instant Savings’ types of coupons versus the more traditional ones,” Altukaim said.

In March, Sam’s ventured outside the box and teamed up with Living Social to offer a $45 membership that included a $20 gift card. Dastugue said this was an effort to try gain broader membership appeal.

“In 48 hours we had 157,000 people sign up for this offer and 90% of those who signed up redeem their membership,” Dastugue said.

He said the membership appealed to young moms building a household on a thrifty budget as well as small businesses looking to stretch a dollar further.

Sam’s also is working to push members up the chain to the Plus category, a $100 membership that provides instant savings coupons throughout the year. The club is also testing cash rewards in some of its larger markets. This gives Plus members $10 back for every $500 spent.

Dastugue told analysts that Sam’s did not expect any negative impact on margin because of the coupon initiative and they will continue to test the cash rewards program through a few more quarters.

HARNESSING TECHNOLOGY
Sam’s Club continues to differentiate itself from other warehouse clubs with a focus on incorporating technology into the shopping experience.

Just as Sam’s Club is working to roll out Scan & Go to more of its clubs after a massive investment in self check-out and convertible check-outs, Costco announces it will abandon its self check-out option.

Sam’s also integrated its online presence with the physical club in the “Click and Pull” service it provides for its business members.

A restaurant owner can order their supplies online at night and pick them up early the next morning on their way into work. The merchandise is already pulled and bundled by store attendants according to the member order. This is a service not offered by other clubs at this time.

Altukhaim said Sam’s is making some moves to step up as a small business resource, and they have been doing this in various ways for quite some time now with small business loans and other offers.

She also applauds Sam’s recent announce of offer “Boot Camps” in 25 cities this year to help its small business customers, and staying relevant to their needs. This can help Sam’s find out who their loyal business members are, what’s resonating with them and discover what it take to get different types of businesses retained.

“Of course, this is a fine balance for Sam’s as they also keep a steady focus on both Business and Advantage members as not to risk pushing an inconsistent message," Altukhaim said.