Sam’s Club, Warehouse Models Face Evolution

One of the biggest challenges facing warehouse clubs like Sam’s Club and Costco is a fundamental shift in consumer populations as Gen Y, also referred to as Millennials, rise to prominence.

More than 80 million consumers ages 18 to 30 make up Gen Y, and the demographic is roughly the same size as the Baby Boomers. But the two generations are different in their wants and needs, according to Logan Gallogly, RNG analyst.

She said retailers will have to learn to accommodate the important consumer groups while also not totally ignoring the Generation X cohort born between 1965 and 1979 and numbering roughly 46 million consumers.

Sara Altukhaim, analyst with Kantar Retail, said warehouse clubs like Sam’s are overdue for evolution as their models were essentially built to serve and grow with the boomers and their wants and needs, household and otherwise.

“The dilemma moving forward is that this base is aging rapidly and their needs are changing with it. At the same time, Gen Y already makes up a bigger demographic cohort than the boomers and this group is beginning to enter important life stages that would normally make a club membership particularly relevant,” Altukaim said.

She and Gallogly said Gen Y is delaying some of the these important life stages such as household formation, marriage and having children which is traditionally when consumers become club members.

“My concern for the clubs is that if they rely on Gen Y to reach these life stages later in life, it might be too late,” Altukhaim said. “At what point does a club membership become irrelevant when you’re dealing with a generation that already skews higher toward, for instance, Amazon and its Prime memberships and Subscribe and Save which is essentially a virtual stock-up.”

“As a Gen Yer, if I don’t have a car, a large house or a large family, and I’m already stocking up online (and willing to maybe pay a bit more for the convenience of not driving or having to find room in my cupboards), what about a club membership appeals to me?” she added.

THE SAM’S RESPONSE
Sam’s Club CEO Rosalind Brewer told analysts Oct. 15 “the Sam’s Club brand must go through an evolution to drive the needed member growth.” Brewer and her team outlined what they thought it would take to bridge the generation gap and ultimately drive more sales and services in the next year amid a shifting member base.

Sam’s leadership said it plans to drive more excitement around in-store and online merchandise.  This December, consumers will see 132 new items in clubs, versus 56 a year ago. And while that may not seem like a whole lot for a mass retailer, the limited assortment in a warehouse makes it tougher to accomplish, according to Charles Redfield, executive vice president of merchandising.

He said the company has changed its merchandise planning policy to sell through a specific date, not an entire season, which is allowing for more frequent transitions for new items in the club. Redfield also said there will be more brands that consumers want in the clubs this holiday season and beyond, but he gave no further details at the Oct. 15 analyst meeting.

Altukhaim said the clubs limited assortment environment also makes contending with these two large but very distinct cohorts (Gen Y and Boomers) tricky. She said club operators have to get smarter about what will resonate with these groups – and where.

“There are a few ways the clubs are trying to win with both of these groups and it’s interesting to see them evolve,” she said.

AGING BOOMER NEEDS
To appeal to their typical (boomer) shoppers as well as an overall more informed shopper base, health and wellness products and services are a strong focus across the clubs, Altukhaim notes.

She said Costco has rolled out more hearing aid services, for example, for its aging members and Sam’s Club holds regularly health screenings to engage and drive traffic. Anti-aging products, particularly unique and premium ones, really stand out at Costco. Likewise she said Sam’s Club has published a Healthy Living Made Simple magazine for almost a year.

All these efforts speak to the ways the clubs are responding to an aging member base – one that is also more educated and able to afford products they perceive as “better for me.”

Gallogly said U.S. retailers are lagging those in Japan with their marketing and merchandising efforts toward aging boomers. She said smaller packaging is something boomers want and need, which works against the buying-in-bulk premise of a warehouse club. Smaller stores are also favored by aging boomers as well as products easily reachable on store displays.

Smartphone penetration is higher among boomers but when they order online they are more likely to use a tablet, a pattern that suggests retailers should invest in user-friendly tablet applications for this cohort.

Another area important to the boomer demographic is travel. Gallogly said there is opportunity for warehouse clubs and retailers to offer travel services. French retailer Carrefour did it earlier this year. Sam’s Club discontinued its travel services in 2011.

WINNING GEN Y
Altukhaim said club operators know they must get their digital strategies into shape if they are going to win with Gen Y. She said Sam’s Club is leading the pack with its openness to innovating across platforms (the physical, mobile and online club).

“I think an interesting example of this is the LivingSocial campaign it held this past spring that drew upwards of 157,000 memberships and also stimulated a lot of social mention,” Altukhaim said.

Brewer said Sam’s is looking at a similar membership drive through social media ahead of the holidays, as they deemed the first campaign successful.

Clubs have been behind mass retailers with their online shopping options. Costco is in the middle of an IT modernization project, including taking steps to optimize searches and slowly starting to expand its offerings online, according to Altukhaim.

Gallogly said clubs will have to improve their inventory management to provide visibility between online and brick-and-mortar items, something big box retailers like Home Depot have already done.

She said Gen Y is already comfortable ordering shampoo and other regular consumables online for drop shipment at home with their Amazon Prime membership. But warehouse clubs and retailers can get this cohort interested with do-it-for-me offerings like gourmet food or other services for which they are willing to pay a premium.

DATA RICH
“Winning with these two very different groups will require better use and integration of insights. I think there’s still plenty of progress to be made, but there are signs that the clubs are getting smarter about using the wealth of information that’s inherent in a membership model,” Altukhaim said.

Sam’s Club recently emphasized new “insights-driven initiatives” underway that include predictive prospecting – using data to better connect with prospective members, she said.

At the same time Sam’s has “geofenced” its clubs, expanded self check out and welcomed price comparisons or so-called “showrooming” from its members.

Costco recently indicated a growing receptivity to data mining down the road, which would be a huge step for the retailer, Altukhaim said.

Amazon, she said, is doing a good job appealing to shoppers at different stages of life and retaining them with a value proposition that essentially evolves as they do.

“While the clubs will sometimes promote college memberships, I think there’s opportunity to get more creative about articulating the value of a club membership at different life stages. Membership data provides a tremendous advantage to the clubs that if approached the right way, could really elevate their unique value proposition,” she said.