Sam’s Club under pressure to do better, pushes out new strategy

The retail sector reported mixed results this week and Bentonville-based Sam’s Club was among the losers – again. Sam’s Club CEO Rosalind Brewer also gave a cautious outlook as the wholesale club tries to reinvent itself to better compete with Amazon, Wal-Mart, Costco and a host of other retailers offering values.

“Our first quarter results were disappointing, as comp sales missed guidance, and we delivered softer net sales and profit than last year,” Brewer said in the recorded earnings call. “We continued to invest in our initiatives to drive growth, and while we made progress in some areas, we still have upside opportunity in others. This year is one of investment and testing, and we’re very focused on strengthening our foundation for business improvement in the longer-term. We’ve been focused on four initiatives designed to improve our foundation.”

Sam’s club delivered a 0.4% comp excluding fuel and a 3.8% comp decline including fuel, results that continue to frustrate Wall Street and Wal-Mart management.

“Sam’s Club performance has been frustrating but we hope that management’s focus on merchandise assortment, marketing, member rewards, and e-commerce investment will drive future traffic and ticket improvement,” noted Budd Bugatch, an analyst with Raymond James & Associates.

Brewer briefly outlined a strategy for recovery in the press release on Tuesday (May 19). She said a new chief membership officer was put in place this quarter to oversee data scientists and marketing professionals with a goal of improving customer engagement.

One thing that made the performance look worse was that membership increased 7.4% in the quarter but despite the added members operating income fell 10.9% to $427 million. Even without the fuel impact, operating income declined 8.6% to $436 million in the period.

Part of the added expense that lowered operating income was related to the Plus Cash Rewards program, which was rolled out nationwide in the quarter. The reward system pays members to shop, a strategy that could lower margins.

Brewer attributed the weak quarter to negative comps in electronics, technology, office supplies, and food deflation in the fresh categories. She also said baby care products had some supply chain holdups which hurt sales. On a positive note, Brewer said traffic counts and ticket sales were up in part because of strong double-digit growth in the Club Pickup comps from online orders.

NEW GAME PLAN
Brewer explained the first step in the new game plan addresses merchandise assortment.

“We are driving newness and differentiation. For example, we increased our organic offerings by 20% since the beginning of the year, and these are important to various demographic groups, including millennials,” Brewer said.

The second step of the game plan is focused on membership and decision sciences. Brewer said the new chief member officer reporting to her will own membership data and analytics. 

“This role, which was put in place at the beginning of the quarter, oversees a new team of data scientists, marketing and insights professionals. I’m pleased that the team’s recent new targeted membership efforts give us optimism for the rest of the year,” she said.

The third step addresses new programing to enhance member value.

“One example is a groundbreaking new pharmacy program called ‘Free/4/10,’ which provides Plus members with free or discounted prescriptions for five costly diseases, including Alzheimer’s, diabetes, mental health, vitamin D deficiency, and prostate health. This program contributed to a number of Plus upgrades since its rollout,” Brewer said.

Brewer said the fourth step is a long-term investment in the e-commerce business. 

“We re-launched Club Pickup in every club in the country, resulting in a 37% sales increase in the Club Pickup Program. Members love the convenience benefits of online ordering and easy pickup at the club. I am encouraged that our investments will pay off in the near future,” she said.

THE EXPERTS SAY
All retailers are wooing the millennials, and some market watchers say Sam’s Club has an opportunity to do more.

“I think Sam’s Club is in a position to offer an ‘online only’ membership to the millennials that could also provide some of the services like subscription shipments that compete with Amazon Prime,” said Sam Lazenby, founder of #OnShelf in Bentonville. 

Lazenby said Sam’s could probably do it cheaper than Amazon and this would give them a jump on Costco, which they often trail. He said perhaps a combo membership option could also work for consumers like himself who would use the pickup option. 

Annibal Sodero, supply chain expert at the University of Arkansas, said recently that Sam’s Club could be hurt by Walmart.com’s subscription-based delivery program. He said Costco is feeling some pain from Amazon’s Prime Box and Dash programs. 

The experts agree that Sam’s Club could mitigate the damage by offering its own subscription-based online program which could be an add-on to the regular membership. Lazenby said that while Costco has strengthened its brand by staying focused on consumers, Sam’s Club’s dual purpose for small businesses and consumers has not been as fruitful.

Rather than chase after every bright shiny object, Lazenby said Costco has maintained the same strategy and much of the same management team for years. They have a disciplined merchandise approach that only offers one or two varieties for many of their items. One of those is usually the Kirkland private label, which has brand equity equal to many name-brand products.

Lazenby, a supplier development consultant, said on a positive note the Sam’s Club buyers he has worked with appear to be good merchants. He said they are willing to take risks and work with the supplier to get the products at the best values.

Typical membership club margins range between 13% and 15%, which is far less than the 30% to 40% margin at  discount retailers.

“Sam’s Club members should be getting the best values on high quality products, that should be reason enough to shop there,”  Lazenby said.