The Supply Side: Sam’s Club to continue reducing products in inventory

Sam’s Club executive Clint Gill, who oversees grocery and beverage for the retailer, said his sales team is in the midst of its annual review of merchandise assortment with plans to reduce inventory items.

“We still have too many items in our clubs, and we are working to downsize the assortment. We are not [actively] adding new items at this time,” Gill recently told suppliers at a recent WalStreet Speaker Series event at Sam’s Club headquarters on May 16. The series is an event of the Greater Bentonville Area Chamber of Commerce.

Gill said the assortment in clubs ballooned as larger pack sizes were added to push revenue higher. Gill said just making the package larger to drive up top line sales is a self-defeating proposition because fewer members will buy that product, which further squeezes the already thin profit margin and negatively impacts his department’s profit and loss reports.

“A pack-size sold in a club should never be more than two times or three times larger than what is sold in traditional retail,” Gill said. “We have some product package sizes get way too large for our core members, which today are busy families. In years past, we catered to several types of members, but that has changed in the last year as we are focusing on households of four or larger with incomes ranging from $75,000 to $125,000. They may also own a small business.”

Gill said the bulk of assortment in the clubs must be the right size and items the core member wants. Gill said work has also started to reallocate club space more rationally with eye-catching general merchandise — fewer items, more curated selection — getting the best location in the club. The food and consumable items, which comprise the majority of assortment in a club, can be placed on long aisles in less prime locations.

While food and consumables will represent the lion’s share of items in a store, Gill said having the right general merchandise is key to building basket size and is what gives members a reason to return for the “thrill of the treasure hunt.”

With regard to private brands, Gill said the club’s move to Member’ Mark has been good, with the brand now commanding a 35% market share penetration across the club. He told suppliers the best way for them to avoid being squeezed out by private brands is to ensure they keep prices low while still delivering on value to the member.

He said suppliers that win with Sam’s Club are those that fully embrace the model and deliver strong value with price hedges such as better packaging, shipping in full pallets to taking costs out of the system.

He said suppliers who try and play the high/low pricing game will lose out at Sam’s Club over time. He said they will be forced to throw tons of trade marketing dollars toward promotions to stay relevant on price which is not conducive with the low price club promise.

“Successful suppliers in the club channel have to take costs out of the product and deliver disruptive prices,” Gill said.

Across the retail industry and looking at the rise of online penetration, Gill said grocery is the last frontier. He said for products such as laundry detergent or toilet paper, less than 1% of sales were online in 2000. That has now grown to 8%. If the trend follows that of home, apparel and hardlines (hardware, sporting goods, etc.) the penetration will increase quickly in the next couple of years. He said 38.6% of apparel is sold online, and this was a category forecasters said would never work given people want to try on their clothes before they buy them. That was clearly a wrong assumption, he added.

Online grocery is about 1% of sales, still very small, but 68% of the growth in his business at Sam’s Club is digital, Gill said. He said Walmart Inc. has the resources as the largest fresh grocery retailer in the U.S. with a fully integrated supply chain with distribution points near 90% of the U.S. population.

“I wouldn’t trade places with Amazon for anything as they have not yet figured out fresh,” Gill said. “I think we are in the third inning of this ball game, and the retailer who can first figure out how to deliver fresh at scale will be the winner. At Sam’s we have memberships that we can leverage to deliver.”

Retailers can’t make the numbers for delivery work favorably with a $35 grocery basket. He said a $130 basket makes delivery financially feasible, and Sam’s is in a position to be able to leverage its membership to add delivery as demand dictates. Gill said half of the growth potential online is in grocery, and he spends a lot of time looking at how to make it happen.

Gill explained Sam’s Club carries between 6,000 and 7,000 items, and the top 1,500 best-selling items online are also carried in three main online fulfillment centers. The less popular items are carried across the broader warehouse network. He said buyers who report to him have the responsibility for their category regardless of where the items are sold. For instance, the cookies and crackers merchant does all the buying for those items for brick and mortar as well as online.

He said grocery is a $15 billion business at Sam’s Club, and 5% of sales are online, with 4% being club pickup and 1% direct to home. While free shipping was rolled out to Plus members at Sam’s Club, Gill said the impact has been dilutive to margins. He said Sam’s Club’s efforts to monetize its data with online marketing packages for suppliers is helping to recover some of the lost margins.

He said Walmart is in a position to own its direct-to-home model. For now, the retailer is working with various third-party services and testing its own internal program.

“Instacart is helping us [Sam’s Club] figure out what a direct to home model might be. It has to be sustainable,” Gill added.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.