Sam Walton’s Sam’s Club ‘experiment’ marks 40 years

by Kim Souza ([email protected]) 2,390 views 

On April 11, Sam's Club CEO Kathryn McLay (seen at the center clapping) helped ring the opening bell at the New York Stock Exchange in honor of the company's 40th birthday.

Many 65-year-olds were retiring, but Walmart founder Sam Walton sought a new challenge. Walmart had grown to more than $1 billion in sales by 1983. Walton saw the success of club stores — like San Diego-based Price Club — and wanted in on the action.

Price pioneered the first wholesale club in 1976. Walton, who traveled his stores and competitors, wrote in his autobiography that he was curious about the new sub-discounter undercutting Walmart prices because they had very little overhead and could sell below his 22% margins.

Early in 1983, Sam and Helen Walton visited San Diego and had dinner with Price Club founder Sol Price and his wife. Walton said Price had yet to learn he planned to return home and copy the Price Club model. But that’s what happened.

The wholesale club model also allowed Walmart to enter larger markets with more business sectors. Walton scouted properties in Midwest City, Okla. He rented an old building for about 85 cents a square foot and began to remodel the space. Walton said he chose mavericks from Walmart’s ranks to head up the new wholesale club venture he called Sam’s Club.

In April 1983, the first Sam’s Club opened in Midwest City, and Walton described the venture as another experiment.

“Starting Sam’s Club was like a second childhood for me, a second challenge anyway,” Walton noted.

Walton said he wanted the Sam’s Club culture to be different from Walmart, but members and customers would still be a top priority. Sam’s Club began with about three buyers and a few like-minded risk-takers. Within a few months, clubs opened in Kansas City and Dallas.

“With Sam’s Club, I had the chance to build a company all over again, and I tried to be as hands-on as I could,” Walton noted.

Kenny Folk joined Sam’s Club in 1986 as the El Paso, Texas, store manager. Folk, who continues to consult with retailers, said the company then had about 25 clubs. Folk said Sam’s Club made plenty of mistakes in the early years, but with Walmart’s financial backing and Walton’s entrepreneurial spirit, the venture was bound to succeed.

When Walton died in April 1992, Sam’s Club had grown to $10 billion in annual sales, with 217 clubs in its first nine years.

Folk said Sam’s Clubs were often located in low-rent areas in buildings that leaked at times. He said selling business memberships became necessary to get folks in the door.

“We didn’t have social media or much of a marketing budget,” he added.

Folk said the membership teams had to beat the street to sign up business members who would put employees on their cards. He said each club was merchandised to suit that community of businesses.

He was sent to Loveland, Colo., to help management grow sales and membership. He said it took 55-gallon drums of antifreeze and oil for tractors to get the business members in the door since it was a farming community. He said the business membership was essential in the early days because it offered savings to business owners who typically spent more.

Peggy Knight left Walmart and joined Sam’s Club in late 1984. She said the Atlanta club was located in an old Home Depot building in a high-crime area. There was no visibility from the interstate, so the team decided to climb on top of the building and write “Sam’s Wholesale Club” on the roof to be seen from the air because they were close to the airport.

“No one could find us. Sam Walton and about 10 other people showed up at our grand opening. It was a disaster,” she said. “That’s when we went out and started aggressively selling memberships to businesses, speaking at chamber events. Memberships were the golden ticket for the club model because merchandise margins were much lower than at Walmart.”

Within eight or nine months, she said the Atlanta club was doing well because of its strong business member base who came in for work essentials and bought mink coats for their wives and other high-end merchandise.

Greg Johnston spent most of his professional career at Sam’s Club from 1985 to 2009. At that time, he said Sam’s catered to business members, and the higher ticket items and treasure hunt feel were also a draw for members. He said frequent leadership turnover at Sam’s Club steered the business differently. There have been 13 CEOs at Sam’s Club in its 40-year history and just five at Walmart in 61 years.

He said club managers know the value of business club members even if corporate heads aren’t talking about them. Folk believes Sam’s Club still values its business members despite the lack of rhetoric. He said club managers know their biggest-spending members, usually business owners who outspend households more than three-to-one.

In recent years, Sam’s Club has moved to two memberships anyone can purchase. This model is similar to competitor Costco which targets high-income households and business owners.

CEO Kathryn McLay declined an interview for this story but did provide an email response about business members.

“We serve a wide variety of members at Sam’s Club, from our growing Happy Hosts to small businesses and nonprofits. We like to say that we specialize in serving those who serve others, and businesses are key in that and will always be part of our DNA,” she noted.

Sam’s Club continued to succeed over the years even as it struggled to find its identity under many diverse leaders.

Folk said some clubs faced fierce competition, such as Price Club, Costco and PACE, which were active in many markets. Dallas was one of those competitive markets. Knight, Folk and Johnston all spent time there. With a tiny marketing budget, the team put up a billboard in the Price Club parking lot.

“Sam’s was in an old building and hard to find, and Price Club had a new store right off the interstate. The Price Club eventually closed, and Sam’s Club in Dallas became a top-selling property for many years,” Knight said.

Walmart made several acquisitions in the 1990s to take competitors out of the market and grow its footprint. Folk’s job was integrating the acquired clubs into the Sam’s Club business model. The largest of those was for Kmart-owned PACE. Folk managed that integration in 1993. He said it almost sank Sam’s Club at one point. He said it took a lot more money than the $900 million Walmart set aside for the integration. Several PACE locations were closed, and Folk said Sam’s Club had no capital expenditures for five years.

He said the next several years were lean. But by 1998, Sam’s Club had sales of $22.9 billion, with operating income up 15% from the prior year. Sam’s Club had 253 clubs, all in the United States. Costco, which acquired Price Club, had about 275 clubs.

Sam’s Club, on its own, would rank No. 39 on the Fortune 100 list, ahead of FedEx and Walt Disney. Perhaps in its early years, Sam’s Club needed the financial wherewithal of Walmart, but by 1998 one in three American households held a Sam’s Club membership, and profits began to grow.

Last year Sam’s Club reported total revenue of $84.3 billion, up 14.7% year-over-year. Sam’s comprised about 13% of Walmart’s total revenue. Sam’s Club also grew comp sales by 10.5% from the prior year, better than Walmart’s annual comp growth of 6.6%.

Sam’s Club has been a training ground for talent growing in Walmart’s shadow, said Scott Benedict, a former Sam’s Club buyer. He said Sam’s Club has also become a true omnichannel retailer, unlike its competitors. Sam’s Club said 70% of online orders are fulfilled by clubs allowing for a profit-positive business.

Benedict said that the rumors of a spin-off of Sam’s Club are gone as the business has become invaluable. At times, Sam’s Club has been the star performer of the Walmart portfolio. He said plenty of Walmart’s top leadership spent time at Sam’s Club. Other former CEOs now leading competitors are Rosalind Brewer, Walgreens’ CEO, and Brian Cornell, CEO of Target.

Johnston said Walton loved Sam’s Club and tried to get into clubs as often as possible. In 1991, only months before Walton died, Johnston got a call from Walton’s pilot to say they were coming to his Kansas City club.

“We jumped into action getting ready for the visit,” Johnston recalled. “But he did not show up. Later that afternoon, I got a call from Sam saying they flew over the club, and the parking lot was full. They opted to go to Walmart nearby that had too few cars.”