Warehouse Clubs and Superstores
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Industry Overview
The US warehouse club and superstore industry (warehouse clubs) includes about 20 companies with some 3,000 stores with combined annual revenue of $350 billion. Major companies include Sam's Club (Wal-Mart); Costco Wholesale; BJ’s Wholesale Club; and Meijer. The industry is highly concentrated: the top four companies hold over 90 percent of sales.
Competitive Landscape
Demographics and small business growth drive demand, and spending in warehouse clubs generally resists economic cycles. The profitability of individual companies depends on high volume sales, low-cost purchasing, and efficient distribution. Large chains dominate the market due to advantages in purchasing, distribution, and finance. Average annual revenue per employee is about $304,000.
Warehouse clubs have grown rapidly. Industry sales increased at an annual average rate of 35 percent between 1998 and 2008, compared to 16 percent for all general merchandise stores. The number of warehouse club stores more than doubled between 1998 and 2008, with expansion coming at the expense of grocery stores and department stores.
Warehouse clubs differ from superstores by requiring a membership to shop. Superstores typically offer a wide range of products, while warehouse clubs offer a limited selection. Both types of retailers sell products across many categories including food, and both compete with grocery stores, mass merchandisers, department stores, drugstores, specialty retailers, and wholesalers. Some retailers, such as Wal-Mart, operate warehouse and superstores as well as traditional discount stores.
Products, Operations & Technology
Major products sold by warehouse clubs are groceries (35 percent of revenue); drug, health, and beauty aids (10 percent); apparel (8 percent); and household appliances (6 percent). Other products include cleaning products, toys, and appliances. Most products are available only in large sizes or bulk quantity. Warehouse clubs may also have onsite gas stations, pharmacies, optical centers, or food courts.
Warehouse clubs offer multiple types of membership plans, including programs for both consumers and businesses. Fees range from $35 to $50 for a standard membership to $80 to $100 for a premium membership. Renewals are important; the renewal rate for Costco members is over 85 percent. Membership figures range from about 10 million for smaller warehouse chains to more than 50 million members for larger chains.
Warehouse clubs are able to provide deep discounts by offering no-frills, self-service operations where the customer experience is secondary to operational efficiency. Companies design floor plans to maximize selling space and optimize merchandise handling and inventory control. Warehouse clubs typically display merchandise on pallets and store extra inventory on overhead racks.
Because customers are willing to drive long distances to enjoy low prices, companies may build retail stores on remote sites, and locations can be far from major shopping areas. Warehouse clubs need lots of real estate; most retail locations range from 110,000 to 190,000 square feet. A typical BJ’s, including parking, requires about 14 acres of land.
Warehouse clubs buy most merchandise directly from manufacturers or importers, typically in full truckloads. Volume purchasing allows companies to receive substantial discounts, resulting in savings to customers. Frequently, companies work directly with manufacturers to develop special sizes or packaging to reduce handling costs and provide the best possible consumer value. Because of the sizable sales opportunity, competition for club business among manufacturers is fierce and most warehouse clubs enjoy favorable purchasing terms. `
Warehouse clubs offer a limited selection of products in a wide range of merchandise categories. Rapid inventory turns are critical, and most companies limit product offerings to the fastest selling styles, sizes, flavors, or colors. Inventory is generally limited to the top brand names in each category and private label goods. Warehouse clubs typically offer between 4,000 and 8,000 stock-keeping units (SKUs), much lower than the 30,000 to 140,000 SKUs carried by grocery stores and mass merchandisers. Because companies target volume purchasers, most products are available in institutional sizes, bulk packaging, cases, or multiple packs. Some companies offer commercial grade appliances and equipment. Unlike most retail operations, inventory shrinkage is low, primarily due to membership requirements and tightly controlled entrances and exits.
By eliminating the traditional multi-level distribution channel, companies save on distributor commissions and storage costs. Retail locations receive shipments either directly from manufacturers or through cross-docking facilities, where workers unload and reallocate truckloads of merchandise for individual stores. Direct and cross-dock shipments minimize stored inventory and reduce receiving costs. Most companies try to turn around merchandise at cross-docking facilities in less than 24 hours.
Warehouse clubs use bar code scanners and computerized point-of-sale (POS) systems at the check out. Inventory management systems track shrinkage and replenishment needs. Some warehouse clubs require manufacturers to tag merchandise with radio frequency identification (RFID) tags to monitor inventory as it moves through the supply chain.
