What’s Driving Sam’s Club’s Growth?

A number of retailers in the U.S. have struggled to achieve positive comparable store sales growth in the recent past on account of weak consumer spending. However, warehouse clubs have performed relatively better due to their attractive cost saving model. The largest warehouse club in the U.S., Costco (NASDAQ:COST) has seen its comparable sales rise in the 4%-5% range during the past several quarters. Moreover, even as Wal-Mart‘s (NYSE:WMT) typical big box stores registered weak sales during the last three quarters, its warehouse model, Sam’s Club, delivered positive comparable store sales growth. While the retailer’s sales are mostly dependent on the economic environment in the U.S., Sam’s Club provides it with a different business model which is more resilient. That is why we believe that Sam’s Club is an important part of Wal-Mart despite its insignificant value contribution (6% as per our estimates).

Warehouse clubs have become increasingly popular among U.S. buyers due to the attractive bargains they offers. Currently this industry is led by three main players — Costco, Sam’s Club and BJ’s wholesale club — and there exists great potential for growth. Moreover, there are several aspects of Sam’s Club’s business that impart it a competitive advantage over the market leader Costco. We believe that this can help Sam’s Club remain at the forefront of the industry growth.

Warehouse clubs charge a membership fee to its customers while offering goods at lower prices. The huge amounts buyers save during shopping far more than offset the membership fee. In fiscal 2013, Sam’s Club generated about $57 billion in sales and $3 billion in membership income.

Our price estimate for Wal-Mart stands at $80, implying a premium of about 5% to the market price.

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Growing Popularity Of Warehouse Clubs Will Assist Industry Growth

Warehouse clubs, a $390 billion industry, started with the idea of providing goods at lower costs and building a loyal customer base. ^[1] Major warehouse clubs such as Costco (NYSE:COST) and Sam’s Club started generating promising results immediately. Costco reached $1 billion in revenues within its first three years, and Sam’s Club crossed $12 billion in annual revenues within 10 years of its inception. ^{[2] [3]} Some consumer reports have suggested that buyers can save up to 55% when shopping at warehouse clubs. ^[1] Moreover, these clubs provide an enjoyable shopping experience as they keep on introducing new products, brands and varieties from time to time. ^[4] As a result, while the U.S. general merchandise store sales increased by 47% during the period of 2001-2011, warehouse clubs saw their sales jump by more than 135%. ^[4]

Due to these attractive bargains, warehouse clubs are likely to perform well irrespective of the economic environment. Since a significant number of warehouse clubs customers are small businesses, better economic conditions will encourage bigger purchases. On the other hand, a tough economic environment can still provide an incentive to shoppers to buy in bulk from warehouse stores to get more discounts. This is evident from Sam’s Club and Costco’s sustained growth last year and during the recession of 2008-2009. ^[5] Therefore, we believe that this industry will continue to grow in the future, and Sam’s Club and Costco will remain the main players.

Competitive Advantage Over Costco And BJ’s Can Help Sam’s Club Gain/Sustain Market Share

The U.S. warehouse club industry comprises of three main players — Costco, Sam’s Club and BJ’s wholesale club. Costco is the biggest of the lot and its revenues have grown faster than Sam’s Club’s over the past few years. However, there are a few points where we believe that Sam’s Club might have a competitive advantage over Costco.

Compared to an annual membership fee of $55 at Costco and $50 at BJ’s, Sam’s Club charges only $40 from its members. ^[5] While executive members pay $110 at Costco to avail the 2% rewards program, Sam’s Club’s plus members pay $100 for similar benefits. Costco operates 439 stores in 40 states of the U.S. and Puerto Rico, with high concentration around California. The retailer earns about 24% of its domestic revenues from the region. On the other hand, Sam’s club is evenly spread across the U.S. with 620 stores in 47 states and Puerto Rico. Additionally, Sam’s Club is the only warehouse club that offers Apple (NASDAQ:AAPL) products, which gives it a slight edge over Costco. ^[6] Sam’s Club also provides excellent services for delivery, installation and technical support. When it comes to groceries, which is the largest product category sold by both warehouse retailers, Sam’s Club was found to be cheaper than Costco. ^[6]

Moreover, Sam’s Club is more resilient to food price inflation than Costco. With rising food prices, retailers can either increase their product prices or absorb the costs, which can affect their margins. Compromising on margins will be relatively easier for Wal-Mart compared to a pure warehouse retailer such as Costco. (see Rising Food Prices and Razor Thin Margins Are A Bad Combination For Costco) For Sam’s Club, Wal-Mart can utilize its sheer size, higher gross margins and efficient supply chain to better absorb food inflation costs. This can put Sam’s Club in a position to offer food products at attractive prices. Given its advantages over Costco, we believe that Sam’s Club is well-positioned to gradually improve or at least sustain its market share.

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1. Best Warehouse Store: BJ’s, Costco or Sam’s Club?, Yahoo Finance, Jan 6 2013 [↩] [↩]
2. Priced to grow: How Costco got started, CNN Money, Aug 19 2009 [↩]
3. Wal-Mart’s SEC filings [↩]
4. Warehouse store showdown: Should you join Costco, Sam’s Club, or BJ’s?, The Christian Science Monitor, Jan 5 2013 [↩] [↩]
5. Companies’ SEC filings [↩] [↩]
6. Best Warehouse Store: BJ’s, Costco or Sam’s Club?, Yahoo Finance, Jan 6 2013 [↩] [↩]