Sam’s Club

views updated

Sam’s Club

608 SW Eighth Street
Bentonville, Arkansas 72712
U.S.A.
Telephone: (501) 277-7000
Fax: (501) 273-4053
Web site: http://www.samsclub.com

Division of Wal-Mart Stores, Inc.
Founded: 1983 as Sam’s Wholesale Club
Sales: $24.8 billion (2000)
NAIC: 45291 Warehouse Clubs and Superstores

Sam’s Club, a division of discount merchandiser Wal-Mart Stores, is one of the nation’s leading operators of members-only warehouse stores. The division runs over 450 stores across the country. Sam’s Club sells to some 41 million customers who pay an annual fee to become members. Members can shop at Sam’s sprawling stores, which are typically 110,000 to 130,000 square feet, and offer more than 4,000 items, from fresh groceries to auto supplies, clothing, and pharmaceuticals. The clubs also offer additional services such as a mail-order pharmacy, travel club, Internet, and long-distance services, car loans, and discount credit card processing. Mark-up on Sam’s Club items is just over wholesale, so goods at these stores are deeply discounted over other vendors. Sam’s Club sells to small businesses such as restaurants, daycare centers, and offices, and also markets to individuals. Sam’s Club entered the warehouse club market in the mid-1980s, after Wal-Mart founder Sam Walton studied the success of other similar ventures. After some consolidation in the industry, Sam’s Club leads the market neck-and-neck with close competitor Costco.

Catching a Trend in the 1980s

Sam’s Club was created by Sam Walton, the remarkable retailer who brought the nation Wal-Mart stores. Walton had built a chain of Arkansas five-and-dimes in the 1960s, and increased this to almost 300 stores in the South in the 1970s. Wal-Mart Stores, Inc. incorporated in 1971 and was a billion-dollar operation by 1980. Wal-Mart stores were located in small towns, usually in markets so small that other retailers avoided them. The stores offered deeply discounted goods, and rural people flocked to them. Wal-Mart continued to expand across the nation in the 1980s, keeping in the main to small towns. Sam’s Club debuted in 1983 as something of a corollary to the Wal-Mart small-town strategy. The warehouse stores were designed for an urban market, giving Wal-Mart Stores, Inc. access to customers it did not otherwise reach.

The warehouse club idea did not originate with Sam Walton. The designated father of the warehouse club industry was the aptly named Sol Price, who ran Price Club. Sol Price opened his first Price Club in San Diego in 1976. The chain spread across the West Coast in the 1980s. Price Club stores were huge, on average 108,000 square feet, and ran with no frills and a minimum of employees. Sol Price guided Sam Walton through one of his stores in the early 1980s, and Walton acknowledged that his Sam’s Clubs were patterned after the Price chain. The first Sam’s opened in Oklahoma City in 1983. It was called Sam’s Wholesale Club, the name that stuck with the chain until 1990. By the end of 1983, there were two more stores, one in Kansas City, Missouri, and one in Dallas. Sales the first year were already $40 million. In 1984 the chain added eight stores, and these 11 stores brought in $225 million total that year. Sam’s Clubs were located in leased warehouses, usually in rather desolate areas. They were huge, and bare of decoration. Goods were displayed on shipping pallets or on steel shelves which reached almost to the ceiling. “Displayed” might be putting it too strongly, as the items were often simply set out stacked inside torn-open packing boxes. But the goods were brand-name, at prices much lower than elsewhere. Customers usually had to buy large sizes or multiple packs of things.

Sam’s Club took advantage of the distribution know-how of the Wal-Mart chain. An analyst for Morgan Stanley quoted in Discount Store News for December 9, 1985, described Wal-Mart’s distribution network as using “some of the most sophisticated systems currently devised.” The chain already knew how to hold down costs, and it amplified this skill at Sam’s Clubs. Merchandise was moved mechanically whenever possible, so that few human hands needed to touch it on its journey from factory to customer’s car. In addition, Wal-Mart had studied the market carefully before plunging into the warehouse business. The urban market of the warehouse store was a great complement to the small-town market of the Wal-Mart chain. The two chains added to each other without competing. Another analyst quoted in the Discount Store News article claimed that Wal-Mart and Sam’s together could “serve almost all the potential shoppers in a market.” Serving everybody was quite a proposition, but it seemed possible. The Sam’s chain grew rapidly, and accounted for a larger portion of Wal-Mart’s sales each year through the 1980s.

In 1986 warehouse club sales accounted for less than 1 percent of total U.S. retail sales. But what Fortune magazine dubbed a “mini-industry” was nevertheless worth about $4.4 billion annually at that time, and the level of profitability was enticing. The entrenched Price Co. was still the market leader in 1986, with sales of $1.9 billion, and profits of $46 million. One key to the profitability of the warehouse concept was that goods turned over very quickly. Inventory at Sam’s Clubs turned over on average 16 to 18 times a year. This high turnover meant that inventory was off the shelves and sold within 30 days, or before the store had to pay for it. Many retailers had jumped on the warehouse trend by the mid-1980s. Besides Sam’s Club and Price Club, competitors in the industry included Costco Inc., Pace Membership Warehouse, Warehouse Club Inc., Wholesale Club Inc., BJ’s Wholesale Club, and Price Savers. Costco, Pace, Warehouse Club, and Wholesale Club all went public in 1986 to fund further expansion. BJ’s also had expansion plans in the mid-1980s, and Price Savers got the backing of the large grocery chain Kroger when it was acquired in August 1985. The industry was getting crowded as chains competed for specific regional markets and then for membership within those markets.

Between its founding in 1983 and 1985, Sam’s Clubs opened in urban markets in the South and Southwest. The chain entered the Midwest in 1986. By 1987, Sam’s had 84 stores. This included stores it bought in 1987 when Sam’s took over the warehouse chain Super Saver Wholesale. Super Saver had gone head-to-head with Sam’s in ten southern cities, and had another 11 warehouse stores in the South. But it was not profitable, and in 1987 Sam’s took over the chain, closing some stores and reopening others under the Sam’s banner. In 1989, Sam’s began moving into the Northeast. This region had little exposure to the warehouse store concept, and was not a Wal-Mart stronghold either. Sam’s opened its first store in the Northeast in Delran Township, New Jersey, and planned to open other stores in New York, Delaware, Maine, New Hampshire, and Pennsylvania. The other leading warehouse chains also targeted the Northeast at that time. The California-based Price Club chain had started Price Club East, and had 11 stores in the Northeast by 1990. Costco also entered the Northeastern market in 1990, with a revamped store format that included a bakery.

By 1989, the Sam’s Club division brought in $4.8 billion in sales, rising more than 25 percent over the previous year. The chain continued to account for a larger portion of Wal-Mart’s total sales each year. By 1989, it was providing over 18 percent of Wal-Mart’s total sales.

Consolidation and Competition in the 1990s

Sam’s changed its name in 1990 from Sam’s Wholesale Clubs to simply Sam’s Clubs. A judge in North Carolina had ruled that the chain was not entitled to the word “wholesale” in its name, since in that state only from 11 to 15 percent of goods bought at the Sam’s stores was actually intended for resale by others. State law required that at least 50 percent of goods sold be intended for resale, to merit the “wholesale” appellation. Though the ruling only applied to North Carolina, the chain thought it would be confusing to have different names in different states. So it adopted the simpler Sam’s Club name overall. While the chain was taking “wholesale” out of its name, it coincidentally bought a rival chain called The Wholesale Club. Sam’s paid about $175 million for the Indianapolis-based chain of 27 stores. The Wholesale Club was founded in 1982, the year before Sam’s. It operated exclusively in the Midwest. The chain had experienced a slow start, then eventually took off, with sales climbing from $165 million in 1987 to approximately $700 million at the time of its acquisition by Sam’s in 1990. It was poised to open three stores in the Chicago area when Sam’s bought it. Sam’s Clubs had been opening stores around Chicago, moving into suburban locations and in smaller towns on the outskirts of the city such as Joliet and Rockford. Sam’s acquisition of The Wholesale Club gained it strength in the Midwest just as other chains were also muscling into the area.

By 1990, competition between Sam’s and the other leading chains was growing more intense as the big players moved out of their core markets. Where the different warehouse chains met head-on, they tried to differentiate. Some offered a brighter format, or emphasized fresh foods and baked goods. One advantage Sam’s had was its relationship with Wal-Mart. Though Sam’s had originally been designated for urban markets, where Wal-Marts opened in small towns, increasingly since the late 1980s Sam’s opened alongside or nearby Wal-Marts. Because Sam’s was for members only, and appealed to small businesses, Wal-Mart’s management claimed the two stores did not overlap. Half the new Sam’s opened in 1990 were paired with a Wal-Mart. The size of the duo dwarfed other players in the same market.

Company Perspectives:

Sam’s Club is the nation’s leading members-only warehouse. We offer our 41 million members exceptional value on name-brand merchandise at “members only” prices for both business and personal use.

The booming warehouse store market the various players had struggled to divide since the mid-1980s began to cool in the early 1990s. The expanding warehouse chains could not keep up their momentum. The biggest players were still Sam’s Club, Costco, Price, and Pace Membership Warehouse, which was run by the formidable retailer Kmart. A poor retail environment in the early 1990s, combined with the intensity of the competition among the chains as they reached out of their core geographical markets, caused several stumbles. Sam’s apparently looked into acquiring Price or Costco, as did Kmart. Eventually Price and Costco merged, forming Price/Costco Inc. in 1993. (Within a few years the name reverted to Costco Companies Inc.) Kmart was unable to keep Pace Membership Warehouse going, and sold 99 of its 113 stores to Sam’s in 1993. At this juncture, Sam’s was the biggest chain left, with about 400 stores and 1993 sales of $14.7 billion. Sam’s also accounted for 22 percent of Wal-Mart’s total sales by that year. But Sam’s entered a period of doldrums. By the middle of 1994, same-store sales levels had fallen month by month for almost a solid year.

The company decided to refocus on its core of small business customers, targeting specific industries such as nursing homes, restaurants, hotel/motel operators, cleaning companies, and restaurants. It stocked items such as institutional quality sheets, heavy restaurant-grade cutlery, wheel chairs, and wrist splints. In targeting particular businesses, Sam’s also moved to carry less of other items, such as housewares, that appealed more to consumers buying for themselves or their families. In 1994 Sam’s also began stocking some unusual items, including juke boxes and grand pianos, that were meant to appeal to upscale consumers who enjoyed the thrill of bargain hunting. Sam’s got a new president in late 1995, Joseph Hardin, Jr. Hardin resigned in 1997 to take a job at the copy shop chain Kinko’s. He was replaced by Mark Hansen. Sales remained slow at the chain, accounting for a shrinking percentage of Wal-Mart’s total. Sam’s had provided over 20 percent of Wal-Mart’s sales in the early 1990s, but by 1997 this figure had dropped to 17.5 percent. In 1998 the company embarked on a major renovation program. It remodeled 70 stores, added bakeries or other new departments to 50 more, and expanded the fresh grocery departments of 120. Some top buying personnel were replaced, and the chain announced it would build a new kind of store, a “Millennium Club,” beginning with a model in San Diego. The Millennium Clubs offered more upscale items, such as wine, not found in other Sam’s. Sam’s Clubs also began offering a host of services, such as Airborne Express shipping service, discounted Internet access, a mailorder pharmacy, software training, and more. It introduced a new private label food line called Members Mark, and assailed its members with direct mail claiming “the secret to living well” could be found at Sam’s. All these moves seemed to have paid off, as 1998 was the best year the chain had had in a long time. Sales were close to $23 billion, and operating profits rose 15 percent over 1997.

But there was more turnover at the top, as Sam’s Club got a new president, Tom Grimm, in October 1998. Grimm had formerly led the Pace Membership Club, which Sam’s acquired from Kmart in 1993. Strong consumer spending in the late 1990s and through 2000 helped Sam’s get back on its feet somewhat. Sales and earnings increased in 1999, and the company opened almost 20 new stores. By 2000, the warehouse club industry had shaken down to only three major players: Sam’s, with over 450 stores; Costco, with close to 300; and BJ’s Wholesale Club, with just over 100 units. Rivalry between Costco and Sam’s continued unabated. Costco had subsumed the Price Club chain that Sam’s was originally modeled after, and Sam’s continued to take cues from Costco, offering similar goods and services. Sam’s and Costco opened stores within the same city, and Sam’s increasingly penetrated California, once a Costco stronghold. Also in 2000, Costco announced that it would open a new warehouse store in Arlington, Texas, only blocks from the site Sam’s had picked for its new store. Sam’s hoped to prevail, enhancing its marketing through ventures such as catalogs geared toward specific groups of members, for example daycare center operators. Sam’s also began attaching gas stations to its stores, moving from a pilot of seven in 1999 to a planned hundred or more by the end of the year. Sam’s also enhanced its pharmacy operations, and offered other services such as one-hour photo processing and prepared meals. The warehouse store industry had matured and changed markedly between Sam’s launch in 1983 and the beginning of the new millennium. From a growing, untapped market with room for many players, it had become a somewhat saturated industry, with head-to-head confrontation for market share within the same geographical area. Though Sam’s had recovered from its mid-1990s slump, conditions in the 2000s seemed likely to continue to be colored by the intensive competition between the chain and its closest rivals.

Principal Competitors

Costco Companies, Inc.; BJ’s Wholesale Club, Inc.

Key Dates:

1983:: First Sam’s Wholesale Club opens in Oklahoma City.
1987:: Sam’s acquires southern competitor Super Saver Wholesale chain.
1990:: Chain changes name to Sam’s Club.
1993:: Company acquires Pace Membership Club, a struggling chain owned by Kmart.
1998:: Company undertakes major renovation program.
2000:: Sam’s, Costco, and BJ’s Wholesale rank as the dominant players in the warehouse club industry.