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WELCOME TO THE CLUBS!

A trip to Sam’s may not be a treasure hunt exactly, but the chain has enjoyed double-digit comps for 12 consecutive quarters nonetheless.

We couldn’t choose just one, so congrats to Co-Retailers of the Year Costco and Sam’s Club.

Club stores were big winners during the pandemic when consumers looking to limit shopping frequency stocked up on big packs of toilet paper and frozen snacks. But on the heels of the pandemic came record high inflation, sending consumers back to club stores once again, this time in search of value. They soon discovered, however, that Costco and Sam’s Club in particular have much more to offer than low prices on bulk packages.

‘Club as a format has been on a winning streak for more than a decade.’

TWO TOP FIVE FINISHES

In fact, the two chains finished second and fifth, respectively, in dunnhumby’s sixth annual Retailer Preference Index (RPI), which ranks the 63 largest food retailers based on a combination of financial results and customer perception. “Club as a format has been on a winning streak for more than a decade,” gaining market share mostly from supermarkets and supercenters, according to Chicago-based dunnhumby. But thanks to their ability to meet the needs of consumers at a very unique moment in time, clubs have never been more popular than they are right now. (Pre-pandemic, no club store ranked higher than seventh in dunnhumby’s RPI).

Both Costco and Sam’s report record-high membership levels, and Sam’s has posted double-digit comps for 12 straight quarters. Costco, on the other hand, “has performed better than any retailer in any channel over the past several years, registering a 14% five-year compound annual growth rate,” reports Karen Kelso, vp at New York-based Kantar. “Its performance has been exemplary.”

Why are the two clubs doing so well versus the competition? A closer look at the RPI provides a few clues. Both chains scored particularly well in the area of operations, which encompasses in-stock levels and accurate, consistent pricing. Post-pandemic, “A lot of retailers have struggled to get back on track with inventory, and consumers have become increasingly frustrated by out-of-stocks and constantly changing prices that make it difficult to shop and hard to budget,” says Neil Saunders, managing director at New York-based GlobalData.  Due in part to the flexibility offered by the pallet-focused, limited-SKU club store model, “Sam’s Club and, especially, Costco… have avoided some of these issues,” he adds. “That reliability is one of the reasons customer satisfaction is so high.”

‘[Costco] has performed better than any retailer in any channel over the past several years, registering a 14% five-year compound annual growth rate.’

Although Costco offers online ordering for home delivery, curbside pickup is limited — and industry observers say the website could use some tweaking.

The two chains also scored high in the area of price, promotions and rewards, which saw the biggest year-over-year increase in importance among consumers surveyed by dunnhumby. Its findings are supported by research carried out by Winston-Salem, N.C.-based Inmar Intelligence in the past year and a half, which found that promotions are important to 75% of shoppers. Moreover, reports evp Rob Weisberg, president of incentives and loyalty, 53% of shoppers purchased a membership at a wholesale club in order to save by buying in bulk, and savings/promotions was cited as the No. 1 reason for shopping at wholesale clubs. He adds that when consumers were asked which categories they purchase more often at club stores than grocery, 26% of respondents said frozen foods.

“Right now, club stores are really resonating with consumers, who are more conscious of their spending and looking for savings, particularly on stock-up items,” confirms Elise Whitney, director of analytics at Cadent Consulting Group, Wilton, Conn. “And while Costco and Sam’s Club have different approaches, they are both capitalizing on this moment.” Let’s take a closer look at how the two chains are meeting the needs of their members.

COSTCO PUTS MEMBERS FIRST
In addition to executing the basics extremely well, “Costco has a very clear model that puts members first,” says Kelso. “They find out what products customers want and then surprise and delight them by offering those items at an excellent value. But the value equation is skewed more toward quality than low prices,” she adds, citing the chain’s well-regarded Kirkland Signature private brand collection as an example (more on that later). Indeed, consumers rated Costco higher than its club store brethren in the quality category, according to dunnhumby.

The chain is also known for an assortment that’s always evolving, creating a fun, treasure hunt atmosphere. (The free samples help, too.) “Members know that they’re always going to find some ‘wow’ items at a great price that they can’t pass up — because they may not be there next time,” explains Kelso. That’s why members almost always leave with more than they intended.

Demos are back at Costco, but not at pre-pandemic levels. However, the chain is reportedly testing self-serve sampling stations that could help lessen staff shortages.

“I went in for milk and eggs last weekend and came out with three pairs of shorts and some motor oil, too,” recalls Whitney (who was able to resist the inflatable kayak). She also appreciates Costco’s generous return policy, which sets it apart from other retailers and bolsters the chain’s reputation for reliability. That said, there is room for improvement, especially around online shopping.

“Costco has never been a leader in that regard but consumers increasingly shopping online have come to expect a reasonable mobile app offering and a cohesive omnichannel experience,” says Cadent managing partner Don Stuart. Costco has a mobile app and online ordering, “But the experience isn’t as seamless as it could be.” For example, prices for products purchased via the website may differ from those sold in the warehouse. But in order to see which one is less expensive, members have to log into the app, which isn’t always worth the hassle. In addition, the digital membership card in the app doesn’t work at Costco gas stations, so consumers still have to carry a physical card.

Online ordering isn’t always simple either. “While much better than it used to be, Costco’s web experience is a little haphazard — solid but nowhere near as good as Sam’s,” says Saunders. “The website feels older and clunkier and is a lot harder to navigate. Plus, it isn’t as obvious which products can be picked up and whether or not items are available.” It’s functional, he adds, “But the whole website really needs a revamp.”

Now would be a great time to make that investment, says Stuart, citing an opportunity to boost online sales of food in particular. Discretionary items make up 58% of Costco’s e-commerce sales, according to a recent earnings call, but sales were down 15% in Q2 as cash-strapped consumers reined in spending on non-essentials. While the chain uses its website to drive traffic to warehouses where it can pick up impulse sales, it could absolutely be selling more food online, which would help offset losses in big-ticket items. A better online option might attract new members or encourage existing members to buy more food at Costco — instead of heading to conventional supermarkets for fill-in trips so they don’t have to deal with club-store crowds.

Sam’s assortment is described as a bit more vanilla than Costco’s, but products are in-stock and prices are consistent (online, too) — two things valued by today’s consumers.

SAM’S EXCELS AT E-COMMERCE

While Costco’s e-commerce program could use some improvement, it’s an area where Sam’s Club excels. Out of 63 chains rated by dunnhumby, the chain earned the fourth-highest score for digital engagement. “It’s really the one area where Sam’s is clearly in front of Costco,” says Kelso.

“Sam’s is on the cutting edge in terms of online shopping, offering a more seamless, omnichannel experience than Costco,” agrees Stuart. Not surprisingly, e-commerce sales were up 21% year-over-year in Q4, with contributions from both curbside and ship-to-home, according to the company in its latest earnings call.

‘Costco has never been a leader in [e-commerce] but consumers increasingly shopping online have come to expect a reasonable mobile app offering and a cohesive omnichannel experience.’

“The online platform is very easy to use, functions such as search work very well, and products are displayed neatly and with a lot of information,” adds Saunders. “Plus, it’s very clear exactly what’s available for delivery and for pickup from the store, and when buying in-store, customers can usually see how many items remain in stock. In addition, the Sam’s website includes quite a bit of inspiration, with hot products and seasonal items featured on the home screen.”

Sam’s is working to improve its Member’s Mark private label program, which is described as “solid” but not a trip-driver.

That digital connection is helping Sam’s with its membership composition. In fact, Sam’s Club CEO Kathryn McLay said in the company’s last earnings call that “We’re attracting a lot younger member base than what we’ve had previously.” The company is also capturing a greater share of wallet from mid- and higher-income shoppers — another very desirable demographic. “So we’re really happy with the way the membership composition is trending.”

Because it’s able to piggyback off of Walmart’s innovation, “Sam’s is also ahead of the pack in terms of technology and automation,” says Stuart. For example, he reports, the chain recently deployed inventory scan towers that are fitted to autonomous floor scrubbers. As they move up and down the aisles, they generate reports on pricing accuracy, planogram compliance and stock levels, all of which lead to improved performance — without burdening store associates. Sam’s also offers Scan & Go technology, used by approximately one in four customers, according to Walmart CFO John David in a recent call with investors. “That’s pretty great digital penetration in that physical footprint, and, I’d argue, probably as good as anyone out there.”

‘OLD-FASHIONED’ SYSTEMS

Costco, on the other hand, is a bit behind when it comes to technology. “It’s a very successful club but also very old-fashioned in some ways,” says Kelso. “Costco doesn’t spend a lot on technology or infrastructure…so its systems are just OK.” However, both chains are looking at more automated solutions that can help reduce labor costs, so investments in technology are likely to become increasingly important.

Another Sam’s Club strength is its slightly less expensive membership fee. It has also run a couple of very successful promos to incentivize membership renewals and trade-ups, including one that added Sam’s Cash to members’ rewards accounts (and boosted digital engagement in the process). However, “The chain often isn’t as sharp on price as Costco…and the in-store experience isn’t quite as fun, with less tasting and less of a treasure hunt atmosphere,” says Saunders.

‘Sam’s is on the cutting edge in terms of online shopping, offering a more seamless, omnichannel experience than Costco.’

The other knock on Sam’s Club is its Members Mark private label lineup, which represents approximately 30% of its sales, according to a recent report from Numerator.  “It’s not that Member’s Mark is deficient in any way,” though some observers would like to see more better-for-you and sustainable items. “It’s just that Kirkland Signature is so strong that it’s raised member expectations for private label everywhere,” says Stuart. So, while Kirkland Signature is a true destination brand, “Member’s Mark doesn’t draw shoppers to Sam’s in the same way.”

Costco offers a wide array of frozen ethnic snacks and meals, making it attractive to younger and more affluent consumers with more adventurous palates.

Kelso agrees. “Kirkland Signature is among the highest-rated private brands across channels, right up there with Trader Joe’s in terms of brands consumers feel confident in and brands they look forward to buying. It’s a huge asset for Costco.” Numerator estimates Kirkland Signature’s share of grocery, household and HBC sales at Costco at 33.5% — a bit higher than Member’s Mark’s 30.0% at Sam’s Club.

However, Sam’s is working hard to improve Member’s Mark by soliciting feedback on the program from customers. “McLay did something pretty cool by creating a team that actually surveys members about what they do and don’t like about Member’s Mark, what products they’d like to see added to the line, what’s missing, etc.,” reports Kelso. “I love the idea of engaging members more consistently in those decisions.”

BOTH CHAINS IN EXPANSION MODE

Both Costco and Sam’s recently announced expansion plans — Sam’s for the first time in years. While Costco says it will open 15 new warehouses during the current fiscal year, Sam’s is planning 30 “over the next several years,” the first of which is scheduled to open in Florida in 2024. At approximately 160,000 square feet, the new Sam’s Clubs will be larger than most of the chain’s current locations, which average 135,000 square feet. The extra real estate will be used to accommodate a significant expansion of the omnichannel fulfillment footprint, including dedicated space for curbside pickup, delivery and ship-from-club orders. Most new clubs will also feature walk-in dairy and fresh coolers, says the company.

‘Kirkland Signature is among the highest-rated private brands across channels, right up there with Trader Joe’s in terms of brands consumers feel confident in and brands they look forward to buying. It’s a huge asset for Costco.’

Widely regarded as one of the best store brands in any channel, Kirkland Signature represents about a third of Costco’s grocery, household and HBC sales.

While Sam’s doubles down on its omnichannel prowess, Costco continues to do what it does best: delight and inspire its members with its unique assortment (at a great price, of course). “I see Costco digging deeper and leveraging current trends, taking advantage of new things in the marketplace,” says Kelso, pointing to a wide array of higher-end ethnic food options that appeal to more affluent and adventurous eaters. “On my last visit, I saw a lot of Indian and Korean entrees for families who want to go beyond the usual. I don’t see Sam’s doing that,” she adds.

Although neither chain has announced plans to add more freezer space in new stores, Kelso says she’d be surprised if they didn’t. Kantar’s ShopperScape database reveals that, among Costco members at least, frozen food is a top priority, with 49% reporting they look specifically for frozen food when they visit a club. “[Costco members] are among the highest spenders, and frozen is a destination category for them,” emphasizes Kelso.

Among Costco members at least, frozen food is a top priority, with 49% reporting they look specifically for frozen food when they visit a club.

JOINING THE CLUB

As volume continues to be siphoned out of traditional grocery, “Manufacturers really have no choice but to engage with Costco and Sam’s, although they may not always like the costs, packaging requirements and the sometimes onerous margins,” says Whitney. “But the volume they deliver is exceptional.”

That said, new items are expected to hit the ground running, according to manufacturers. In an eight-week rotation at Costco, says one supplier, a new product has to clear “huge thresholds” during the first three or four weeks because that’s what the buyer looks at when determining whether or not to continue the item for another rotation. So even if weeks five through seven are awesome, it probably won’t be enough. And sometimes new items don’t get a lot of support, reports the supplier, citing a rigid, ‘live or die’ attitude among some buyers. “Bottom line: If your new product doesn’t hit that sales threshold in its first region the first time out, it can take years to get another shot.” (And meetings are reportedly very hard to get, especially for smaller vendors.)

‘Bottom line: If your new product doesn’t hit that sales threshold in its first region the first time out, it can take years to get another shot.’

Saunders says there’s a reason for that. “There isn’t as much openness to new products as you’d find at traditional grocery because both chains want to keep SKU counts down for efficiency,” he explains. “That doesn’t mean they’re closed to new ideas, but suppliers really have to justify their shelf space and come with a very coherent view of how new products will deliver.”

On the plus side, says another supplier, both Costco and Sam’s Club pay on time and in full. And both take fairly low mark-ups, though they require full truckload shipments. As a result, “They make money, their members save money and the vendor makes money. So everyone wins.” She adds, “I can’t say that about a lot of grocery retailers.”

Denise Leathers

Denise Leathers

Denise is the Editorial Director for Frozen & Refrigerated Buyer.

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