Wal-Mart isn’t happy with the way things are going at its Sam’s Club warehouses.
The company last week sent a memo to employees announcing job cuts, leadership changes, and several new strategic priorities for the bulk-shopping giant.
The moves grew out of management’s “in-depth analysis of its business to map out a winning path for the future of Sam’s Club,” CEO Rosalind Brewer said in a company memo.
That path to success apparently involves stealing market share from the current king of specialty retailing, Costco.
In the strategy memo, Sam’s Club named three initiatives that could help it compete more effectively with Costco. First, it aims to focus on attracting high-income shoppers, especially through targeting business members. Second, Sam’s Club hopes to revamp its private-label business so that members can find better exclusive values when they visit its warehouse. And third, the retailer is targeting e-commerce as a major opportunity to “transform the club experience.”
Costco’s success with business subscribers has been a key factor behind its stellar business results lately. Executive members, who pay twice the $US55 annual fee, account for 39% of its subscriber base — up from 25% in 2007. The 2% spending kickback that these members receive is a drag on sales growth; but management is happy to take that short-term hit for a chance at higher per-member spending over the long term.
In fact, Costco heavily promotes its executive membership, and aims for that group to keep expanding toward 50% of the subscriber base.
Private-label merchandise is another area where Costco excels over its retailing rivals. The Kirkland Signature brand has been a huge success, helping it offer a wide range of products at lower prices than national brands, while at the same time raising its profitability.
More than one quarter of the small selection at a typical Costco warehouse is taken up by Kirkland-branded items. And, if anything, Costco wants to sell more of these differentiated products. “We expect to continue to increase the sales penetration of our private label items,” the company says in its 10-K.
While Costco has a significant lead over Sam’s Club with business members and private-label products, e-commerce is one area where Wal-Mart might have the advantage. The megaretailer has been pouring billions of dollars into building out fulfilment centres and delivery services across its deep national store footprint.
It just expanded its home-grocery-delivery program into more markets. And Sam’s Club has several “shop online and pick up at the store” options; it’s even testing online order pickup drive-through options at several warehouses.
Costco, meanwhile, is investing in e-commerce, but conservatively. Rather than seeing it as a fundamental transformation of the club-shopping experience, as Wal-Mart does, Costco approaches digital shopping as a complementary business.
It’s important that Costco competes effectively online, but management understands that its unique value proposition is tied to a member actually visiting the warehouse. “We’re not going to be the company that delivers two different cereals to your doorstep at 7 a.m. as long as you order by 10 p.m. the night before,” Chief Financial Officer Richard Galanti told investors in last quarter’s conference call.
It’s no surprise that Wal-Mart would look to Costco for ideas on how to get the Sam’s Club business back on track. The warehouse giant just closed the books on an awesome fiscal year, during which sales improved 6%. Sam’s Club’s growth, by contrast, was less than 1% during the last six months.
Still, if Wal-Mart wants to pawn off a significant portion of its rival’s membership base, it won’t be easy. Costco’s subscriber-renewal rate is sitting at a record-high 91% right now.
Demitrios Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.