When Costco opened its Brandon store, it gave away 90,000 free memberships to secure a foothold in the Tampa Bay area. Now the company is hunting for more sites. "We wouldn't come in if we weren't confident we could have at least four stores in the Tampa Bay area,'' Costco's chief executive says.
By MARK ALBRIGHT
© St. Petersburg Times, published June 4, 2001
At Sam's Clubs in Hillsborough County, managers shaved an extra penny off the $500 price of a leather chair and ottoman to beat rival Costco's price on similar pieces.
As executives studied the competition, Sam's Clubs' six local stores got face lifts with brighter lights and new gourmet food departments. Even the paint jobs were scrutinized: The Sam's store in Brandon got a new red stripe around the once drab battleship gray and blue building. "What really irritated me," Brandon Costco general manager Jason Zook said, "was Sam's painting their building to look like a Costco."
Welcome to ground zero in the warehouse club wars. After eight years with no competition on Florida's west coast, Sam's Club is battling other chains expanding across the state. BJ's Wholesale Club Inc. of Natick, Mass., plans to open four stores in Orlando and two in Sarasota this fall.
But the most aggressive assault comes from Costco, the Issaquah, Wash., chain that pulled out of the Tampa Bay area in 1990. When it opened the Brandon store in November, 90,000 shoppers got free one-year memberships to shop for an eclectic mix of everything from cases of chicken wings to $239.99 Prada purses. Now the company is hunting for more sites. "We wouldn't come in if we weren't confident we could have at least four stores in the Tampa Bay area," said Jim Sinegal, president and chief executive of Costco Wholesale Corp.
The stakes are high: Florida is Sam's Clubs second-biggest stronghold behind Texas. The bay area has been Sam's biggest uncontested market in the Southeast. Sam's Club alone generated about $310-million in annual sales. Company executives vow to keep their turf.
"We are not going to stand still and let them take our market," said Mike Peel, regional operations director for Sam's, the membership club unit owned by Wal-Mart Stores Inc. "We'll be adding new locations and have a few surprises of our own coming."
Warehouse clubs were invented by San Diego entrepreneur Sol Price, who created the Price Club in 1976. The high-volume stores got noticed by Wal-Mart founder Sam Walton. He opened his first Sam's Club seven years later. Meanwhile, Sinegal, who worked for Price, left to create Costco the same year.
Price's no-frills operation charged $25 a year for a membership, initially as a way to weed out would-be shoplifters or check bouncers. Later, the membership became a way to limit access to business shoppers. Price thought manufacturers would be more willing to let him offer cut-rate deals to small-business owners as a new form of wholesaling. As the warehouse business grew, Price opened membership to others.
The club business has changed dramatically since the industry's youth. Consider Costco's original Clearwater store, which closed in 1990. The store was a cheap warehouse with a parking lot next to a pistol range. Alligators caught occasional naps on the grass.
Inside, the store was spartan. Built over a landfill, the cracked concrete floor was so uneven clerks learned to yell "cart" to warn bystanders when a fully-loaded started rolling away. Shoppers also had to dodge forklifts toting pallets. To find the frozen foods, customers had to wheel carts inside a cooler. Checkout lines were long and moved slowly because there were no price scanners. Payment options were cash or check. Costco closed the store and two others in Tampa and Palm Harbor because they never made money.
These days, clubs follow the McDonald's strategy: pay for prime retail real estate, often across the street from malls. They feature food courts and food sampling stations. Forklifts are banned to after-hours duty except in emergencies.
Faster checkouts became a priority. Stores now have as many checkout lanes and scanners as supermarkets. At Sam's Club clerks use wireless scanners to work through long lines.
"The club industry has really changed with Costco being the innovator while Sam's was more the copier," said Robert Toomey, a securities analyst with Dain Rauscher Inc.
Making money on warehouse clubs requires close adherence to a formula. For starters, clubs get cash upfront from customers. Fees vary. Sam's individual membership costs $35 a year; it's $40 at BJ's and $45 at Costco.
It takes two to five years to get enough paying customers to be profitable. Costco's offer of free membership in Brandon, which ended in January, wiped out the store's first year profit.
Clubs work on a hair-thin gross margin, the difference between what a retailer pays for goods and what a customer pays for them. It's a measure of a retailer's markup, costs and efficiency. Warehouse clubs work on 13 percent gross margins, almost half as much as supermarkets, so expenses must be pared.
There is no advertising. To avoid credit card transaction fees, Sam's and Costco accept just one credit card other than their own. Shoppers load carts direct from the shipping pallets. "The only time we touch most products is to tear the shrink wrap off the pallet," Zook said.
Keeping selection to a minimum saves money. Costco carries 13 cereals, compared with the 36 varieties found at a Kash n' Karry. Overall, Costco stocks 3,800 items, a fraction of the 30,000 to 40,000 found in a supermarket. Products come in only one size: huge. IAMS dog food, for instance, is sold in 44 pound bags, while Advil comes in a 325-count bottle.
The tiny selection also drives sales volume. By stocking only the top-selling items, clubs turn over inventory 18 times a year, six times the volume of a deparment store and twice that of a discount store. The average Costco churned $105-million in sales in 2000, about $35-million more than the average Sam's or even the busiest Home Depot in the Tampa Bay area. Such fast inventory turnover means clubs don't need to borrow to pay suppliers.
Another strategy: a changing selection of upscale lifestyle items at discount prices. Costco uses so-called "signalling" items, status brands put in conspicuous places, to bolster its image.
"In apparel, they'll mix some Ralph Lauren Polo or Calvin Klein shirts in the front row with more obscure names to create the brand name veneer of a treasure hunt," said Neil Z. Stern, a retail consultant with McMillan/Doolittle in Chicago.
It's an eclectic mix. Shoppers can buy potato chips by the pound or diamonds priced as high as $40,000 at Costco. The Brandon store recently had the Prada purse, a Chanel handbag for $1,249 and wines priced from $10 to a top shelf $98.99 for Mondavi Napa Reserve Cabernet Savignon.
Sam's Club, which avoids competing with itself by carrying none of the brands sold at Wal-Mart, is getting more brand name conscious to catch up with Costco. Sam's price range for wines is a more modest $5.99 to $37.99 a bottle. Sam's diamonds are priced up to $11,000.
Despite the perception, not everything is the cheapest price in town. The Brandon Costco, for example, recently had a $419 sea kayak, $75 higher than the Sports Authority down the street. Sam's Club wanted $46.99 for a DeWalt palm grip sander, 99 cents more than Home Depot.
Indeed, clubs are not for everyone. Paula Moore, a single parent from Wimauma, stopped shopping at clubs because "I got tired of spending $150 a trip and only having a little, bitty bag of groceries to show for it," she said.
But there are loyal fans, such as Joe Plevel of Apollo Beach, a 64-year-old truck trailer salesman. He prefers Costco, where he bought bargain-price patio furniture and a mirror. "It's cleaner and has more upscale merchandise," he said.
When his free year at Costco comes to a close, Plevel will need to decide if he'll keep going to both Sam's and Costco.
Costco's Sinegal thinks he will keep Plevel's business: "The biggest thing I learned working for Sol Price was that if you treat the customer right and offer them great value, they just cannot resist."
- Mark Albright can be reached at firstname.lastname@example.org or (727) 893-8252.