Sunday, June 21, 1998

Sam's Club division reinventing itself

By CHUCK BARTELS / Associated Press

LITTLE ROCK, Ark. -- Sam's Club is embarking on a new wave of expansion with an eye toward its competition: any place a person spends money.

The wholesale store division of Wal-Mart Stores Inc. is hoping to attract small business owners and individuals, particularly maturing baby boomers whose income is increasing, Sam's Club president and chief executive officer Mark Hansen said.

The wholesale clubs provide "members" with a low-price source for business supplies and bargains on everything from tires to meat. The warehouses buy and sell in bulk -- and do so in a stripped-down atmosphere that has lower overhead than department or discount stores.

But the field has been consolidated with the number of warehouse clubs dropping from 13 in the 1980s to three.

Costco Cos., based in Issaquah, Wash., leads the $47 billion sector with $21.5 billion in annual sales at 284 locations. Sam's Club, based in Bentonville, Ark., has 444 stores, but is second in sales with $20.7 billion in the last fiscal year. A third company, B.J.'s Wholesale Club Inc., based in Natick, Mass.,has a smaller portion of the market in the Northeast and in Florida.

But Hansen says there's room to expand, even with the consolidation.

"One of the great misnomers is that it's a closed loop," Hansen said of the wholesale clubs. "You compete with anyone who is taking money from a customer," including grocers, office supply stores, electronics dealers and other retailers.

Michelle Henderson is already a convert to the clubs. She makes the 25-mile trip from England to the Little Rock Sam's Club every two months, spending between $200 and $400. She buys items for her family of five, their four pets, and for the family farm.

"With so many people in the family, it's cheaper to buy in bulk," she said. While food and dry goods -- like the case of cookies she was loading into her sport utility -- are the staples of the trips, Ms. Henderson said she also buys oil, cleaning supplies and tools for the farm and its tractor shop.

While they offer good prices and bulk quantities, the warehouse clubs offer a limited line of products. Of about 4,000 items on Sam's Club shelves, about 1,400 are available most of the time, and the rest are rotated, some being one-time buys.

As Sam's Club positions itself to expand, about 200 stores will be remodeled or replaced. The stores are adding more fresh items, such as meat, vegetables and gourmet foods to their typical bulk frozen food items.

Analysts say the move is a good one.

"Same store sales are starting to improve," said Don Spindel, a retail analyst with A.G. Edwards & Sons Inc. in St. Louis. "They are much better focused on what their mission is and they are going a good job implementing their game plan."

Sam's Club is raising its membership fee from $25 to $35, the only increase since the club was first opened in Oklahoma in 1983. With the price hike, however, members are getting more services. Spouse cards, which once cost extra, are now included. Likewise, members can go through Sam's to seek lower prices on everything from cars to cruises, and for Internet and long distance services.

Hansen said Sam's Clubs remains committed to the membership concept, but said he is willing to greatly change the shopping environment and what is offered on the shelves.

An analysis by Jeffrey Feiner of Lehman Brothers says wholesale clubs have several factors in their favor.

The strong economy coupled with fewer sources for small businesses to buy supplies will keep people coming through the warehouse club doors. Ever-increasing value consciousness among consumers gives the clubs an edge.

In addition, the trend to home offices, and to spending more time at home in general, will be a boost to the clubs, he said.

For the fiscal year ending Jan. 31, Sam's Club sales were up 4 percent, from $19.8 billion to $20.7 billion. Its operating profit was $950 million, an increase of 10 percent from the year previous.

Despite the jump in sales, warehouse clubs have a long way to go -- they represent just 2 percent of the overall retail market.

"There is good news to that," Hansen said. "We have 98 percent opportunity."