Rival warehouses woo the well-to-do
On a recent Saturday, he added another item: a two-carat diamond.
Kline and his wife, Lisa, didn't think of Sam's for diamonds when they first decided to upgrade her engagement ring. Then, when a new Sam's store opened in nearby Plano, it sent them a flier promoting "a diamond extravaganza." This traveling gem show — Sam's Club's first — featured diamonds priced as high as $1 million.
The Klines and shoppers like them have become the prize in a battle between Sam's Club and archrival Costco Wholesale for pre-eminence in the wholesale-club business. Long known for selling huge quantities of diapers, detergent and diskettes at discounted prices, Sam's Club is using diamonds, along with luxury watches, fine wines and even sculpture, to woo the well-to-do customers who for years have helped Costco consistently best Sam's.
In the United States, Costco's approximately 229 stores had average annual revenue of $114.3 million in the fiscal year ended last September, while Sam's 439 stores open a year averaged only $61.1 million in the fiscal year ended last January. Costco's profits have slipped some this year because of energy and technology woes in California, its biggest state, and the cost of expansion in new markets such as Texas. But Costco shoppers still spend an average of $110 at each visit. Sam's won't provide its comparable number but acknowledges that Costco's is higher.
$94 Dom Perignon
Costco, based in Issaquah, lures its more affluent clientele with warehouse prices for gourmet foods and upscale brands such as Waterford crystal, Raymond Weil watches and Ralph Lauren clothing. Costco also is one of the largest purveyors in the world of Dom Perignon champagne, which it sells for about $94 a bottle.
Warehouse clubs traditionally have served small business and consumers who like to buy in bulk. But Costco devotes 25 percent of its merchandise to what it calls treasure-hunt items: the deeply discounted TaylorMade golf clubs, the Prada and Coach handbags and the Ashworth golf shirts shoppers stumble upon on their way to the paper towels. The largest buyer of Bordeaux in the country, Costco says its wine buyer prides himself on finding up-and-coming premium wines before they hit Wine Spectator magazine. And Costco has sold diamonds for years; the company promises to give members a refund plus $100 if one of its diamonds is appraised for less than double the Costco price.
Now, taking its cue from Costco, Sam's is making its stores brighter and adding colorful signs to brighten its grungy girders-and-cardboard-boxes image. The Wal-Mart Stores unit is adding brand names such as Maytag appliances and Ralph Lauren bedding and clothes, and beefing up its fresh-foods department with steamed shrimp and bagels. Last winter, Sam's unveiled a revamped jewelry division that offers a wider assortment and higher grade of diamonds and pearls, plus watches by Ebel and Concord that sell for little more than half of department-store prices.
"I highly respect that company in the Northwest," says Tom Grimm, Sam's chief executive. "But now they have to contend with a Sam's organization that knows where it wants to go."
In the slower-growth economy, wholesale clubs generally are doing better than retailers overall as consumers become more price-conscious. And Sam's in particular is seeing results from adding higher-end products to its mix. The average sales ticket has increased about 7 percent this year. In June, Sam's sales at stores open at least a year jumped 7.1 percent from a year earlier. By contrast, Costco's same-store sales rose 5 percent. And in each company's most recent quarter, Sam's operating earnings increased 15 percent, while Costco's net income slid 13 percent.
"There's no question Sam's is getting better, and I wouldn't be a retailer if I wasn't paranoid," says Jim Sinegal, chief executive of Costco. "They're zeroing in on an aspect of our business, so we have to get a new target. We have no illusions."
Bulk sales a big hit
Intense competition has been a defining characteristic of the warehouse-club business since it was born in 1977, when Sol Price opened his first Price Club in San Diego.
The concept of charging membership fees for the privilege of buying bulk goods just a sliver above wholesale prices was a huge hit in the 1980s. But by 1993, the industry was in trouble.
A series of consolidations and store closings ensued. Costco acquired Price Club. Sam's bought Kmart's Pace Club chain. The two emerged with 85 percent of the wholesale-club market. But they took different tacks to reinvigorate the business.
Costco, considered the innovator, created a fresh-food department modeled on upscale gourmet-food shops. The move helped drive repeat business, increasing average visits to every 10 days now from once every three weeks in the mid-1990s.
With only 3,600 products, compared with about 40,000 at an average supermarket, Costco wanted to break up the potential monotony for its more upscale customers. Enter the high-grade jewelry and crystal that justified a basic membership fee of $45, $10 more than the Sam's fee.
"No matter what community you're in, business owners are on the top end of the demographic scale," Sinegal says. "So we figured if our customer is not going to buy Waterford, who is?"
Rural roots
With its roots in the more rural, lower-end Wal-Mart chain, Sam's focused on its members' business needs, offering bulk packages of the kinds of items sold in Wal-Mart's discount stores and supercenters.
"Costco's membership base is a little more affluent, so it allowed them to get to a better merchandise mix faster than Sam's," says Lee Scott, Wal-Mart's chief executive. In the last fiscal year, Sam's sales accounted for 14 percent of Wal-Mart's total revenue of $191 billion, when Wal-Mart's earnings increased 17 percent to $6.3 billion. Shares of the Bentonville, Ark., parent have hovered in the mid-$50s recently, off their 52-week low of $41.44 last October.
Plagued with revolving-door management, Sam's in early 1999 brought in Grimm, who was retired and living in Salt Lake City when Wal-Mart called. A veteran of the wholesale-club business, Grimm had founded Pricesavers, a Utah-based chain that he eventually sold to Kmart.
Vision of the future
After investigating what members wanted, Sam's unveiled its vision of the future in Plano this summer. The new store opened just a mile up the road from Costco's first Texas store, which opened last fall.
The new Sam's Club is bigger than most, and with its steel casings pushed to one side, it has a more open, orderly feel than a typical Sam's Club. Each department is designated by a brightly colored blimp-size sign with a picture of the category offerings underneath. Costco still eschews signs in its stores, hoping to encourage shoppers to walk through the whole store.
The new Sam's Club has a cafe and is outfitted with computer kiosks along the wall for accessing the Sam's Club Web site. In the fresh-food section, a large copper kettle churns out caramel popcorn and nut clusters.
Grimm hopes soon to roll out many of the features in the Plano prototype chainwide, including a new 8-by-23-foot display case of premium wines, some so expensive that they are kept under lock. Just days after the Plano store opened, it sold out of the tightly allocated Opus One, a California red wine that went for $114 a bottle, about 30 percent less than retail.
For the last year, the chain has been testing a food factory in a Seattle store that produces smoked meats and tortilla chips, bottles a private-label sports drink and makes fresh-squeezed orange juice behind glass walls so customers can watch. Costco is also testing special-order kiosks for items ranging from top-brand faucets to expensive area rugs.
Sinegal says he believes there is plenty of market share for both companies. In the end, he says, "it is the customer who will decide."