Low Prices, Bulk Goods Lure Affluent to Warehouse Clubs
Industry sales figures have jumped 2-1/2 times, from $16 billion in 1989 to more than $40 billion by end of 1994
BROOKINGS,ORE — .
IT'S an industry that has attracted consumers who are ''fed up.'' They are suspicious of big business and big government, and resent overcharging by contractors.
Such customers are fighting back ''against companies that no longer guarantee jobs, paychecks that no longer keep pace with inflation, and pension plans that don't guarantee benefits,'' claims Gene Wright of Andersen Consulting in Chicago.
Whether or not the wholesale-club retail industry consciously exploits such consumer resentments is a point of debate. But the industry does know its typical customers are affluent, educated homeowners who probably own four-wheel-drives.
They haul store merchandise by the pallet load, which has helped generate annual retail-sales figures that have jumped more than 2-1/2 times in recent years, from $16 billion in 1989 to more than $40 billion by the end of 1994.
Warehouse clubs seem to have found a merchandising-marketing strategy that has put them well ahead of the competition. Many industry experts maintain that, having caught its breath during a recent period of retrenchment, the industry will plunge ahead with greater expansion, though this time overseas rather than in the United States.
The strategy, says Daniel O'Connor, president of Management Ventures in Boston, depends on three things: a limited variety of products, high sales volume, and especially a low-cost structure. ''Compared with everyone else, it's the lowest'' - two or three times lower than supermarkets.
Little variety at clubs
Usually only one brand - of ketchup, pasta (maybe only fettucini and spaghetti), and flour - is offered. But these brands are almost always the best-known and accepted as top quality by most consumers.
The package size of products is traditionally industrial-strength - for example, 10 pounds of fettucini or 25 pounds of flour. Purchasing in such quantity saves the buyer as much as 33 percent, according to Paul Crnkovich of Cannondale Associates, a club retail-marketing consultant.
As economical as such price levels might seem, clubs do extremely well. Mr. O'Connor, whose company monitors American retailing, says they have the lowest investment percentage - about 11 percent - of any retail operation. But they must keep their pencils sharp.
''The club industry is built on a cash environment,'' O'Connor explains.
''Credit cards can destroy this environment. Clubs don't accept VISA and MasterCard but not because of having to pay a fee. It's because they need the cash to make the economies of their operation work,'' he adds.
Profits come from member fees
Membership fees - $35 a year for two members of a family - are another important contributor to clubs' profits. In fact, 2 percent of the 3 percent profit margin of most clubs comes from such fees.
Mervyn Weich, the founder and former president of BJ's Wholesale Club, puts it simply: ''They make the money on the member not the merchandise. To make it work, they must have customers who will pay the fee.''
This doesn't seem to be a problem. O'Connor said the warehouse-club industry has signed up about 44 million cardholders. ''Even if 50 percent are secondary cards [those held by a second person in the family], it is a penetration of about 20 million households. That's 21 percent of the 95 million households in America.''
Club members are well-to-do
Moreover, these cardholders appear to have money to burn. O'Connor defines the ''typical high-purchasing member'' as someone who has owned his home for an average of nine years, is 47 years old, and has a yearly income of $50,000.
O'Connor adds: ''Forty-three percent of cardholders are college graduates; 25 percent have done post-graduate work; and 92 percent give to charities and belong to charitable associations.''
This kind of market penetration is all the more remarkable given the present condition of American retailing. Experts say the United States is hugely ''overstored.''
Today, there are 18 square feet of selling space for every American, up from 12 square feet only eight years ago. Since population growth is holding at a rate of only 1 percent a year, any retailer who expands does so at the expense of his competitors.
But if anyone is going to survive in the American retailing jungle, it is likely to be those with the sharpest teeth and claws - the warehouse clubs.