It's not often that giant Wal-Mart Stores Inc. feels the need to defend itself. But at the overflowing annual meeting on June 3, Chief Executive David D. Glass tried to assure employees and investors that there was no cause for dismay over Wal-Mart's $14.7 billion Sam's Clubs division, despite 11 consecutive months of same-store sales lagging behind prior-year levels. The warehouse-club industry "should not be written off," Glass maintained. "We believe it's alive and well and thriving."
A few years ago, such optimism would have gone unquestioned. But brutal competition, price deflation, and general economic malaise have pummeled the club operators. The shakeout led Price Co. and Costco Wholesale to merge, and Kmart Corp.'s PACE Membership Warehouse to close. Analyst Robert F. Buchanan of NatWest Securities says the formula of bargain-priced goods in no-frills warehouses has "become somewhat stale."
"OFF FOCUS." Sam's, in turn, is on the spot. After acquiring 99 of PACE's 113 stores last year, the chain is the No.1 player in the $39 billion club industry. Its lackluster results have been a key factor in Wal-Mart's sluggish stock, which trades around 25, down from a 52-week high of 301/2 last November. Wal-Mart, which drew 22% of its revenues last year from Sam's, knows the warehouse-club unit has to change. "What was once an exhilarating concept needs some new lifeblood," says Wal-Mart Director Jack C. Shewmaker. Adds Executive Vice-President Joseph P. Hatfield Jr.: "We've gone through some tough times. We got off focus a little bit."
To get that focus back, Wal-Mart is returning Sam's to its roots--the office managers, convenience-store operators, and other businesspeople who come to warehouse clubs to stock up on products from paper goods to soda. Despite the image of clubs as havens for big families and budget-minded penny-pinchers, businesses, in fact, are the core market, accounting for about 70% of sales. Sam's executives admit they have spent too much time recently chasing after individual consumers. So they're tweaking Sam's product mix and packaging to get more sales to business customers. They've created a 225-person sales force targeting larger businesses and have gone into direct marketing.
Sam's has more reason than its rivals to focus on business customers. It must avoid cannibalizing sales from Wal-Mart's regular discount stores and combination grocery-and-general-merchandise units, known as supercenters. "We're going to have a supercenter sitting close to us in the year 2000 in just about every location we're at," says Hatfield. "If we don't figure out how to drive the wholesale side of the business, it's going to be pretty tough to survive."
Moreover, Sam's remains a key element in Wal-Mart's growth plans. The division, which had 419 stores in the U.S. at yearend, is planning to add 25 clubs this year. It also is expanding the number of Sam's warehouses in Mexico--where it currently has 10 clubs as part of a joint venture with Mexican retailer CIFRA--and plans to introduce the concept to Brazil and Argentina.
Wal-Mart executives say cutthroat competition among clubs masked Sam's strengths. In its drive for dominance, for instance, Sam's built multiple stores in the same market, though it knew the short-term result would be lower sales at those units. While same-store sales have slumped, Sam's has hardly run out of steam. Analyst Buchanan expects Sam's total sales to jump 31%, to $19.2 billion this year. He projects operating earnings to rise 30%, to $288 million.
But long term, with saturation in the U.S. market looming, the key to the division's prospects is its ability to boost volume from individual stores. Hence the focus on business customers. Sam's believes its buying clout and economies of scale will enable it to offer products at prices 40% to 50% lower than the wholesalers and distributors it will compete against. Sam's is targeting about a dozen business categories in particular. Hospitals, nursing homes, and other health-care providers are one: In about 40 clubs, Sam's is testing selling a selection of medical supplies, from wrist splints to wheelchairs. The chain is also rolling out products aimed at janitorial companies and hotel/motel operators, including items such as floor strippers and institutional sheets and towels.
Sam's is trying to land procurement business from big companies, as well. Working with GE Capital Corp., it developed a system to offer billing and purchase-order tracking for customers that typically haven't been able to take advantage of cash-and-carry warehouses. Wal-Mart says the program, dubbed "Sam's Club Direct," has landed 7,200 new accounts from schools, governments, and corporations.
And Sam's plans to start testing electronic kiosks in a handful of stores, to compete better with the broad selections offered by some wholesalers and such "category killers" as Home Depot Inc. and Staples Inc. The goal is to enable customers to order products not stocked in the clubs, with delivery direct from the manufacturer or arranged by Sam's for a fee.
COMPLAINTS. Cracking new business-to-business markets will not be easy. The head of a major food-service company now competing with Sam's says that restaurants want more than the lowest price. He says his salespeople also help out restaurants on issues from menu design to marketplace trends. "Warehouse clubs to date don't have that kind of assistance," he says. Avis Inc., meanwhile, would like to buy copy paper for its hundreds of locations through Sam's. But Sam's won't bill each location directly or deliver less than a full truckload, says Joy Strommer, a senior buyer at Avis. Sam's says it offers those services, but for a fee.
Sam's executives acknowledge that they must move carefully. The club business is built on limited selection, high volume, and thin margins. Company managers say they're keeping a close eye on added costs. For example, they are dropping old items as they add new ones. To make room for heavy-duty cutlery, bus trays, chafing dishes, and other restaurant goods, Sam's cut the number of traditional housewares it carries from about 60 to 25 items. In all, the chain has eliminated about 10% of the products it had stocked.
And there are other, more subtle changes. Instead of offering Listerine in gallons, as clubs usually do, Sam's is packaging the mouthwash in packages with three travel-size 4-ounce bottles--a much easier size for convenience stores to sell. Sam's isn't forsaking individual consumers; it expects some to like the notion of being able to buy restaurant-quality cutlery. And it has set up a new buying group to find "treasure hunt items"--high-priced goods at deep discount, such as jukeboxes and grand pianos--that keep Sam's upscale consumers coming back.
Is it enough? Sam's has several forces in its favor. Analysts expect the chain to begin reaping the benefits of the consolidation in the club business. Indeed, Sam's executives expect same-store sales for the year to wind up ahead of 1993's. And the potential for growth looks strong. "There are so many business-to-business opportunities these guys have not begun to tap into," says consultant Daniel W. O'Connor of Management Ventures Inc. But to snare these opportunities, Sam's must prove that it can match its sheer muscle with marketing finesse.