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Recipe for Success - Warehouse Clubs’ Broad Appeal

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A study done by market research firm Mintel finds that high-income shoppers feel warehouse club brands are on equal footing with leading national brands. In fact, 38% believe store brand or private label brands at warehouse clubs are comparable to name-brand items in terms of quality—a number that increases to 44% of households earning $150K+. That’s the highest percentage of all income groups surveyed, compared to 27% of those earning less than $25K, 36% of those earning $50-$74.9K and 41% of those with incomes between $100-$149.9K.

A reason for this may be that consumers in this group are more likely to shop in a greater variety of stores and may be more aware of the price fluctuations among retailers. Category managers at Mintel also think these shoppers are able to afford driving around to different stores compared to shoppers of a lower income. Messaging and signage in warehouse clubs are likely to have more impact on consumers in this demographic.

The warehouse club category also might be immune to the threat of online shopping, as more than 60% of Americans have shopped (in-store) at a warehouse club in the last six months, but only 25% have done so online. Large bulk-size packaging could deter purchases online because of prohibitive shipping costs.

Mintel manager Ali Lipson thinks part of the appeal of warehouse club shopping is the “‘treasure hunt’ aspect, or discovering unique items throughout the store.” Currently, the warehouse clubs’ online model is unable to replicate this experience.

About 36% of warehouse club shoppers agree that they like finding unique items when shopping at warehouse clubs. This number increases significantly for women aged 55 and over, with 45% of that demographic reporting as much. The least likely bargain hunters are women between 18 and 34 (30%).

Findings show that more than half of warehouse club shoppers like to browse the selections, and 48% say it is worth paying the membership fee to shop at a warehouse club, and the huge amounts buyers save during shopping far more than offset the membership fee. The uniqueness of these stores lies in the varied product mix, which appeals to the “discovery” experience many shoppers seek. This characteristic also encourages repeat visits, as product selections can vary widely from time to time.

The success of the warehouse-club operating model lies in fewer SKUs (stock-keeping units) to maximize profits, so the “less is more” philosophy plays a big part in the success of warehouse clubs. Maximizing inventory turnover has many benefits. Having a better product mix doesn’t always translate into higher sales or turnover. In fiscal 2013, Costco held its inventories for 29.8 days. In comparison, inventories stayed in Wal-Mart's stores or warehouses for an average of 43.8 days.

Also, the faster existing inventory is moved, the more shelf space becomes available for new trending products. While Wal-Mart clears the old stuff on its shelves, Costco keeps their assortment fresh with what consumers are demanding right now. Secondly, high inventory turnover increases sales per SKU over the year, resulting in stronger bargaining power over suppliers. When Costco purchases more products from a single supplier, they get more bulk discounts and become a more significant customer for that supplier.

Just because warehouse club shoppers tend not to buy from the stores’ websites, doesn’t mean they’re not fans of the technology.  About 11% of those surveyed said the store app helps them navigate the store and find products that encourage them to visit warehouse clubs more often or sign up for membership.

Meanwhile, 12% agree sales associates with handheld devices that can provide checkout anywhere in the store would increase their store visits. That number is likely to rise as the quest for saving time plays a larger part in a busy shopper’s life.

TAGS: retail, retail trends, retailers, management,
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