By  on February 2, 1994

NEW YORK -- The warehouse club industry has taken it on the chin in the past year, with consolidations, closings and clipped sales. Yet industry leader Sam's Club continues to spread across the country and generate gains.

Warehouse clubs are bare-bones retailers -- no fancy fixtures in the cavernous stores, usually just boxes of multipack merchandise hauled out on skids. There is little to differentiate one club from another. Sam's secret, say analysts and observers, is in the organizational clout that its parent, Wal-Mart Stores of Bentonville, Ark., is famous for.

The field of major national players in the club business has dwindled to two from five in the past year, and industrywide sales have paled from the rosy double-digit growth -- often surpassing 20 percent -- in 1990 and 1991, to troubling low-single-digit growth of under 5 percent or, in some cases, negative comparable-store sales.

Last month, Sam's gobbled 91 of Kmart Corp.'s Pace Membership Clubs; last May, it bought 14 Pace units. Kmart closed its remaining 22 Pace units on Dec. 24 and is now out of the club business.

The other national powerhouse is Price-Costco, which was formed when warehouse operators Price Co. and Costco merged. The company has about 210 stores, generated $16 billion in sales last year, and poses a significant challenge to Sam's, which by itself had sales of about $15 billion in 1993.

Including the Pace acquisition, Sam's operates more than 400 clubs, and sources say plans call for an additional 20 to 25 new sites this year.

According to a Salomon Bros. research report on Wal-Mart, sales at Sam's are expected to rise to about $22 billion in 1994.

Sam's did not respond to a request for an interview.

Since the Price-Costco merger, BJ's Wholesale Club, owned by Waban Corp., Nattick, Mass., is left as the next largest competitor, with 52 clubs. But it is a regional operator, concentrated in the Northeast. Another regional operator, which got out of the club business by closing its seven SourceClub units last month is Fred Meijer Inc., Grand Rapids, Mich. A spokesman said Meijer "saw the warehouse industry wasn't what it was two years ago, having gone to two major companies, so we decided to focus our energies on our full-line stores."These stores sell groceries and general merchandise.

Meijer, the spokesman added, is negotiating with "a lot of people" regarding the sale of SourceClub units, but he declined to elaborate. Sources have said that Sam's is one of the companies shopping.

"Sam's is always looking for ways to improve costs and sharpen prices -- nothing's sacred," said retail analyst William Whyte of Stephens Inc., an investment firm in Little Rock, Ark.

The Pace sites will give Sam's an even higher purchasing power and critical mass, he said. The company also will benefit from economies of scale and will link all the stores to a central computer system.

Whyte added that Sam's was able to cherry-pick the best sites of the Kmart chain.

"They bought into markets where they will have instant sales, places where it would have been very expensive to go if they had to start from scratch," he said. "The sites they didn't take were probably where a competitor had a much larger market share, or where the building didn't suit Sam's needs."

With the Pace sites, Sam's gained a presence in five more states -- Alaska, Arizona, Rhode Island, Utah and Washington. By picking up 21 Pace units in California, Sam's gains enhanced exposure as well as the coveted membership lists there. California has been dominated by Price-Costco, which maintains headquarters in San Diego and in Kirkland, Wash.

"Essentially, Sam's eliminated a look-alike competitor that was struggling to survive," Whyte continued. "When a store is struggling, it offers ridiculous prices, putting pressure on all the competition. This should ease the pressure somewhat on everyone."

Whyte said research shows that a market needs to have total retail sales of $1.5 billion to $2 billion to sustain one club.

"There are only so many markets with that kind of volume, so the places where clubs can go are limited before an area becomes overstored," he said. "Sam's is the fastest-growing division of Wal-Mart now, but that pace will eventually slow down."

Janet Mangano, retail analyst with Burnham Securities, concurred.

"If Sam's has any advantage over its competitors," she said, "it's in the expense controls and inventory management and the support of Wal-Mart. As Sam's takes on Pace, it will have significant operating leverage even in a slow-growth sales environment. The challenge to pick up sales is still here, even though we are seeing negative comps as we start 1994.""Most clubs don't have the in-depth merchandising and operating skills and disciplines to compete in today's more intense environment," said R. Fulton Macdonald, president of International Business Development Corp., a consulting firm. "Wal-Mart brings to Sam's Clubs the high level of organizational and operating capabilities, in essence putting sophisticated muscle behind a basic retailing concept."

Retail analyst Leonard Hirsch said another reason Sam's Club has continued on its roll is that it is one of the few players in the club industry that stuck with the original premise of the club concept -- catering to small businesses.

"Pace and BJ's became more consumer-oriented, and the economics of those businesses changed," Hirsch said.

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