By  on October 16, 2006

Warehouse clubs, not content to sell bulk toilet paper and giant bottles of ketchup, are trying to reinvent themselves as destinations both for wholesale bargains and luxury products. Their aim: attract affluent consumers who spend more with each visit.

In June, Sam's Club held a press event in a rented penthouse apartment in Manhattan to tout its luxury offerings for the holiday season. There were diamond necklaces in weights of 1 carat to 5 carats, priced from $2,700 to more than $8,000, and designer handbags, including a Prada style for $395.

"We've been recognized as a bulk seller and as catering to small businesses," Greg Spragg, executive vice president of merchandising for Sam's, told the crowd, adding that the retailer wants to become known for selling affordable luxury items.

Sam's and its rival Costco have much to overcome in terms of strengthening luxury offerings. First and foremost is the difficulty in buying designer apparel, handbags and accessories directly from manufacturers. At the summer press event, Dee Breazeale, vice president and divisional merchandise manager for the jewelry division of Sam's Club, said the Prada handbag on display was just one of many designer brands Sam's carries.

"There are always about 12 handbag styles available at Sam's," she said. "It's always a treasure hunt. You never know what you're going to find."

Designers have been aggressively bringing legal action against unauthorized retailers such as warehouse clubs and off-pricers, which will further limit the product flow. Fendi filed a complaint in June against Wal-Mart Stores, Sam's parent, in U.S. District Court, Southern District of New York, alleging that Sam's had been selling counterfeit handbags with the Fendi logo. A Wal-Mart spokesman said that the complaint was without merit and that the company would show the products were acquired properly.

One indication of the direction Sam's may be moving in is the recent hiring of Patty Warwick as senior vice president of apparel. Warwick, who was senior vice president and general merchandise manager of home at May Merchandising Corp., has extensive experience in private label development.

In her résumé, Warwick wrote: "Succeeded in developing and delivering the first private-label brands to May Company's home store." She also has ties to designers. As senior vice president and general merchandise manager of home, intimate apparel and hosiery at the Meier & Frank division of May, she "transformed the division to an upscale fashion-oriented business," according to the résumé.Costco, with $57 billion in annual sales and 488 stores, is known for selling caviar and gourmet foods, expensive wines, handbags, jewelry, household appliances and personal care products. Merchandise varies from market to market, but Costco's Web site offers a glimpse: handbags by Dolce & Gabbana, Carlos Falchi, Fendi, Coach and Furla; Chip & Pepper boot-cut stretch jeans for $119.99; watches from Bulgari, Bedat, Breitling, Cartier, Chopard and Concord, as well as a Patek-Phillippe Twenty-4 style for $21,999.99; and Diesel, Ralph Lauren, Marc Jacobs, Giorgio Armani and Versace sunglasses.

Costco said it goes about buying fashion the way any department store would. The assistant merchandise manager for apparel, Shannon West, listed fall trends in Costco Connections magazine such as aged and worn denim in skinny cuts, jeans with pockets embellished with stitching and rhinestones, ruffle shirts, bell and flutter sleeves, cardigans, cowlnecks and crochets, and coats in cotton velvet, faux shearling and quilted micro fiber.

"Shannon and her team keep the clothing tables at Costco up-to-date with trips to New York several times a year to meet with suppliers and see the latest trends," the magazine said.

Costco is forging ahead in the fragrance and beauty area. Stores sell Baby Phat Goddess, Burberry Brit Red, Estée Lauder's Tom Ford Amber, Salvatore Ferragamo Subtil and Chanel No. 5. The retailer recently launched Kirkland Signature by Borghese beauty products. Georgette Mosbacher, Borghese's chairman, chief executive officer and president, said the line is almost identical to the signature Borghese brand, but the prices are not. For example, the Age Defying Eye Cream, which costs $19 at Costco, would be priced at $125 to $175 in department stores, Mosbacher said.

The company also plans to expand the test of its concierge service, available in Southern California, to the rest of the state. Shoppers can call an 800 number to get advice about merchandise, which the company said is perhaps better than consumers would receive from the manufacturers' toll-free numbers.

More than half of Costco's members, 64.7 percent, earn in excess of $50,000 annually, according to Retail Forward. Almost half of all Sam's Club members, 48.8 percent, earn less than $49,500 a year; however, the retailer said the number of members with higher incomes is growing."Selling high-margin discretionary products to its customer base has become a lucrative enterprise, but the clubs need to focus on high-velocity items,'' said Todd Slater, a retail analyst at Lazard Capital Markets. "Upscaling too much can prove dangerous."

Sam's Club, which does $40 billion in annual sales, emphasizes fresh produce, bakery goods, organics, wine, office supplies for small business owners, electronics and fine jewelry, especially engagement rings. Apparel makes up a relatively small fraction of sales, and the retailer rarely sells designer labels.

Like its larger sibling, Wal-Mart, Sam's has been making overtures to upscale customers for some time. Several years ago, Sam's ran an ad in In Style magazine with the tag line "Expect the Unexpected" and an image of a 20-carat fancy yellow-gold diamond ring for $1 million, which was featured on its Web site.

These days, Sam's offers what it calls "Dream Jewelry": a 10-carat heart-shaped diamond for $721,233, a 31.90-carat cushion-cut cognac diamond ring for $343,000 and a necklace with 82 carats of pear-shaped diamonds, $263,574.

Slater said such jewelry is basically window dressing. "If the clubs didn't carry jewelry, I doubt it would significantly impact the business model one way or the other," he said. "It's an impulse category and can contribute high margins, and in the case of a big diamond, a high average ticket. It adds cachet and even differentiation, but it's probably not a huge category. Watches are probably an important piece of the jewelry category.

"It's important for the clubs to focus on high-velocity items," Slater continued. "They are geared for a low number of high-velocity items [and stockkeeping units] that can sell in the millions of units, that can fit on a palette and that are self-service and don't require a lot of labor to sell. The club is a low-cost model that has paper-thin margins, so the club model is not very well suited to low-velocity, high-average-priced retail unit items."

The key to generating higher sales may be location, location, location.

"Sam's grew up in the South, and its stores are located, on average, in smaller, more rural markets than Costco, which grew up on the West Coast," Slater said. "The average Costco club is located in larger and more affluent markets, so it tends to appeal to a higher-end demographic and generates higher average club volumes."Costco has been actively looking for real estate in Manhattan. The company was planning to open a unit in a new retail development, East River Plaza, between 116th and 119th Streets, but it was replaced by Target. Robert Futterman, chairman of the real estate company that bears his name, said finding another site for Costco will be difficult but not impossible. "I know they want to be in the city," he said. "They need to be on one level. But where are you going to get 150,000 square feet in Manhattan?"

Futterman said he hasn't "heard much buzz about Sam's Club" looking for space in Manhattan.

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