Thursday, February 03, 2011

Potential Sale of BJ's Wholesale

Various news organizations report this morning that BJ's Wholesale Club has decided to explore strategic options, including the possible sale of the company. This news comes after substantial external pressure has been placed on the company in recent months, particularly as a private equity investor (Leonard Green) took a significant equity stake in the firm.

Why has BJ's ended up in this predicament? On the one hand, the company has improved its financial position in many ways over the past few years. Specifically, the firm has established a much stronger balance sheet, with an elimination of most long term debt and an increase in cash on hand. On the other hand, investors have clamored for faster growth, something that the firm has been unable to deliver. Recently, the firm has taken some actions to try to mollify investors; for instance, it has shut several underperforming stores. However, investors want more substantial change.

Here's the irony: BJ's has actually made itself much more attractive to a private equity firm because of its strengthened balance sheet. Putting itself on more stable financial footing has now meant that they may lose control of the firm.

Can the firm improve its performance, perhaps under different ownership? It certainly has great potential, but one wonders about the disadvantages that the firm faces because it cannot exploit the same economies of scale available to Sam's Club and Costco. For years, the firm has walked a fine line, by trying to offer great value to consumers, while at the same time attempting to do some things to differentiate from their bigger rivals. BJ's knows that it cannot simply compete in a head-to-head battle against its rivals in terms of price because of lack of scale. However, differentiating successfully, particularly against the Costco, can be very challenging. Costco achieved such success in this market, even more than Sam's Club, because it created a retail concept that was more than just about having low prices.

1 comment:

Jagadeesh Venugopal said...

As someone who shops at BJ's week after week,I have a few thoughts to offer.

First off, they offer mostly low margin grocery-type goods. In years past, I'd look forward to shopping at Costco because I'd find that one thing which I really didn't need but caught my fancy.

Secondly, where they offer goods such as TVs etc, they are not all that price-competitive with BestBuy or WalMart. I cannot remember the last time I bought a DVD from BJ's.

Third, the shopping experience leaves something to be desired. Open packages, sometimes pilfered, etc. I wouldn't see that as often at Costco. It appears that no one cares.

The bottom line is... as a middle-class consumer, I have money to spend. But BJ's does not seem to make any effort to sell me anything other than milk, bread and detergent in large quantities at cut-rate prices.