Wednesday, August 26, 2015

Wal-Mart, Sam's Club, and Costco: A Key Strategy Lesson

The Wall Street Journal published an article today (by Sarah Nassauer) titled "Sam's Club Aims to be Less Like Wal-Mart."   The article quotes the Rosalind Brewer, chief executive of Sam's Club:  "“We want to be less of a Wal-Mart."  The article goes on to explain Brewer's thinking:

The new strategy means carrying fewer products that appeal to households that earn $45,000 a year—Wal-Mart’s sweet spot—in favor of targeting wealthier shoppers with more organic food, brand-name clothes and 1,000-thread count Egyptian cotton sheets, she said during a recent interview.  Sam’s struggle to shake an early focus on mainstream consumers has become a liability as club stores have evolved into a favorite among more affluent shoppers who are able to pay a membership fee for access to discounts on items from large screen TVs to bulk boxes of peaches. At the same time, big- box retailers and grocery stores have embraced discounted bulk sizes, without a membership fee. Rival Costco Wholesale Corp. has thrived, building stores in wealthy enclaves and delivering strong annual sales gains.

The story of Costco and Sam's Club offers a key strategy lesson for all managers.   Think about the wholesale club business for a moment.  Who is the typical consumer?  The data show that they have a substantially higher income than the usual Wal-Mart customer.  Does that surprise you?  Consider the wholesale club business for a moment.   You have to pay an annual membership fee.   You buy in bulk.  Therefore, while you may save on a per unit basis, the total cash outlay on a typical shopping trip is quite high.  You need an SUV to get the goods home, because they are bulky.  Moreover, you need a good-sized house with an ample pantry space to store the goods.  In short, the wholesale club model is more attractive to customers with a higher level of disposable income than many Wal-Mart shoppers.

Consider Costco's success.  They figured out who the customer was in this business, and they tailored their entire business model to this consumer.   For that reason, Costco locates in wealthier suburbs, and they offer premium goods in many categories.  They have become the largest retailer of wine in the country.  They know their customer.   Why has Sam's Club stumbled a bit in the past?  Wal-Mart built Sam's Club and tried to leverage all that was successful and effective about their value chain in the discount retailing business.  However, the activities and choices that were well-suited for discount retail were not necessarily tailored effectively to the wholesale club  business.  You see the temptation though.  Successful firms want to leverage their existing capabilities, choices, and activities when they move into a new market segment.  Yet, that effort to leverage what they do well may become a stumbling block if the new segment has some crucial differences for which they should account. Costco could build a business model well-suited to the more affluent customer because they were building from scratch. 

No comments: