3 Ways to Benefit From the Growth of Warehouse Club Retail

According to a First Research report, the $390 billion warehouse club industry in the U.S. has grown a whopping 137% from 2001-2011, as compared to a mere 47% for all general merchandise stores. Despite the weak consumer confidence, harsh weather conditions, and the recession, warehouse clubs keep chugging along as shoppers can save up to 55% at warehouse clubs , according to Consumer Reports. The warehouse clubs operate on the premise of offering discounts for bulk purchases on everything from toilet paper and frozen pizza to Coach handbags and vacation packages, all in return for a membership fee.

The warehouse club landscape in the U.S. is dominated by three major players -- Costco (NASDAQ: COST  ) , Wal-Mart's (NYSE: WMT  ) Sam's Club and the privately held BJ's Wholesale Club. PriceSmart (NASDAQ: PSMT  ) , driven by the same business model, is also known as Latin America's Costco. The prime contributor to these companies' profits is the membership fee. Hence, growing and retaining a loyal customer base is a crucial part of the long-term growth story. The three warehouse clubs grew impressively during the last ten years. Let's take a look at how the three businesses have performed recently.

PriceSmart's impressive moves
PriceSmart ended its second quarter with more than 1.15 million active accounts, representing year-over-year growth of 11.4%.  In addition, it also saw a membership renewal rate of 85%. One of the drivers for membership growth was the opening of new locations. The company recently opened a new location in Honduras, the third in the region .

PriceSmart is also working on three warehouse clubs in Colombia, which are slated to be operational by the end of this calendar year. Currently, PriceSmart operates 32 warehouse clubs  across many countries in Latin America, and this leaves room for further growth going forward. These new openings will drive membership growth going forward.

The merchandise mix is another growth driver for revenue from memberships -- both new and renewals -- as a wider variety would attract more buyers. The new location in Honduras will have more rack space to accommodate significantly more merchandise than some of the clubs that were built in the early days of the company.

Costco's robust performance
Costco has a comparatively larger footprint than PriceSmart with a total store count of 657 locations  worldwide. This is expected to increase to 663 locations by the end of fiscal 2014. These new additions will drive membership growth going forward.

Its membership renewal rate worldwide is above that of PriceSmart, standing at 87.3%. New membership sign-ups saw 1% year-over-year growth in the third quarter. Most importantly, paid executive membership increased at the rate 26,000 per week in the quarter. Executive members contribute a little over two-thirds of total sales, and hence are an important component of the company's loyal consumer base.

Costco is also bridging the gap between online shopping and in-store shopping experience through investments in the e-commerce channel. The pilot run of selling club memberships via social media initiatives, including LivingSocial and Zulily , has yielded good results in attracting tech-savvy consumers. Though still in its early days, this will be a good growth driver for membership sign-ups going forward. Along with its online presence, this move will drive growth as consumers are gradually switching to online shopping. In addition, sluggish economic growth will also fuel new membership sign-ups.

A closer look at Sam's Club
Sam's Club contributes about 12% of Wal-Mart's net sales. However, Sam's fiscal 2015 started off on a sour note. Net sales were lower than expected. Even the increase in membership revenue was primarily on the back of last year's fee increase .

Unlike Costco, Sam's performance is dependent on government assistance . The reduction of government assistance and inclement weather negatively affected its same-store sales by 90 basis points during the quarter. Net sales grew by a meager 0.5% year-over-year, excluding fuel, and comps declined 0.5% year-over-year.

Sam's is working on initiatives like providing a better assortment of merchandise and a more rewarding membership  plan in order to overturn the weak performance. Also, with Wal-Mart's acquisition of the Simplexity's wireless activation platform earlier this month, it will be able to support wireless activations of membership more efficiently. Sam's has also begun testing a "My Subscriptions" service as a part of its commitment to the integration of "bricks and clicks" initiative to attract tech-savvy consumers .

The takeaway
The strategies adopted by all three warehouse retailers look impressive. Considering the growth prospects of the warehouse retail industry, they should continue doing well. But, investors should think of picking PriceSmart or Costco over Wal-Mart as the first two are pure-play warehouse retailers, and are in a better position to profit from the industry's growth.

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