You don't have to look further than your mailbox these days to understand that grocery stores, supermarkets, and warehouse retailers are gunning for your business. In a given week I receive anywhere from five to eight pieces of mail and a mound of sales advertisements from local grocery, supermarket, and superstore chains so big it looks as if it could eat the rest of my mail for lunch.
Grocery and warehouse businesses have to be aggressive when courting new customers because margins within the industry are often razor-thin. Consumers tend to be highly price-sensitive, but they also have other factors which can come into play, such as customer service quality, location of the store, selection of product, and product quality. It's important for this industry to have a constant flux of new customers walking through its doors.
Perhaps even more important are repeat customers. Loyal consumers have the potential to be less reliant on promotional events to visit a store because they've already developed some form of attachment to the brand, which means they're a valued source of higher margins. For grocers and price clubs like Costco Wholesale (NASDAQ:COST) loyalty is the bread-and-butter of their business.
Costco attempts to set the bar high on customer loyalty
Costco's story is well-documented. The company is renowned for compensating its employees handsomely, for offering health care options to both full- and part-time employees, and for instilling the small factors that help consumers form attachments to the store. The company's $1.50 combo price for a hot dog and soda, a price that hasn't changed in nearly 30 years, is a genuine gesture to consumers that helps place the company on equal footing with its customers rather than on a pedestal.
As hard as this might be to believe, considering these aforementioned factors that have driven Costco's success, it's not the loyalty leader among price clubs, according to research firm Brand Keys.
Utilizing its proprietary Customer Loyalty Engagement Index (link opens PDF), Brand Keys surveyed more than 32,000 respondents regarding 555 companies in 64 sectors and examined what emotional and rational expectations made consumers more loyal to one brand than another.
As discussed above, loyalty is crucial in the price-club sector. Generally speaking memberships play a key role in keeping consumers loyal -- as it's unlikely someone is going to pay an annual membership to shop at a price club then shop elsewhere -- but word of mouth from members, product selection and pricing, and a number of other factors determine whether those customers renew their membership or if the company in question can garner new members.
The price club with better customer loyalty than Costco
Would you care to venture a guess as to which price club surpassed Costco in customer loyalty?
Have your answer?
If you said Wal-Mart's (NYSE:WMT) Sam's Club then you've hit the nail on the head, as privately held BJ's Wholesale brought up the caboose.
Let's have a look at a few of the possible reasons behind Sam's Club topping Costco in this ranking.
I would suggest first and foremost that price played a big factor in generating consumer loyalty toward Sam's Club. Though both Costco and Sam's Club offer various tiers of membership pricing, Sam's Club's comparable plan in the basic tier ($45) and premium tier ($100) are $10 cheaper than Costco's, which cost $55 and $110, respectively. In addition, Sam's Club's advantage membership, or its basic tier membership package, comes with two annual membership cards as an added convenience to family members who no longer have to share just one, free flat-tire repair, car battery testing, wiper blade installation, and its "Click 'n' Pull" service, which allows members to order something online and pick it up in store the next day. All told these perks are pretty good for $45 per year.
Costco's premium membership certainly offers ample rewards for those who spend a lot in its stores (its executive membership makes members eligible for 2% rewards up to $750 each year on qualifying purchases), but across a wider swath of price club shoppers it would appear that membership fees tends to be of the utmost importance.
But pricing advantages can extend beyond just membership fee comparisons. According to Cheapism.com, which compared prices of 38 typical grocery items, Sam's Club was the clear leader with its goods coming out 3.6% lower than Costco.
A number of factors help in keeping Sam's Club's costs down, including the immense scale of parent Wal-Mart's operations, which allows Sam's Club to piggyback onto its parent company's distribution and supplier network in order to keep costs down and, in turn, offer its goods at a perceived discount to its peers. Sam's Club also pays its employees far less than Costco does, which is another factor that helps keep its costs low and allows it to remain price-competitive.
Another important factor where Sam's Club can claim an edge over Costco would be customer convenience. Generally speaking, Sam's Club's member hours are on par with or more generous than Costco's, giving members more opportunity to shop and doing its best to be as accommodating as possible to its members' diverse schedules. Not to mention that Costco is closed on all major U.S. holidays, while Sam's Club is open on Memorial Day, Fourth of July, and Labor Day for all of its members. It's these little conveniences that certainly help Sam's Club keep its members loyal.
Loyalty isn't everything
While loyalty is certainly important to the success of price clubs, investors should keep in mind that loyalty isn't everything. External factors and company strategies can also influence how well, or poorly, they perform.
Costco, for example, tends to target a more affluent clientele. The advantage of this is that higher-income consumers are usually less price-sensitive and tend to be more indifferent to swings in the economy. In other words, if the U.S. economy is struggling there's a good chance that affluent members aren't changing their buying habits much, if at all, which bodes well for Costco's long-term growth and cash flow stability. Costco's 4% same-store sales increase in the third quarter, reported in May, is a testament to the strength of its strategy.
Sam's Club, on the other hand, tends to focus on a lower-income to middle-class consumer where price is essentially everything. Brand Keys' survey clearly shows that the Wal-Mart-owned company has been very successful to that end. But, Sam's Club's strategy won't always translate into success because lower-income consumers are more susceptible to economic fluctuations. Weak wage growth, rising inflation, or delayed tax refunds can all have adverse impacts on Sam's Club's core customer. This is one reason why Sam's Club witnessed its same-store sales dip by 0.5% in its latest quarter despite being the so-called customer loyalty leader.
When evaluating these businesses as investments it's important to consider customer loyalty, but it's also vital that you look at the big picture. At this very moment, or at least until lower-income and middle-class individuals are feeling less budgetary pressure, Costco continues to look like the better bet even if it is taking a back seat to Sam's Club in customer loyalty.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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