Oklahoma television station KJRH recently compared prices of 23 everyday-use products at Wal-Mart (NYSE:WMT) and the megaretailer's warehouse chain, Sam's Club. The study found that five of these items were priced slightly higher or equal at Sam's Club -- paper towels, garbage bags, and ketchup carried higher price tags, while laundry detergent and cat food were offered at the same prices under both formats.
The station said, "adding it all up, Sam's Club was $5 cheaper than Walmart." This means shoppers "would have to shop at Sam's Club at least nine times a year for that [annual fee of $45] to pay off -- depending on how much you spend during each trip."
Wal-Mart reacted to this report by suggesting that each of its formats have their own strengths and unique selling points.
The findings raise a pertinent question: Is Sam's Club losing buyers to Wal-Mart?
It ultimately boils down to preference
There's some truth in Wal-Mart's assertion because its different store formats target different consumer needs. Wal-Mart Supercenters are typically one-stop shops that sell groceries, electronics, and a host of other general merchandise.
With less square footage than Supercenters, Wal-Mart Discount Stores offer almost everything but groceries, and the even smaller Neighborhood Markets sell daily consumables including groceries, bakery products, household supplies, and health and beauty products.
Sam's Club, too, offers broad range of groceries and general merchandise, alongside a pharmacy, photo studio, and other specialty services.
The main difference between Wal-Mart stores and Sam's Club warehouses lies in purchase volumes. Typically, the "everyday low prices" strategy of the Wal-Mart stores attracts daily shoppers, while Sam's Club caters to big families and small businesses who buy in bulk.
When the price comparison was released, "bargain shopping expert" Shannon Wilburn told KJRH she was surprised with the results, but that "keeping in mind where you are and how many people you're buying for is really important."
Focus on small businesses can make a big difference
Small businesses make up one-third of Sam's membership base. It says its serves 600,000 small businesses every day. One key reason why Sam's comps have suffered is because U.S. small businesses have struggled in recent years. Until 2008, the number of start-ups was higher than the number of closed-down companies each year in the U.S. But the scenario has reversed in the past six years. Recent statistics show the net new companies number is a negative 70,000.
In November, Sam's Club CEO Rosalind Brewer told Fortune magazine, "That group (small businesses) is financially strapped, and right now, our exposure to that group is behind our deflated traffic. But we try not to forget our heritage in that space."
In contrast, only 10% of Costco's members are small businesses, which has cushioned the company from this group's falling sales. But as the Fortune article noted, small businesses give Sam's "an opportunity to differentiate itself." Without this distinction, Sam's will find it difficult to grow sales in the face of competition from rivals and its own parent company.
Several initiatives under way
Sam's Club is collaborating with Melinda Emerson, an expert in handling small-business affairs, to provide entrepreneurial support to current and aspiring business owners. The main purpose behind this collaboration is to arrest business failure. Bloomberg estimates that almost eight out of 10 businesses close down within the first 18 months of operation.
Sam's Club plans to offer specialized services including health care, payroll, and legal assistance that will help business owners to focus more on business growth. Wal-Mart estimates these services can save small businesses up to 40% in expenses. Sam's has also increased its selection of online offerings targeted at small businesses to 13,000 types of items.
Sam's prices might overlap with Wal-Mart's, but the two formats target different buyer groups. While Sam's reliance on small businesses has not worked in its favor in the past few years, this is still is the warehouse's key point of differentiation.
Since Wal-Mart can't give up on the warehouse for strategic reasons, it makes sense to address the needs of its core customer group through various initiatives. These steps, together with International Monetary Fund's predictions for 3.6% U.S. GDP growth in 2015, could spur Sam's Club to higher sales and comps growth.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.