Wal-Mart Stores (NYSE:WMT) has dominated retail for the last two decades, but its warehouse chain Sam's Club has always been something of an ugly stepsister to the parent brand. Though Sam's Club has roughly as many stores as rival Costco Wholesale (NASDAQ:COST), its sales are only about half that of the leading warehouse retail brand.
Comparable sales at Sam's Club have been weak for several years now, and performance has lagged. Now, Sam's Club executives have a plan to get out from Wal-Mart's.
Sam's Club CEO Rosalind Brewer told the Wall Street Journal, "We want to be less like Wal-Mart." Imitating Costco, Brewer is trying to direct her brand to go more upscale with products like organic food and name-brand clothing.
Currently, Sam's Club seems to be lost in the retail shuffle, lacking a compelling value proposition for Wal-Mart's regular shoppers. Part of the problem is that Sam's is often attached to Wal-Mart -- 200 of the 650 domestic stores share a parking lot with Wal-Mart -- meaning that its own parent is its stiffest competition most of the time.
While Costco has penetrated wealthier areas on the coasts, Sam's Club is predominant in the same parts as Wal-Mart, primarily rural and suburban America. Other shortfalls are that Sam's has no regional buyers, and so cannot accomplish the product diversification necessary for such a shift to specialize stores. Also, 81% of its shoppers have visited a Wal-Mart in the past month, making clear the overlap between the two stores.
Sam's has found that 150 of its stores are located in high-income areas, and the company plans to change its product mix to attract wealthier shoppers who might ordinarily go to Whole Foods Market. Commenters on the WSJ article also expressed frustration with Sam's, complaining about poor customer service, lackluster products, and too much similarity to Wal-Mart. It's clear that the brand could be improved.
A hidden opportunity
As Wal-Mart trades at 52-week lows after a disappointing earnings report, Sam's Club may be the company's most overlooked segment for improvement. With $58 billion in sales, the business only makes up about 16% of Wal-Mart's overall sales; but if it were a stand-alone company, Sam's Club would be one of the biggest retailers in the country.
In each of the past two years, sales at Sam's have grown just 1.3%, indicating that it's underperforming Wal-Mart overall. As the company has increased Sam's Club expansion in recent years, that number should grow in the future. Net sales growth also increased to 2.8% in the most recent quarter.
For a company of Wal-Mart's size, finding new growth opportunities can be difficult; but going upscale with Sam's Club seems like an easy way to differentiate its warehouse club from its core business, and tap into a new customer base. As Costco's success has shown, the membership-based warehouse model is one of the stickiest and strongest retail models in the digital era, and Wal-Mart's own success with its small-format Neighborhood Market stores in densely packed higher-income cities should also inform it of its own opportunity with Sam's Club.
With Wal-Mart's unparalleled economies of scale and supply chains, Sam's Club should arguably be successful in its industry. And with its Supercenters facing significant headwinds, Wal-Mart needs all the growth opportunities it can get. The Neighborhood Market and e-commerce channels have proven viable income streams worthy of increased investment, and the growth in the warehouse retail industry indicates a similar potential for Sam's Club.
As Wal-Mart goes deeper into its turnaround phase, with its focus on higher pay and improved customer service, now would be a perfect time to revamp Sam's Club and target the higher-end customer that Wal-Mart's Supercenters can't reach.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and Whole Foods Market. The Motley Fool owns shares of Costco Wholesale and Whole Foods Market. 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.