US Insights

Sam's Club closures aren't part of the retail apocalypse

Tim Campbell

Analyst

Retail 01.16.2018 / 09:00

SamsClubStore

The move pushes Sam’s toward a healthy long-term trajectory.

On January 11, Sam’s Club announced the imminent closure of 63 clubs in dozens of states. It would be tempting to explain the development as the next chapter of the retail apocalypse. If Sears and Macy’s are closing stores, are Sam’s closures just another harbinger of harder times to come for the club? Such a characterization is not accurate; the closures represent a step to improve Sam’s Club’s long-term health. To understand why, we must take a detour through the retailer’s recent history.

It’s no secret that Sam’s recent performance through 2016 was less than stellar due to insufficient operational rigor and inconsistent communication both internally and to shoppers. During this period, Sam’s Club continued to open new clubs, some of which competed for shoppers with existing clubs. Before the closures, Sam’s Club had over 650 clubs in the US and Puerto Rico compared to Costco’s roughly 518 clubs. Over one third of Sam’s Club buildings shared a parking lot with a Walmart Supercenter. These supercenters not only eroded Sam’s Club sales, but also muddied the price perception of the club, negating the advantages of bulk value in the mind of its shoppers.

Yet former CEO Rosalind Brewer initiated a turnaround by doubling down on online convenience and developing an engaging in-club experience. These efforts are further being refined and crystallized under current CEO John Furner. Sam’s has honed its focus around SKU rationalization, improved item quality and productivity, expanded private label, advanced a variety of eCommerce initiatives, and remodeled existing locations to drive more treasure-hunt experiences. These efforts have borne fruit. In Walmart’s most recent quarter, Sam’s Club grew sales by 4.4%, faster than both Walmart US and Walmart International.

Why Now?

So why close clubs now? In fact, Sam’s had already closed four clubs in June and August of 2017 as a foray into reevaluating the efficacy of its brick & mortar footprint. Building oversaturation had reduced club productivity and rationalizing the overall club count was the next step in revitalizing the business. A leaner club portfolio means more dollar investment per club, more focus on upgrading the in-club experience, a more distinct value proposition from Walmart Supercenters, and comparatively more focus on eCommerce growth initiatives. As a part of the closures, up to 12 of the locations will become eCommerce fulfilment centers. Sam’s has been growing online sales by roughly 30% year over year, and these efforts will help further facilitate this growth. Club Pickup, for instance, is Sam’s Club’s largest growth driver.

Still, competitive factors likely affected which clubs would close and when. One announced club is in Renton, WA, Costco’s heartland. Other closures along the East Coast had to compete with big box fixtures like BJ’s Wholesale. Among the closures were also three clubs in Puerto Rico, recently devastated by hurricane Maria. Across the board, Walmart’s same-day decision to raise wages may cause an upward cascade effect on employee wage structure. If so, some Sam’s Club locations might have become more unprofitable, hastening the decision to close them.

Mistakes

The move was not without its missteps. Rather than informing all affected employees first well ahead of the actual closings, workers arrived at clubs Thursday morning to find them closed for the day. They learned alongside the general public that they would soon to be out of a job. Though many clubs will not officially close until later in January, others were shuttered immediately. Sam’s right to strategic discretion was overshadowed by how the news was miscommunicated to employees.

In addition, the timing of the announcement added an unneeded layer of politicization. The announcement, combined with Walmart’s announcement earlier that day of wage hikes and bonus dispersals unnecessarily dragged Walmart and Sam’s into the rancorous debate on the efficacy of recent tax reforms, especially as the wage hike was bandied as a beneficial byproduct of tax reform only hours before the closures were announced.

Conclusion

Let’s be clear. The closures have significant short term downside. 10% of Sam’s Club locations in the US and Puerto Rico will disappear and not all of the volume will be recouped by nearby clubs. Yet the move pushes Sam’s toward a healthy long-term trajectory.  The wholesaler will be positioning itself for a more upscale value proposition with increased investment per club. Sam’s Club is not only adapting to a changing marketplace but will expect its suppliers to change as well. A tighter assortment, more operational rigor, and, now, fewer clubs mean that Sam’s is expecting suppliers to rationalize their assortment and upgrade the remainder to be as relevant and as personalized as possible for its members. It won’t be easy for anyone, but the right decision rarely is.

Source: Kantar Retail, Kantar Consulting

Editor's Notes

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