Warehouse club store sales are tipped to reach a record US$191 billion this year, according to a new report by Fung Global Retail & Technology.
And the authors of Deep Dive: Warehouse Club Stores-Time to Take the Treasure Hunt Online, say e-commerce, which has been compelling traditional retailers to rethink their strategies, must now become a factor in the warehouse club sector as it adapts to changing demographics and growing competition.
While warehouse clubs are opening in many markets around the world, three quarters of the sales will come from the US. From 2001 through 2016, US warehouse club sales grew at a compounded annual growth rate (CAGR) of 7.2 per cent, more than twice the 3 per cent CAGR of the overall retail industry. However, growth in the US sector is slowing, with researchers projecting a CAGR of 2.4 per cent from 2016 through 2020, more than 1.5 points lower than is projected for the retail industry overall during the same period.
“The slowdown can be attributed to changes in demographics and the ways people shop and, of course, to the steady growth and encroachment of e-commerce,” writes Fung Global Retail & Technology MD Deborah Weinswig.
“The warehouse clubs need to leverage their unique strengths, which include providing high-quality goods at low prices and providing customers with a strong treasure hunt experience, as well as offering strong private-label brands.”
E-commerce comprised 4 per cent of Costco’s sales and 2.8 per cent of Walmart’s sales in 2016, compared with 8.1 per cent of all retail sales in the US. (The third major US. warehouse club, BJ’s Wholesale Club, is privately held and does not break out sales by channel.)
Warehouse clubs also must adapt to American urbanisation, the report says. Younger generations are increasingly choosing to live in cities and forgo car ownership, leaving them no convenient way to bring large, bulk purchases home from a warehouse club.
“To meet these consumers’ needs, warehouse clubs should explore offering more of their goods in smaller quantities online and also explore delivery methods that e-commerce companies are using, such as click-and-collect and expedited shipping,” Weinswig notes.
As the number of older shoppers and single-person households continues to rise, fewer consumers will make a big weekly grocery shopping trip. These shoppers will likely favor buying “little and often,” Weinswig writes, and warehouse clubs may need to adjust to smaller basket sizes and expand their non-food offerings.
Discounters such as Germany’s Aldi and Lidl present ongoing competition for the warehouse clubs, as do small grocery stores. Grocery e-commerce will also grow in the US, as store-based chains increase their multichannel offerings. And warehouse clubs must embrace the smartphone in order to appeal to the younger generations.
Sam’s Club leads the sector in m-commerce, with a mobile app that lets users shop for items not in stores, access personalised coupons and take advantage of click-and-collect options. Costco’s app has fewer capabilities, and BJ’s has no mobile app at all.
Subscription services provide both competition and opportunity, the report continues. “The subscription market is estimated to be worth $3 billion… [which] suggests there is huge market potential in offering subscriptions to businesses, providing office supplies, snacks, beverages, and other consumables such as paper towels and toilet paper,” Weinswig writes.
Other trends noted in the report include offering new products and, especially, services that cannot be replicated online, such as health screening, optical and pharmacy. The warehouse clubs are also looking at potential international expansion in markets such as Australia, Brazil, China, India, Mexico, Pakistan, South Africa and Turkey; the use of robotic technology to reduce labor costs; growing their private label brands; reshoring production to the US; and focusing on product quality and safety.
Despite facing challenges, the sector continues to expand, and thus far has seen little cannibalisation. Costco alone plans to open 31 new warehouses in 2017, but Fung Global Retail & Technology projects that the sector is unlikely to become saturated in the near term.
“Currently, economic conditions in the US favor the sector. Unemployment continues to decline and consumer sentiment has increased,” Weinswig writes. “Locating stores in geographic areas likely to enjoy economic growth and withstand downturns is the key for increasing and sustaining club membership.”