In Part One of this Deep Dive, we provide an overview of the warehouse-club sector.
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May 29, 2017
In Part One of this Deep Dive, we provide an overview of the warehouse-club sector.
• The 40-year-old global warehouse club sector is estimated to • Yet the sector’s growth rate slowed over the same period,
generate approximately $191 billion in revenues in 2017. actually hitting zero in 2015. And researchers are
forecasting that the US segment will grow at a 2.4%
• The clubs’ business model seeks to limit gross profits so as to
CAGR, more than 1.5 points lower than overall retail,
offer low prices to members while generating profits for
from 2016 through 2020.
shareholders through reasonable membership fees.
• The spoiler behind the sector’s decelerating growth rate
• The majority of the clubs are located in the US, which
has likely been e-commerce, which the clubs have been
accounted for nearly three-quarters of sector revenues in
slow to embrace. Warehouse clubs currently generate 4%
2016. The market is dominated by three companies: BJ’s
or less of their revenues from e-commerce.
Wholesale Club, Costco Wholesale and Sam’s Club (a division
of Walmart). • As is the case with many other retailers, warehouse clubs
need to develop a strategy to compete with e-commerce
• The US warehouse club sector grew at a 7.2% CAGR from
players, as well as leverage their unique strengths to
2001 through 2016. Its growth rate outpaced that of the total
adapt to other demographic and technological changes.
US retail industry by 3.3 percentage points over the period. | 1
The international market grew atV an even brisker 10.8%
CAGR.
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Table of Contents
May 29, 2017 | Deep Dive: Warehouse Club Stores
About This Deep Dive ........................................................................................................................... 3
Executive Summary .............................................................................................................................. 4
Warehouse Club Companies at a Glance ............................................................................................... 6
Sector Overview ................................................................................................................................... 7
Historically Strong Growth and Outperformance .................................................................................. 7
Sector Inflection Point in 2015 ............................................................................................................ 10
Warehouse Club Characteristics ......................................................................................................... 11
Conclusion………………………………………………………………………………………………………………………………………...26
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About This Deep Dive
Fung Global Retail & Technology is publishing its Deep Dive: Warehouse Club Stores—Time to Take the
Treasure Hunt Online in three installments.
The Executive Summary outlines the spectacular rise of the sector over its 40-year history. From humble
beginnings, warehouse clubs have grown into beloved shopping destinations for their members, who
enjoy low prices as well as the chance to be surprised and delighted as they go on a treasure hunt
through the stores. Yet the industry is at a crossroads, characterized by slowing growth, demographic
changes, and the challenges presented by the convenience and appeal of e-commerce.
Part One Overview: Sector Overview
Part One of the report discusses the historical strong growth and performance of the warehouse club
sector, its heavy concentration in the US and the top three companies in the space. The analysis reveals
that the sector hit an inflection point in 2015 and has experienced a slowing growth trend in recent
years that market researchers expect to continue through 2020.
The warehouse club sector features a unique business model, where membership fees are the primary
contributor to profits and large volumes offset ultraslim margins. While the majority of warehouse club
members are individual consumers, small businesses are also an important component of membership.
Warehouse clubs’ growth has exceeded that of department stores and grocery stores. E-commerce,
however, accounts for a smaller percentage of sales in the sector than it does for other retail sectors
and the US retail industry overall. The sector is led by Costco, the largest club by revenue. Part One
concludes with an analysis of warehouse clubs by region.
Part Two Overview: Warehouse Club Advantages and Challenges
Part Two of the report examines the advantages and challenges warehouse clubs face. The clubs benefit
from economies of scale and their broad product mixes, which attract shoppers. They provide significant
value pricing to their customers, a treasure hunt shopping experience that offers unexpected surprises
and bargains, and a focus on organic products. Retailers such as Costco are located in the prosperous
top third of the Weinswig Retail Hourglass, a model that illustrates how companies operating in the
midmarket get squeezed.
Challenges the warehouse clubs face include shifting shopper preferences due to generational and
demographic changes, the steady encroachment of e-commerce, and Amazon’s entry into multiple
areas of commerce.
Part Three Preview: 10 Topics for Retail, Company Profiles and
International Overview
Part Three discusses 10 topics affecting the warehouse club sector and retail in general: the changing
grocery shopper, e-commerce, mobile commerce, robotics in retail, private labels, the sourcing
revolution, ancillary products and services, US market saturation, international expansion, and the brief
independence of Jet.com.
Part Three concludes with profiles of the top three US warehouse clubs and an analysis of the
attractiveness of selected global markets.
The Fung Global Retail & Technology team hopes that you will find this Deep Dive interesting and
informative!
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May 29, 2017 | Deep Dive: Warehouse Club Stores
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Executive Summary
Warehouse club stores have had a great run in the 40
years since 1976, when Sol Price founded the first Price
Club, which ultimately became today’s Costco. The clubs
were initially open only to business customers, but later
allowed employees of nonprofit and government
organizations to join, and eventually opened to the
public. The clubs had a unique business model—limiting
profitability so as to pass the savings on to customers
and making the bulk of their profits from membership
fees. Customers love the clubs’ low prices, the ability to
buy in enormous quantities and the delight of finding
unexpected bargains in treasure hunts throughout the
stores. There are not many stores in which customers
can purchase a 20 lb. package of steaks, a flat-panel TV
and a diamond engagement ring all in one trip.
The warehouse clubs have successfully leveraged
postwar demographics, generally situating themselves
in suburban areas with high median incomes and many
small businesses to serve, offering consumers in those
areas the convenience they need. While shoppers in
such areas tend to be affluent, everybody loves a
bargain, so many well-off consumers shop the
warehouse clubs along with their more price-conscious
neighbors.
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2
The clubs’ popularity has shown up in their financials. From 2001 through 2016, US warehouse club
revenues grew at a CAGR of 6.2%, outpacing the 3.0% annual growth rate of the overall retail industry
by more than three percentage points. The sector’s growth outside the US was even more brisk over the
same period, averaging 10.8%. Profitability did not suffer, either. Despite the clubs’ vow to limit gross
margins in order to offer attractive prices, the top three US warehouse clubs generally have seen
operating margins of around 2%–4%.
Despite this prosperity, growth has slowed over the past 15 years, and global growth ground to near
zero in 2015, making it an inflection point. Now, the US segment is forecast to grow annually at about
2.4%, less than half a point higher than the total retail industry. 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. In 2016, e-commerce accounted for 8.1% of US retail and grew by 15.1%
year over year.
What should the warehouse clubs do to recapture their previous appeal to consumers and reignite the
growth rates of years past? Clearly, e-commerce is part of the answer. Among the major warehouse
clubs, e-commerce’s share of sales is likely highest at Costco, where the channel accounts for 4% of
revenues. One short-lived but interesting player in the e-commerce field was Jet.com, which Walmart
acquired in 2016. Jet attempted to combine the low prices of warehouse clubs with the convenience
and ease of e-commerce and m-commerce. The company also implemented some innovative ways to
reduce shipping costs.
The warehouse clubs need to leverage their unique strengths, which include providing high-quality
goods at low prices and providing customers with a treasure hunt experience, as well as offering strong
private-label brands. Costco’s Kirkland Signature private label accounts for about one-quarter of the
company’s sales, making it a $30 billion brand. Kirkland Signature products are available on
Amazon.com and Jet.com, and the label is arguably a major international brand in its own right.
Warehouse clubs also need to adapt to the changing demographic patterns of American suburban life.
Members of younger generations are increasingly living in cities rather than in suburbs. In urban areas,
living space and storage are at a premium, and many urban dwellers do not own a vehicle that they can
drive to a warehouse club and fill with large, bulky purchases. 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.
In this deep-dive report, we offer an overview of the warehouse club sector, analyze the key factors that
are influencing the sector and profile the major players, as well as provide suggestions on what
warehouse clubs can do to recapture the strong growth they saw in previous periods.
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Warehouse Club Companies at a Glance
Figure 1. Selected Metrics for the Big Three US Warehouse Clubs, 2016
1 2 3
Category BJ’s Costco Sam’s Club
Financial
Net Revenues (USD Bil.) $15.0 $119.6 $57.4
YoY % Change 4.0% 2.5% 0.9%
*
E-Commerce’s Share of Revenues (Last FY) N/A 4.0% 2.8%
Membership Fee Income (USD Mil.) $270 $2,683 $1,348
Gross Margin 16.5% 13.8% 16.0%
Operating Profit (USD Mil.) $294 $4,211 $1,671
Operating Margin 2.0% 3.5% 2.9%
Membership
Number of Members (Mil.) 11.1 87.6 60.3
Percent Business 25% 55% 20%
Percent Consumer 75% 45% 80%
Avg. Annual Household Income (USD) $59,600 $74,000 $45,000+
4
Membership Fee—Basic/Premium (USD) $50/$100 $55/$110 $45/$100
Avg. Annual Membership Fee Revenue per $25 $32 $23
5
Member (USD)
Stores
Number of Clubs—US and Puerto Rico 219 506 659
6
Number of Clubs—International — 219 201
Number of Clubs—Total 219 725 860
Total Store Area (Mil. Sq. Ft.) 24 104 88
Average Store Size (Thous. Sq. Ft.) 107 144 132
Products
Number of SKUs 7,000 4,000 6,000
Number of Private-Label SKUs 500 550 500
Number of Private-Label Brands 8 3 11
Other
Avg. Sales per Club (USD Mil.) $70 $168 $87
Avg. Sales per Sq. Ft. $637 $1,168 $659
Avg. Sales per Employee (USD Thous.) $571 $554 $497
Avg. Sales per Member (USD) $1,362 $1,405 $970
*For parent company Walmart
Source: Company reports/eMarketer/US Census Bureau/Fung Global Retail & Technology
1
BJ’s was acquired by several private equity firms on September 30, 2011. The company’s last public filing was for the fiscal year ended
January 2011; all subsequent figures are estimates.
2
Figures for Costco in this report are calendarized (Costco’s fiscal year ends August 31), unless otherwise noted.
3
Figures for Sam’s Club consider the fiscal year as having ended in December of the prior year.
4
Costco announced that, effective June 1, 2017, the membership fee for all US and Canada Gold Star (individual), Business and Business add-
on members will rise to $60, and that membership fees for Executive members in the US and Canada will rise to $120.
5
Average fee revenue is below the membership fee due to free memberships (e.g., Costco provides a free household card with all paid
memberships).
6
Sam’s Club’s international stores are reported under Walmart’s International segment.
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Sector
Overview
Historically Strong Growth and Outperformance
Total revenues for global warehouse clubs are estimated to hit a record $191
billion in 2017, according to Euromonitor International. The sector posted an
exceptional CAGR of 7.2% in the US over the 15-year period from 2001 through
2016, and Euromonitor predicts that the global sector will grow at a 4.1% rate
from 2016 through 2020.
Figure 2. Global Warehouse Club Sector Revenues (USD Bil.)
$250
$200
$150
$100
$50
$0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E 18E 19E 20E
Source: Euromonitor International/Fung Global Retail & Technology
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The warehouse club market is The warehouse club market is largely a US-centric phenomenon. The US
largely a US-centric represented 73% of the global market in 2016, but Euromonitor expects the
phenomenon. The US country’s share to decrease to 68% by 2020.
represented 73% of the global
market in 2016, but Euromonitor Figure 3. Share of Global Warehouse Club Revenues, by Geography
expects the country’s share to
decrease to 68% by 2020.
16% 17% 18% 20% 20% 21%
2% 2% 2% 2%
8% 8% 2% 2%
8% 8% 9% 9%
74% 73% 72% 70% 69% 68%
15 16 17E 18E 19E 20E
US Brazil Mexico Other
Source: Euromonitor International/Fung Global Retail & Technology
Costco is the largest international warehouse club operator, with stores in
Australia, Canada, Japan, Mexico, South Korea, Spain, Taiwan, the UK and the
US. Sam’s Club operates warehouses in Brazil, China and Mexico as well as the
US.
Apart from the “big three” US clubs (BJ’s, Costco and Sam’s Club), there are just
a handful of other players in the sector. Cost-U-Less operates 13 stores in the
Caribbean and South Pacific. Makro Cash & Carry Belgium is a cash-and-carry
retailer operated by Germany’s Metro Group. Finally, PriceSmart is the largest
operator of membership warehouse clubs in Central America and the Caribbean.
The predicted change in share within a growing market means that the
warehouse club sector is growing faster in other geographies than it is in the US.
Euromonitor predicts that the global market will grow at a 4.1% CAGR through
2020 and the US market at a 2.4% CAGR.
Figure 4. Est. Warehouse Club Market Growth, by Geography, 2016–2020E (CAGR)
12% 10.8%
10%
8.4%
8.0%
8%
6.3% 6.1%
6%
4.1%
4%
2.4%
2%
0%
China Other Brazil Mexico UK World US
Source: Euromonitor International/Fung Global Retail & Technology
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In the US, the sector is In the US, the sector is dominated by Costco, which represents about 65% of the
dominated by Costco, which market and generates more than twice the revenue of its nearest competitor,
represents about 65% of the Sam’s Club.
market and generates more
than twice the revenue of its Figure 5. Big Three Warehouse Clubs: Estimated Revenue (Left Axis, USD Bil.) and
nearest competitor, Sam’s Club. Market Share (Right Axis, %), 2016
$140 70%
62%
$120 60%
$100 50%
$80 40%
30%
$60 $119.6 30%
$40 20%
$57.4
8%
$20 10%
$15.0
$0 0%
Costco Samʼs Club BJʼs
Figures are in US dollars, converted based on year-over-year exchange rates.
Source: Euromonitor International/Fung Global Retail & Technology
In addition, the sector has remained nicely profitable, with the big three US
players posting solid and growing profits in recent years.
Figure 6. Big Three Warehouse Clubs: Annual Operating Income (USD Bil.)
$7
$6.2
$5.7
$6 $5.5
$5.2
$4.9
$5
$4
$3
$2
$1
$0
12 13 14 15 16
Costco Samʼs Club BJʼs
Source: Company reports/Bloomberg/National Retail Federation (NRF)/Kantar Worldpanel/
Fung Global Retail & Technology
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Sector Inflection Point in 2015
The warehouse club sector has enjoyed many years of strong growth, and it
appears to have many more years of growth ahead of it. But as the graph below
shows, sector revenue growth was 4.0% in 2016.
Figure 7. Global Warehouse Club Revenues (USD Bil.)
$250 2016–2020E CAGR: 4.1%
$200
2001–2016 CAGR: 7.2%
$150
$100
$50
$0
The warehouse club sector 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E 18E 19E 20E
growth slowed over the 2002–
2015 period, even hitting near- Source: Euromonitor International/Fung Global Retail & Technology
zero growth in 2015.
The figure below shows that warehouse club sector growth slowed over the
2002–2015 period, even hitting near-zero growth in 2015.
Figure 8. Global Warehouse Club Sector Growth Rate
16%
14%
12%
Trend
10%
8%
6%
4%
2%
0%
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E 18E 19E 20E
World US
Source: Euromonitor International/Fung Global Retail & Technology
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10Warehouse Club Characteristics
Business Model
Warehouse clubs sell paid memberships to consumers and small business
customers that provide access to a wide selection of goods, often in bulk, at
discounted prices in large-store formats. Grocery products are a major driver of
foot traffic, but shoppers can purchase everything from apparel to appliances to
seasonal goods to eyeglasses at warehouse clubs. At the heart of the warehouse
club business model are memberships and economies of scale. The clubs’ large
membership bases enable them to purchase items from suppliers in large
volumes at low cost, which, in turn, helps them attract more members. Clubs
can price products with just enough markup to cover costs and operating
expenses and, in some cases, a sliver extra to contribute to the bottom line.
At their inception, warehouse clubs sold items geared toward small business
owners, generally the more affluent demographic in a region. As the business
model evolved, the clubs added great-quality merchandise at bargain prices for
nonbusiness use, and the treasure hunt aspect of shopping in the clubs, which
delights consumers, gained traction and became integral to the clubs’
operations. Today, general consumers represent a greater portion of the clubs’
membership base than business owners do.
The warehouse club sector has enjoyed resilient growth through most economic
cycles, offering value pricing on brand-name staples and discretionary “luxuries”
when the economy stalls, as well as high-end items that appeal to shoppers in a
robust economy. On a recent trip to warehouse stores in Connecticut, our team
found items available from a variety of well-known brands, including Bose sound
systems, Apple iPads and iPhones, Charisma sheets, Dockers khakis, Speedo
swimsuits and Fitbit activity trackers. While Costco had luxurious diamond rings
for sale at $16,999, Sam’s Club offered an aspirational handbag collection
featuring Coach, Kate Spade, Michael Kors and Tory Burch. In addition to well-
priced national brands, warehouse clubs are increasingly offering private-label
items and ancillary services that range from gas stations to pharmacies.
Warehouse clubs sell paid
memberships to consumers and
small business customers that BJ’s, Costco, Sam’s Club—the Big Three
provide access to a wide The US, which comprises the majority of the global warehouse club market, is
selection of goods, often in bulk, home to three main warehouse club companies, known as the big three: BJ’s,
at discounted prices in large- Costco and Sam’s Club (a division of Walmart).
store formats.
Figure 9. Big Three Warehouse Clubs: Revenues, 2016 (USD Bil.)
$140
$119.6
$120
$100
$80
$57.4
$60
$40
$15.0
$20
$0
Costco Samʼs Club BJʼs
Source: Company reports/Fung Global Retail & Technology
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Membership Fees Are the Main Profit Driver
While sales per member drive While sales per member drive revenue at warehouse clubs, membership fees
revenue at warehouse clubs, are what expand profits. Over time, membership revenue exceeds net income
membership fees are what and accounts for a substantial portion of pretax operating profits. We estimate
expand profits. Over time, that total membership fees contributed 70% of the big three’s operating income
membership revenue exceeds in 2016.
net income and accounts for a
substantial portion of pretax Figure 10. Big Three Warehouse Clubs: Operating Income Breakdown, 2016 (USD Mil.)
operating profits.
$5,000
$4,211
$4,000
$1,528
$3,000
$2,000 $1,671
$2,683 $326
$1,000
$1,345 $294
$270 $24
$0
Costco Samʼs Club BJʼs
Membership Fees Other Operasng Income
Source: Company reports/Fung Global Retail & Technology
At Costco, membership fees exceeded net income every fiscal year from 2004
through 2016, and fell within a range of 69%–86% of operating income,
averaging 75% during the period. Given the importance of membership fees,
attracting and retaining members is a priority for the company. In fiscal 2016,
Costco’s renewal rate was 90% in the US and Canada and 88% worldwide.
Costco runs on lean operating margins to ensure member savings, and leads the
sector in sales per member. The company generated 45% higher sales per
member than Sam’s Club did in 2016. Costco also maintains a large and growing
membership base that drives profits.
Figure 11. Big Three Warehouse Clubs: Merchandise Revenue per Member (Left Axis)
and Membership Fee Revenue per Member (Right Axis), 2016
$1,600 $40
$1,405 $1,362
$1,400 $32 $35
$1,200 $30
$970 $25
$1,000 $23 $25
$800 $20
$600 $15
$400 $10
$200 $5
$0 $0
Costco Samʼs Club BJʼs
Revenue per Member Average Membership Fee per Member
Source: Company reports/Fung Global Retail & Technology
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12In fiscal year 2016, Costco had In fiscal year 2016, Costco had the highest membership of the big three
the highest membership of the warehouse clubs and only about 11% of its members had explicit business
big three warehouse clubs and accounts.
only about 11% of its members
had explicit business accounts. Figure 12. Big Three Warehouse Clubs: Member Composition, FY16 (Mil.)
100
86.7
90
80
70
39.1
60 50.7
50
40 10.8
30
20 10.9 36.8
10
0
BJʼs Costco Samʼs Club
Costco - Gold Star Costco - Business
Costco - Household Members Members
BJ’s and Sam’s Club figures are estimates.
Source: Company reports/Fung Global Retail & Technology
In recent years, Costco and Walmart (serving here as a proxy for Sam’s Club)
both saw flattish growth in the percentage of their revenues deriving from
e-commerce. E-commerce accounts for a lower share of both companies’ sales
than it does for the overall US retail industry: in 2016, e-commerce accounted
for 8.1% of all retail sales in the US, and grew by 15.1% year over year.
Figure 13. Costco and Walmart: E-Commerce’s Share of Sales
4.5%
4.0%
4.0%
3.5%
3.0% 3.0% 3.0%
3.0% 2.8%
2.5%
2.5% 2.1%
2.0% 1.7%
1.5%
1.0%
0.5%
0.0%
FY13 FY14 FY15 FY16
Costco Walmart
Source: Company reports/Internet Retailer/Fung Global Retail & Technology
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Although the figure above shows that Costco leads Walmart in terms of e-
commerce revenue as a percentage of sales, the figure below shows that
Walmart leads substantially in terms of e-commerce revenue in dollar terms.
Walmart completed its acquisition of online retailer Jet.com on September 20,
2016, and a recent article published on tech news website Recode estimated
Jet’s annual revenue at about $500 million.
Figure 14. Costco and Walmart: Online Sales Totals (USD Bil.)
$16
$13.7
$14
$12.2
$12
$10.0
$10
$7.7
$8
$6
$4.6
$4 $3.3 $3.4
$3.1
$2
Macroeconomic factors,
including disposable income, $0
FY13 FY14 FY15 FY16
employment and consumer
Costco Walmart
sentiment, affect warehouse
club membership growth. Source: Company reports/Internet Retailer/Fung Global Retail & Technology
Currently, economic conditions
in the US favor the sector.
Membership Composition Is Key
Macroeconomic factors, including disposable income,
employment and consumer sentiment, affect warehouse
club membership growth. Currently, economic conditions
in the US favor the sector. Unemployment continues to
decline and consumer sentiment has increased.
Locating stores in geographic areas likely to enjoy
economic growth and withstand downturns is the key
for increasing and sustaining club membership.
Costco’s US locations are in states that are more
affluent than its competitors’ stores are, and BJ’s has
clusters of stores in affluent states. The locations of
these stores likely benefit the companies.
The majority of warehouse club members are
consumers, but small businesses are also an
important component of membership. The number
of small businesses in the US grew by 1.7%
between 2010 and 2014, and it is likely to increase
as the US economy grows. Costco commands the
largest percentage of business members among
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14the big three warehouse clubs. In a strong economy, this is an advantage, but
falling demand from small business customers in a weak economy could slow
the chain’s growth.
Figure 15. US: Small Business Data
2010 2012 2014
Number of Small Businesses 5,717,302 5,707,941 5,806,382
% Change — (0.2)% 1.7%
Employment by Small Businesses 54,996,680 56,062,893 57,894,592
% Change — 1.9% 3.3%
2014 data were released on September 29, 2016.
Source: US Census Bureau
Sector Performance
The US continues to dominate The US continues to dominate the warehouse club sector, as it is the only
the warehouse club sector, as it international market with a substantial number of major club chains. The US is
is the only international market also the only major economy whose statistics office routinely reports sector data
with a substantial number of for warehouse clubs. These sector data are bundled with data on predominantly
major club chains. nonfood supercenters, such as those operated by Walmart. In this section, we
examine figures for both the warehouse club sector and the warehouse club and
supercenter sectors combined. Costco has led the gains in the US sector. In five
years, the company gained more than two percentage points of share of the
broader, combined warehouse club and supercenter sector.
Figure 16. Big Three Warehouse Clubs: Share of Warehouse Club and Supercenter Sales
25%
19.3% 19.7%
20% 18.9%
18.0% 18.2%
17.2%
13.9% 13.9% 13.6% 13.4% 12.9%
15% 13.0%
10%
5% 3.1% 3.1% 3.1% 3.2% 3.3% 3.4%
0%
2011 2012 2013 2014 2015 2016
BJʼs Costco (US) Samʼs Club
Source: Company reports/US Census Bureau/Fung Global Retail & Technology
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The Warehouse Club Sector Has Enjoyed Robust Growth
In the face of competition from In the face of competition from discount channels, Internet pure plays and
discount channels, Internet pure specialists, some nonspecialized retail sectors are faltering. Warehouse clubs,
plays and specialists, some though, remain strong, even compared with rival grocery and department
nonspecialized retail sectors are stores.
faltering
Figure 17. US: Sector Sales for Warehouse Clubs and Supercenters, Department Stores,
and Grocery Stores (USD Bil.)
$700
$600
$500
$400
$300
$200
$100
$0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Warehouse Clubs and Supercenters
Department Stores
Grocery Stores
Source: Company reports/US Census Bureau/Fung Global Retail & Technology
Based on US Census Bureau data, grocery was the fastest-growing sector of the
three in 2016, with sales increasing by 2.3%, followed by warehouse clubs and
supercenters, which grew by 0.6%. The department store sector declined for the
eleventh consecutive year in 2016, shrinking by 3.1%.
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16The figure below breaks down the big three warehouse clubs’ combined
revenue in terms of domestic and international sales. Sales in both market
segments grew from 2012 through 2016.
Figure 18. Big Three Warehouse Clubs: Combined Annual Sales (USD Bil.)
$191.9
$200 $186.3 $187.8
$176.6
$180 $170.1
$31.5 $32.4
$32.6
$160 $30.2
$28.1
$140
$120
$100
$80 $153.8 $156.3 $159.6
$142.0 $146.4
$60
$40
$20
$0
12 13 14 15 16
US Internasonal
Source: Company reports/Fung Global Retail & Technology
Revenue growth for the big Revenue growth for the big three warehouse clubs was much lower in 2015 than
three warehouse clubs was in the immediately preceding years, and international growth
much lower in 2015 than in the uncharacteristically lagged that of the US in 2015, largely owing to declines in
immediately preceding years, Brazil and Mexico.
and international growth
uncharacteristically lagged that Figure 19. Big Three Warehouse Clubs: Total Sales Growth
of the US in 2015, largely owing
16%
to declines in Brazil and Mexico.
13.5%
14%
12%
10%
7.5% 7.9%
8% 7.2%
6% 5.0%
4% 3.1%
1.6% 2.1% 2.6%
2%
0%
(2)%
(4)% (3.1)%
12 13 14 15 16
US Internasonal
Source: Company reports/Fung Global Retail & Technology
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Warehouse Club Growth Exceeds Supercenter Growth
Historical Results
From 2012 through 2016, US From 2012 through 2016, US warehouse club revenues grew at a 3.0% CAGR,
warehouse club revenues grew while revenues for supercenters grew more slowly, at a 1.7% CAGR, we
at a 3.0% CAGR, while revenues estimate, based on US Census Bureau data.
for supercenters grew more
slowly, at a 1.7% CAGR. Figure 20. US Warehouse Clubs and Supercenters: Revenues (USD Bil.) and CAGR
CAGR
$500
$440.2 $442.7 3.0%
$450 $433.3
$406.3 $419.3
$400
$350
$300 $283.9 $283.1 1.7%
$272.9 $279.5
$264.3
$250
$200
$150
$100
$142.0 $146.4 $153.8 $156.3 $159.6 3.0%
$50
$0
12 13 14 15 16
US Warehouse Clubs Supercenters
Source: Company reports/US Census Bureau/Fung Global Retail & Technology
In terms of percentage of total US retail sales (excluding gasoline and auto
parts), the warehouse club and supercenter combined sector remained flat from
2012 through 2016, whereas the big three warehouse clubs gained just 0.2
percentage points of share.
Figure 21. US: Sector Sales as a Percentage of Total US Retail Sales
14%
11.9% 12.0% 12.0% 12.2% 11.9%
12%
10%
8%
6%
4.1% 4.2% 4.2% 4.3% 4.3%
4%
2%
0%
2012 2013 2014 2015 2016
Warehouse Clubs and Supercenters Big Three Warehouse Clubs
Source: Company reports/US Census Bureau/Fung Global Retail & Technology
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18Recent Results
During the 2016 calendar year, Costco posted revenues of $119.6 billion, up
2.5% year over year. Comparable store sales for the year excluding gasoline
increased by 2.8%. Consensus estimates call for revenues of $126.7 billion in
fiscal year 2017, up 6.7%, and for EPS of $5.91, up 10.9%.
In March 2015, Costco
In its fiscal second quarter of 2017, Costco reported a total comp increase of 3%,
announced that Visa would
comprising a 3% increase in the US, an 8% increase in Canada and a 2% decrease
replace American Express as the
in other international regions.
company offering its rewards
credit card beginning April 1, In fiscal 2017, Costco plans to open eight new warehouses, five in the US and
2016, putting an end to a 16- three in Canada.
year business relationship. This
In March 2015, Costco announced that Visa would replace American Express as
transition negatively impacted the company offering its rewards credit card beginning April 1, 2016, putting an
Costco’s fiscal first-quarter 2016 end to a 16-year business relationship. This transition negatively impacted
earnings by $15 million, or $0.02 Costco’s fiscal first-quarter 2016 earnings by $15 million, or $0.02 a share. By the
a share end of fiscal 2016, nearly 85% of 11.4 million American Express cards had been
transferred and activated, and 730,000 new members had activated their cards;
these figures were ahead of the company’s internal expectations.
In fiscal 2017, Sam’s Club reported revenues of $57.4 billion, up 0.9% year over
year. In the year, comparable store sales increased by 0.2% including fuel and
increased by 1.1% excluding fuel. For the fourth quarter of fiscal 2017, Sam’s
Club reported comp sales growth (excluding fuel) of 2.4%. Including fuel, comps
increased by 3.1%.
In October 2016, an SEC filing disclosed that Walmart had increased its stake in
Chinese e-commerce company JD.com after selling its stake in the Yihaodian
online marketplace to JD.com in June. In its fiscal third-quarter 2017 earnings
call, Walmart announced that its Sam’s Club flagship store had launched on
JD.com’s website, offering hundreds of millions of customers access to Sam’s
Club’s products with same-day and next-day delivery service.
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The Competitive Landscape
As stated earlier, the warehouse club sector is highly concentrated. There are
only three big players, all of which are US-centric and headquartered in the US,
which accounts for more than 70% of sector revenue, and concentration is likely
to remain high given the substantial capital needed for new entrants or other
rivals to be able to compete with these sector leaders. Nonetheless, warehouse
club chains face heavy competition from each other and from other retail
verticals, including specialty hardline, drugstore, department store, mass
merchant and Internet retailers.
Revenues and Growth: Costco Leads the US Market
Costco is the leader of the big Costco is the leader of the big three warehouse clubs in terms of total sales, US
three warehouse clubs in terms sales and sales per store. Its scale is due in part to its substantial international
of total sales, US sales and sales presence, but high-volume, low-margin and limited-line trading is the company’s
per store. Its scale is due in part formula for success. The big three recorded an estimated total of $192 billion in
to its substantial international revenues in 2016, up 2.2% from the prior year. Costco drove the sector’s growth
presence, but high-volume, low- in the year; the company’s $3.0 billion of growth exceeded an increase of $0.6
margin and limited-line trading billion at BJ’s and an increase of $0.5 billion at Sam’s Club.
is the company’s formula for A drop in Sam’s Club revenue in 2015 stemmed from a near-30% decline in the
success. company’s gasoline revenue, which decreased to $4.5 billion from $6.4 billion in
the prior year, primarily due to lower fuel prices. Sam’s Club’s revenues
excluding gas increased by 1.4% in 2015. The company’s retail square footage
increased by 1.2% and its comparable store sales were flattish.
Comps weakened during the 2012–2015 period across the sector, reflecting
tougher trading as the sector moved closer to maturity, if not saturation.
Figure 22. Costco and Sam’s Club: Comparable Store Sales (YoY % Change)
7% 6.2%
6%
4.8%
5%
4.1%
3.8%
4%
3%
2%
1% 0.4% 0.5% 0.4% 0.6%
0.2%
0%
(0.3)%
(1)%
2012 2013 2014 2015 2016
Costco Samʼs Club
Source: Company reports/Fung Global Retail & Technology
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20The figure below displays US store revenues and number of US stores for the big
three warehouse clubs.
Figure 23. Big Three Warehouse Clubs: US Revenue (Left Axis, USD Bil.) and Number of
US Stores (Right Axis), 2016
$100 900
$87.2
$90 800
$80 700
659
$70
600
$57.4
$60
506 500
$50
400
$40
300
$30 219
$20 $15.0 200
$10 100
$0 0
BJʼs Costco Samʼs Club
US Revenue US Stores
Source: Company reports/NRF/Fung Global Retail & Technology
The table below lists net US revenues for the big three warehouse clubs.
Figure 24. Big Three Warehouse Clubs: Net US Revenues (USD Bil.)
2012 2013 2014 2015 2016
BJ’s $12.5 $13.0 $13.8 $14.4 $15.0
Costco $73.1 $76.3 $81.9 $85.0 $87.2
Sam’s Club $56.4 $57.2 $58.0 $56.8 $57.4
Total $142.0 $146.5 $153.7 $156.2 $159.6
Includes membership fees for BJ’s and Costco
Source: Company reports/NRF/Fung Global Retail & Technology
The table below lists net revenue growth for the big three warehouse clubs.
Figure 25. Big Three Warehouse Clubs: Net Revenues (YoY % Change)
2012 2013 2014 2015 2016
BJ’s 5.7% 4.0% 6.5% 4.3% 4.0%
Costco 10.9% 5.2% 7.5% 1.8% 2.6%
Costco (US only) 9.9% 4.4% 7.4% 3.8% 2.6%
Sam’s Club 4.9% 1.3% 1.5% (2.1)% 0.9%
Total Global 8.4% 3.8% 5.5% 0.8% 2.1%
Includes membership fees for BJ’s and Costco
Source: Company reports/NRF/Fung Global Retail & Technology
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Warehouse Clubs Versus Other Large General
Merchandisers
Warehouse clubs compete Warehouse clubs compete against specialists such as electronics and toy
against specialists such as retailers, generalists such as Walmart and Sears, and Internet pure plays. So,
electronics and toy retailers, how do the two biggest US warehouse clubs measure up against their primary
generalists such as Walmart and competitors in terms of sales and growth?
Sears, and Internet pure plays.
• In scale, Costco and Sam’s Club rival large specialist retailers such as
Kroger and Best Buy, respectively. Both clubs also are well ahead of big-
name generalists, such as Kohl’s, Sears and Dollar General.
• Compared with many big store-based rivals, such as Walmart, Target,
Best Buy and Sears, Costco and Sam’s Club have outperformed in terms
of revenue growth. Costco grew at a 5.5% CAGR from 2011 through 2016
and Sam’s Club grew at a 1.3% CAGR from 2011 through 2016.
• Costco’s growth has rivaled Dollar General’s, confirming that both have
benefited from the polarization in retail that has made discount channels
the champion over midmarket players.
Figure 26. Selected US Warehouse Clubs vs. Selected US Retailers: Revenues (USD Bil., 2016) and Revenue CAGR (2011–2016)
$600
Walmart US
$500
$400
2016 Revenue
$300
$200
Costco
Kroger Amazon
$100 Home Depot North America
Target
Best Buy Samʼs Club
Sears
Toys "R" Us Kohlʼs Dollar General
$0
(15)% (10)% (5)% 0% 5% 10% 15% 20% 25% 30%
Revenue CAGR 2011–2016
Source: Company reports/FactSet/Fung Global Retail & Technology
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22Large Volume Compensates for Ultraslim Margins
Warehouse clubs are inherently Warehouse clubs are inherently a low-gross-margin format: sector profits are
a low-gross-margin format: driven by volume, even more so than in other forms of mass-market retail.
sector profits are driven by Costco operates on especially lean gross margins, which feed through to
volume, even more so than in ultraslim operating margins that are an inherent part of its value-for-money
other forms of mass-market proposition. Membership fees contribute the bulk of profits. Membership
retail. Costco operates on revenues alone contributed 2.2% of Costco’s total revenues in fiscal 2016.
especially lean gross margins,
which feed through to ultraslim Figure 27. Big Three Warehouse Clubs: Gross Margin, 2016
operating margins that are an
16.0% 16.5%
inherent part of its value-for-
money proposition.
11.2%
Costco Samʼs Club BJʼs
Source: Company reports/Fung Global Retail & Technology
Costco’s reported and BJ’s estimated operating margins generally increased
during the 2012–2016 period, but Sam’s Club’s margins declined in 2015 and
2016 due to higher costs from investment in people, payroll, technology,
promotions and demos combined with costs for expanded payment options and
real estate charges.
Figure 28. Big Three Warehouse Clubs: Operating Margins, 2012–2016
4.0%
3.5%
3.4%
3.5% 3.3% 3.2% 3.2%
3.1%
2.8% 2.9% 2.9% 2.9%
3.0%
2.5%
1.9% 1.9% 2.0%
2.0% 1.8% 1.8%
1.5%
1.0%
0.5%
0.0%
12 13 14 15 16
Costco Samʼs Club BJʼs
Source: Company reports/Fung Global Retail & Technology
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Costco Leads in Sales per Store and Store Size
Sales per store is one of Costco’s Sales per store is one of Costco’s most impressive metrics and helps explain its
most impressive metrics and market leadership. The company’s average annual sales per outlet are almost
helps explain its market double those of its closest competitor. Costco said that 165 of its stores
leadership. The company’s generated revenues exceeding $200 million each in fiscal year 2014. Of those,
average annual sales per outlet two generated revenues of more than $400 million that year.
are almost double those of its The average Costco store is 7% larger than the average Sam’s Club, and much
closest competitor. larger than the average BJ’s (BJ’s reportedly stays small in order to have a higher
density of clubs). Costco does benefit from larger store sizes, but that alone does
not account for the disparity in sales per outlet between the chains. Because
Costco and Sam’s Club have close to the same number of stores, on average,
Costco’s dominance is likely due to its impressive sales density coupled with its
larger store sizes.
Figure 29. Big Three Warehouse Clubs: Average Store Size (Thous. Sq. Ft.)
160 144
140 132
120 107
100
80
60
40
20
0
Costco Samʼs Club BJʼs
Source: Company reports/Fung Global Retail & Technology
The average Costco store produces nearly twice the revenue of the average
Sam’s Club store, and much higher revenue than the average BJ’s store.
Figure 30. Big Three Warehouse Clubs: Sales per Store, 2016 (USD Mil.)
$180 $168
$160
$140
$120
$100 $87
$80 $70
$60
$40
$20
$0
Costco Samʼs Club BJʼs
Source: Company reports/Fung Global Retail & Technology
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24Costco is the leader in sales Costco is the leader in sales density (i.e., in sales per square foot), despite
density (i.e., in sales per square offering fewer SKUs than either Sam’s Club or BJ’s, indicating that Costco
foot), despite offering fewer achieves exceptionally strong sales volume per SKU. This allows Costco to get
SKUs than either Sam’s Club or better buying prices, which it passes on to shoppers. This is the epitome of
BJ’s, indicating that Costco narrow-range, deep-discount retailing, and Costco’s performance on this
achieves exceptionally strong measure suggests that rivals (especially Sam’s Club) have significant potential to
sales volume per SKU. This drive up sales densities and boost profitability per store.
allows Costco to get better
buying prices, which it passes on Figure 31. Big Three Warehouse Clubs: Sales per Sq. Ft., 2016
to shoppers. $1,400
$1,168
$1,200
$1,000
$800
$659 $637
$600
$400
$200
$0
Costco Samʼs Club BJʼs
Source: Company reports/Fung Global Retail & Technology
The table below shows that the big three warehouse clubs have been steadily
growing their store counts in recent years.
Figure 32. Big Three Warehouse Clubs: Store Counts
FY13 FY14 FY15 FY16 Mar. 2017
BJ’s 201 207 210 213 219
Costco 634 663 686 715 728
Sam’s Club US 620 632 647 655 659
Total 1,455 1,502 1,543 1,583 1,606
Source: Company reports/Fung Global Retail & Technology
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VMay 29, 2017 | Deep Dive: Warehouse Club Stores
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Number of Product SKUs Does Not Differentiate
Offering members wide choice Offering members wide choice does not really offer a competitive advantage in
does not really offer a the warehouse club sector. With fewer product lines than its US rivals, Costco
competitive advantage in the has achieved leadership and impressive growth. This underscores that Costco
warehouse club sector. With sells very high volumes of the SKUs it stocks, which allows the company to buy at
fewer product lines than its US very attractive prices. Plus, large stores and limited ranges mean substantial on-
rivals, Costco has achieved shelf presence, driving down costs of replenishment.
leadership and impressive By these metrics, Costco is effectively a hard discounter akin to European
growth. grocery discounters Aldi and Lidl, whose ultranarrow ranges and high volumes
translate into low prices, and turn wafer-thin margins into a profitable business.
Figure 33. Big Three Warehouse Clubs: SKUs and Private Labels
No. of SKUs No. of Private-Label SKUs No. of Private-Label Brands
BJ’s 7,000 500 8
Costco 4,000 550 3
Sam’s Club 6,000 500 11
Source: Company reports/Fung Global Retail & Technology
US Warehouse Clubs Have Varying Regional Focuses
In terms of geography, BJ’s focuses primarily on the Northeastern US, while
Costco’s stores are most common in the Southwest. Sam’s Club stores are
primarily located in the Southwest, Midwest and South-Central US. The regions
with the highest number of stores are highlighted in the table below.
Figure 34. Big Three Warehouse Clubs: US Store Distribution, 2016
Region BJ’s Costco Sam’s Club Total
Northeast 138 62 58 258
Southeast 75 50 108 233
Midwest 6 74 134 214
South Central — 36 156 192
Northwest — 63 33 96
Southwest — 207 165 372
Other — 14 5 19
Total 219 506 659 1,384
Source: Company reports/Fung Global Retail & Technology
Conclusion—Part One
Part One of the report discussed Part One of the report discussed the historical strong growth and performance
the historical strong growth and of the warehouse club sector, its heavy concentration in the US and the top
performance of the warehouse three companies in the space. The analysis revealed that the sector hit an
club sector, its heavy inflection point in 2015 and has experienced a slowing growth trend in recent
concentration in the US and the years that market researchers expect to continue through 2020.
top three companies in the
space. Part Two of the report examines the advantages and challenges warehouse
clubs face. Advantages include the economies of scale while providing significant
value pricing to customers and a treasure hunt shopping experience that offers
unexpected surprises and bargains. Challenges the warehouse clubs face include
shifting shopper preferences due to generational and demographic changes, the
steady encroachment of e-commerce, and Amazon’s entry into multiple areas of
commerce.
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26Deborah Weinswig, CPA
Managing Director
Fung Global Retail & Technology
New York: 917.655.6790
Hong Kong: 852.6119.1779
China: 86.186.1420.3016
deborahweinswig@fung1937.com
John Mercer
Senior Analyst
John Harmon, CFA
Senior Analyst
Amy Lin
Research Assistant
Hong Kong:
8th Floor, LiFung Tower
888 Cheung Sha Wan Road, Kowloon
Hong Kong
Tel: 852 2300 4406
London:
242-246 Marylebone Road
London, NW1 6JQ
United Kingdom
Tel: 44 (0)20 7616 8988
New York:
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New York, NY 10018
Tel: 646 839 7017
FungGlobalRetailTech.com
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