Wal-Mart’s Weak Link: Sam’s Club Refocuses To Close Costco Gap

Sam’s Club is strategizing to stay in the race with such rivals as Costco and its own sibling, Wal-Mart Supercenters.

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BOSTON — In his autobiography, Sam Walton fondly recalled the founding of Sam’s Club in 1983 as a "second childhood."

Lately, though, Wal-Mart’s $31 billion warehouse club division has hit an awkward and somewhat listless adolescence, characterized by ebbing profits and a fuzzy corporate focus. Operating profits declined by 2.4 and 0.7 percent in the third and fourth quarters, respectively. Overall, the business failed to grow its operating income in 2002, which remained at $1.03 billion. Sam’s Club’s numbers look especially pallid when compared with the leaps of Wal-Mart’s Supercenters and the gains in recent years of rival Costco Wholesale Corp.

On a conference call in February, Wal-Mart Stores Inc. chief executive officer Lee Scott characterized Sam’s Club’s performance as "very disappointing."

Scott’s admission comes after executives have spent more than three years quietly taking wrench and pliers to the 564-store chain.

Successive management teams (Sam’s Club has had five ceo’s since 1992) have revised the chain’s strategy — shifting it from a no-frills, business-oriented club to a dressed-up, consumer-friendly concept. The new format tested in key Texas markets replete with kettle corn, tables of designer duds and celebrity book signings.

But the spiffier stores failed to produce the anticipated return-on-investment, or much traction against Costco, which has made catering to upscale consumers its calling card. The Issaquah, Wash.-based warehouse club has 412 stores and $37 billion in global revenue, making it the warehouse industry’s biggest player. Costco had operating profits of $1.13 billion in the year ending September 2002. It is the SUV crowd’s Saturday morning haunt and the largest seller of first-growth Bordeaux in the U.S., according to Saveur magazine.

Now Sam’s Club appears to be returning to the middle ground — and, apparently, to the masses of middle-income families who have built the Wal-Mart empire — with an initiative dubbed "Club of the Community."

Broad-stroke demographics explain the reasons for Sam’s Club’s shift: 58 percent of Costco’s membership has a household income over $75,000 versus 43 percent of Sam’s Club, according to consumer tracking firm Scarborough Research.
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