« March 2010 Table of Contents
Top Story: Value Kings
Club stores continue to change the way seafood is sold
By James Wright
March 01, 2010
If one thing has become clear during the past 18 months,
it's that American consumers respond to and support companies that understand their needs. At a time when mainstream supermarkets are struggling to turn profits, members-only discount warehouses are fulfilling their promises to stretch even the tightest budget.
The top three publicly held retail club stores, Costco Wholesale, BJ's Wholesale Club and Sam's Club, continue
to succeed by offering value their members won't likely
find anywhere else. Large families and even small businesses have long benefited from the volume buys. You have to buy more - and perhaps have a little more trunk space than necessary for a run to the local supermarket - but the
per-item cost savings are nearly unbeatable.
In the end, it's the product quality that has kept families and entrepreneurs coming back for more than three decades of savings and cravings. And the combined membership numbers for all three club exceed 100 million, roughly one-third of the entire country's population. As long as consumers want deals, enjoy searching for them and don't mind spartan in-store amenities, club stores will thrive. Even during the current economic downturn, the top three discount clubs are posting billions of dollars in sales and planning for expansion while supermarket operators cut back on extras and continue to search for a workable formula.
The major clubs have had a significant impact not only on the way seafood is packaged, but also on the manner in which it's produced and processed. Some of the legendarily strict club-store product specifications have forced seafood suppliers to innovate and concentrate on quality and dependability - or end up losing what may be their biggest account.
The club store success model has never been a secret.
"It's a simple philosophy," says Tom DeMott, COO and managing partner of Encore Associates, a retail-industry consulting firm based in San Ramon, Calif. "Have no more than eight or 10 items on display at any time, keep the selection down to a minimum and hit price points that are attractive. And they work on only 14 to 16 percent markups. Regular retailers have 40, 50, 60 percent markups."
By focusing on core seafood items and by cutting out layers of distribution, handling and markups, club stores have stayed profitable despite offering savings of up to 30 percent compared to mainstream supermarkets.
"It's the 80-20 theory - 80 percent of a seafood department's sales are done on 20 percent of the SKUs," says Joseph Sabbagh, president of Los Angeles-based seafood consulting firm Sax Maritime Associates. "These huge seafood departments [at supermarkets] are yesterday. They can wind up doing more harm than good."
A straightforward yet admittedly impersonal format has earned club stores the loyalty of millions of frugal consumers who pay to shop there. It also has captured the admiration of many in the seafood industry for the no-bull way in which clubs go about their business and for the exacting product standards that they have created for their buyers (and that other buyers have copied).
In short, club stores have changed the game in retail seafood. And the difference between the clubs and mainstream retailers has never been more noticeable: As
supermarkets have struggled to stay in the black during the economic downturn of the past two years, club stores have been posting profits and building new locations.
Price was right
New York native Sol Price is regarded as the godfather of the members-only discount-store industry, having founded Price Club in San Diego in 1976 with the austere goal of keeping overhead to an
absolute minimum and providing unprecedented value to customers. Gone were paid advertising campaigns in local newspapers, comprehensive product selections and fully trained counter staffs in various departments.
In were concrete floors, locations often well outside of town centers, the "treasure hunt" mentality and incredible savings based on volume. After all, Price Club's original target audience was small-business owners. The business model Price spawned remains intact today and was worth $141.2 billion in 2008, according to the publication Warehouse Club Focus .
Price, who died at the age of 93 this past December, also founded, with his son Robert, PriceSmart, a members-only club operating in Central America and in the Caribbean. Longtime competitor and founder of über retailer Walmart, Sam Walton, acknowledged that Price's business model was inspiring. In his 1992 memoir, "Made in America," Walton wrote, "I guess I've stolen - I actually prefer the word 'borrowed' - as many ideas from Sol Price as from anybody else in the business."
In 1993, Price Club merged with Costco Wholesale, which has become the largest of the three major club stores in terms of net sales and average store size, and is considered by many to be the leader in discounted retail seafood sales. (Costco representatives did not
return calls for comment.)
"Costco has a disciplined approach," says DeMott. "They're very much into fresh; they guarantee the freshest product they can sell. They do incredible research and ferret out how they can go right to the source and hit price points or simply not sell it."
The Issaquah, Wash.-based Costco also earns raves from a very important segment of its customer base: its seafood suppliers, including many who shop at club stores for their own families.
"Costco is a world-class organization," says Joe Bundrant, president of Trident Seafoods in Seattle. Costco offers a number of Trident-branded seafood products, both in its stores and online.
"In some instances, [Costco is] setting a higher standard," says Todd Blount, president of Blount Fine Foods, a Fall River, Mass.-based producer of soups, including clam chowder. "It's no secret that Costco has some of the tightest specs and highest-quality product. They give the customer a really good value. In general, it's much easier to get a better-quality product for a better price [by shopping there]. Forget the size - they expect higher quality."
Not only do club-store shoppers get value for their hard-earned money, says Blount, but their suppliers are afforded the opportunity to brand their products in exciting ways that they can't accomplish with typical retail packaging. For instance, Blount's club-store soups are packed in pairs, grouped together by a paperboard sleeve.
"It gives us a pretty good space to communicate to the customer," says Blount. "The product size is bigger, with more packaging to print on. It's eye-catching. A cup of soup at a supermarket just has a label. With a paperboard sleeve, there's more space to print on and you can use better photography."
A winning formula
Among suppliers, club-store accounts are some of the most sought-after in the seafood business - and can be difficult to land and maintain. Because of the volume, a club-store account can make or break a business.
"There's a formula for doing business with Costco. It's not easy to break in, and you have to have the right procedures and a good broker who can guide you and help you avoid obstacles," says Jeff Krause, president of RT Foods, a supplier of value-added frozen seafood in Scottsdale, Ariz.
"We have our factory audited every year," says Krause. "You have to have the right packaging. Pricing is always at the top of the list. And then there's delivery. If you can't deliver, then you're in trouble."
Suppliers like RT Foods would be lucky if their products filled an entire shelf of a typical grocery store. At Costco, they can get an entire freezer door. "From the supplier's perspective, [merchandising is] what they do right," adds Krause.
Robert Fields, director of fresh meat, seafood and deli for Sam's Club, a division of Walmart in Bentonville, Ark., says club-store vendors need to be on their game to be consistent suppliers.
"They gotta bring us a quality product. That's our No. 1 deal - the focus is on quality," says Fields. "What's also really important is logistics. If they don't have a reliable logistics train, it makes it very difficult for us to do business, because our members are counting on that product day in and day out. We can't have a lot of out-of-stocks, we can't have a lot of short shipments. Dependability is what we're hunting for from a vendor."
Bonnie Volpe, frozen-foods buyer for BJ's Wholesale Club, based in Natick, Mass., agrees with Fields, adding that the company provides a comprehensive vendor package that demonstrates best practices, all the way from harvesting and processing to quality and delivery expectations.
"We look for credibility, reputation and whether the potential new vendor can supply BJ's needs on a consistent basis," Volpe says.
Club stores transformed farmed salmon sales in the United States by sheer volume and by demanding that portions of fresh, farmed salmon be skinless, with any brown-colored flesh and pinbones removed. Their specs for seafood products are famously strict and have been copied by other buyers.
"At one time, Costco was the single-largest buyer of farmed-salmon fillets in the country, by far," says DeMott. "When you have that situation, a major buyer with a certain spec, now the vendor can more easily supply that product to the industry as whole."
Club stores brought farmed-salmon consumption to "a whole new level," says
Jason Paine, VP-sales for Multiexport Foods, a Miami-based Chilean-salmon importer. Especially in the mid- to late-1990s, he adds, when their buying led to double-digit category growth.
"They just have such critical mass with these retail outlets. They're really able to sell big volumes with refined logistics," says Paine. Club stores also have their own distribution centers, which allows them to work directly with big suppliers and bring their trucks right into their warehouses.
"The salmon market used to be more of a commodity-based, weekly pricing scenario. Club stores were the first to do program business, with advance [purchase orders] and set volumes you could count on week in, and week out," says Paine. "Salmon was
always a great item with wide acceptance, but at retail it always subsidized the shrink - the products that didn't sell as well."
Fields of Sam's Club says the company's strategy of focused offerings keeps shrink down. Sam's has roughly six fresh-seafood SKUs and about 24 frozen SKUs.
"We try to carry a limited assortment and turn volume and keep the product fresh and the quality high. When you look at our fresh seafood area, I'm only carrying salmon, catfish, tilapia and maybe one other species. It's a whole lot easier to manage the logistics and the shelf life of the products. Our shrink is definitely lower than a supermarket's," says Fields. "Seafood is not a loss leader for us as a company."
Dave Ritacco, BJ's fresh-seafood buyer, says core items allow buyers to branch out.
"While the top-line sales contributors are skewed toward a handful of items - e.g. salmon, tilapia, shrimp - it gives us the opportunity to offer products, regionally or chain-wide, that round out the selection and create the 'wow' factor for our members," Ritacco says. But BJ's evaluation methods aren't based on gut feelings or emotions - it's more like advanced mathematics.
"BJ's looks at trend analysis [even at the foodservice level] and data supporting potential incremental sales versus cannibalization to help define the expected penetration into a category the new item would offer," says Ritacco. "The information is then compared with BJ's current product selection to assist in the decision process."
Whatever club stores are doing, it's working. Costco posted nearly $70 billion in sales in 2009, down 1.5 percent from the previous year but enough to lead the members-only discount-retail category, despite having fewer stores in fewer states than Sam's Club.
Sales increased a modest 1.6 percent for BJ's in 2009, to $9.9 billion. Sam's Club did the best in 2009, reporting a 5.6 percent increase in sales last year to nearly $47 billion. But in late January Sam's let go of more than 11,000 employees - mostly part-time positions in the product-sampling department, a move that CEO Brian Cornell called "cost neutral."
But even with lateral moves of late, club stores are positioned for the future with a proven and profitable value proposition - one in which the customers always pay to play.
Associate Editor James Wright can be e-mailed at firstname.lastname@example.org