Costcp vs Sams Club

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“Warehouse Club Wars”
Costco vs Sams Club

Table of Contents

Introduction……………………………………………………………………………………….3 Warehouse Business Model……………………………………...…………………………....3 Costco Background……………………………………………………………………….……..5 Sam’s Club Background……………………………………………………………….………..6 Competition and Market Position of Rivals……………………..…………………….………..7 Comparision across Functional areas………………………………………………….………..9 What is Cross docking?……………………………………….………………………..13 What is Vendor Managed Inventory?……………………………………….….……..14 Vertical Integration and Alternative Sales Channels………………….…………..………..17 Conclusion……………………………………………………………………………………….17 Appendix A – Savings for Members…………………………………………………………...19 Appendix B – Port’s Fiver forces (Wraehouse Clubs) ………………………………….…20 Appendix C – Warehouses popular with higher Income families…..………………………..21 Appendix D – Costco derives Value from paying its employees more ……………….….22 Appendix E – Costco and Sam’s Clubs Websites ………………………….……………….23 Appendix F – References…………………………………………………………………..….24

Introduction

The membership warehouse concept was pioneered by Sol Price, who opened the first Price Club in a converted airplane hangar on Morena Boulevard in San Diego in 1976. Sol Price’s Price Club emerged as the unchallenged leader in member warehouse retailing, with stores operating primarily on the West Coast. Although he originally conceived Price Club as a place where small local businesses could obtain needed merchandise at economical prices, Sol Price soon concluded that his fledgling operation could achieve far greater sales volumes and gain buying clout with suppliers by also granting membership to individuals—a conclusion that launched the deep discount warehouse club industry on a steep growth curve.

Price Club was eventually merged with Costco in 1984. The same year, Walmart adopted the Warehouse Club concept and launched its first Sam’s Club stores.

The Club warehouses typically have concrete floors, sparse décor, and goods displayed on pallets or simple wooden shelves. The Warehouse floor plans are designed for economy and efficiency in the use of selling space, in the handling of merchandise, and in the control of inventory.

Warehouse Business Model

Warehouse Clubs are “big box stores that sell groceries as well as general merchandise at lower costs”

The basic model is to maintain very low prices, sell high volumes, and maintain very high Operating efficiencies. The business idea is that low prices on a limited selection of national brand merchandise and selected private-label products in a wide range of merchandise categories produce high sales volume and rapid inventory turnover.

All current warehouse Clubs operate under the following model: (Refer Figure 1): * low Profit margins.
* Low prices
* Limited selection (around 4000 items)
* Wide range of merchandise categories (tires to baby wipes) creates the rapid inventory turnover. * Volume purchasing
* efficient distribution
* reduced handling of merchandise
* no-frills warehouses

Warehouse Clubs comprise a very big business opportunity and a current market of 500B+ (including Costco $71B, Sam’s Club $54B, BJs $11B and Walmart SuperCenters - $390B.)

There is a combined Membership base of more than 130 million paying members across the existing warehouse clubs who pay membership fees in exchange for the privilege of shopping at the warehouse clubs.

The typical sales for each SKU is $12M per SKU at Costco and $10M per SKU.

This allows them to order massive amounts from manufacturers. Bulk packages sell larger quantities to consumers. The huge warehouse clubs eliminate the need for actual warehouses. At the same time, they reduce the need for handling. This greatly enhances distribution efficiency. Their large-scale membership base makes them strong.

Figure 1

Warehouse Clubs are very popular with households with higher incomes(Refer...
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