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The paper will discuss the warehouse club industry. This industry comprises of retail stores that sell a wide range of merchandise. The industry requires customers to purchase large, wholesale quantities of products. This makes the industry to be attractive to bargain hunters and owners of small businesses (Garretson, Fisher & Burton, 2002).
Products and Services
Warehouse clubs deal with a wide variety of products that include candy, snacks, health as well as beauty aids. Others include tobacco, alcoholic beverages, cleaning and institutional supplies, and dry and fresh food. Some clubs have packaged food and tobacco. In addition, the industry deals in pharmacy, optical, one-hour photo, food court, and hearing aids among other products. Some warehouse stores specialize in online marketing of their products. However, most have physical warehouses, where customers walk and purchase products.
The warehouse club industry is capable of keeping low prices because of the no-frills format of warehouse stores. No-frills format refers to the removal of non-essential features in services or products in order to keep low price (Kotler & Armstrong, 2012)
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Largest Firms in the Industry
The largest companies in the warehouse industry are Costco Wholesale Corporation, Sam’s Club and BJ’s Club. The paper will focus on these three firms, as the other American warehouse clubs (Fed Mart and Price Club) are now defunct (Garretson, Fisher & Burton, 2002).
Costco Wholesale Corporation
Costco Wholesale Corporation is a warehouse club chain found in the United States of America. As of July 2011, the organization was the largest membership warehouse club in America (McGregor, 2008). The first warehouse of the organization was in Seattle. Costco has since decentralized to the United Kingdom, Canada, Taiwan, South Korea, Japan and Mexico. According to Costco Wholesale (2012), Costco has approximately 142,000 employees, both full time and part-time. In September 2009, the company had 55 million members. The company’s main strategy is the provision of lowest prices in high quality merchandise. This strategy aims at selling large quantities of goods at low prices.
The average pay of a Costco worker is remarkably high, when compared to the competitors. For instance, Costco pays $17 per hour, which is 42 percent higher than that of Sam's Club.
Costco has the biggest market share in the industry. The differentiated branding, in addition to private label products, enables Costco to provide an upscale club experience to members. This allows Costco to gain market share and, at the same time, increase sales per square foot (Costco Wholesale, 2012). Costco enters a market by selling membership to employed persons in leading companies. The company also sells membership to owners of small businesses. These practices help to capture the highest income population in discount retailing. Costco’s main competitor is Sam’s Club.
This is a chain of retail warehouse clubs, belonging to Wal-Mart Stores, Inc. In 2008, estimates showed that Sam's Club served approximately 47 million members from the United States of America (McGregor, 2008). Sam's Club holds the second position in sales volume of warehouse clubs. As already noted, the first one is Costco Wholesale Corporation. However, Sam’s has more retail locations (602) than Costco (600). Most of the time, the Club sells its merchandise in bulk. It also sells the merchandise directly off pallets. The products sold include jewelry, designer goods, crystal and collectibles, electronics, apparel, food and meats. In addition, most locations have pharmacy, photo, bakery, optical department, among others (Roads, 2007). The club has approximately 47 million members from the United States of America. It operates about 580 clubs nationwide (Roads, 599). There are approximately 100 locations in other countries like Brazil, China, and Mexico.
Sam's Club had $44.4 billion revenues in the year 2007. The Club earned revenue of $ 46.9 billion in the year of 2009. The Club offers an aggressive competition to Costco's Wholesale Corporation because of the wide range of products it provides. In addition, the number of retail locations challenges the position of Costco as the largest warehouse club in America.
BJ’S Wholesale Club
BJ’s Wholesale Club, Inc. is a warehouse club chain that operates on the East Coast of the U.S. and in the state of Ohio. The company began in 1984. In January 2010, there were 190 BJ's locations in the United States of America. The company has about 23, 500 employees. Its main competitors are Costco Wholesale Corporation and Sam's Club. BJ's has many benefits to its members. These involve "member pricing", which is a variety of "name-products" goods at discount wholesale prices (Garretson, Fisher & Burton, 2002).
According to Roads (2007), BJ's is the third company with the largest market share in the United States of America. However, its influence is not comparable to Costco or Sam's Club. In 2007, BJ's had $9.0 billion in revenue from 177 warehouses.
The major issues of the warehouse industry concern the decline in demand because of the current global financial conditions, the ability to maintain market share because of stiff competition, demographics, and the ability to get ongoing and reliable merchandise sources (Kotler & Armstrong, 2012).
There is a significant reduction in consumer durable spending because people have deferred purchases like furniture and large appliances. In fact, purchases of apparel have reduced by 6 percent for women and 10 percent for men. There have been marginal increases for the apparel of children. This is crucial as the product categories for the two types of products make up to 30 percent of the warehouse industry (Garretson, Fisher & Burton, 2002). Although Costco has only a three percent decline (Costco Wholesale, n.p.), this is a worrying trend. If the economy continues to decline, there is the fear that the Costco Wholesale Corporation will lose its unrivaled economic stability. This means that the company should come up with other measures of guarding against the threat of economic meltdown.
Demographics are another key issue that is facing warehouse industry. For instance, in the case of Costco, demographics cause trouble for the industry’s business model of "a single size packaging" of large volumes of goods. The company pursues this practice in order to reduce handling and restocking of the goods (Costco Wholesale, n.p.). This has the advantage of cutting down the expenditure of the organization. However, the world has an increase in the number of the aging population, single and divorced people as well as smaller families. This means that few people will need the large sizes of goods that Costco offers. This might serve societies that have large families, for instance, in Africa. However, in the countries that Costco has warehouses, the prevalent trend is that of small families. McGregor (2008) established that the average American family consists of five members. This means that there is the fear that people might start to shop elsewhere, as they no longer need the large volumes of goods that Costco Wholesale Company offers. As a result, the company should explore the possibility of packaging goods in small packages.
Pairing the problem of packaging with the concerns of reliable supplies of merchandise brings another significant issue. There are aggressive competitors that threaten the market share of companies in the warehouse industry. Though a company like Costco has controlled much of this competition, there are signs that competitors and suppliers are gaining ground. For instance, Proctor and Gamble cited Sam's club as their preferred merchandiser (McGregor, 2008). This is because Sam's Club has more efficient logistics and inventory management systems than Costco Wholesale Corporation (McGregor, 2008). Besides, Sam's Club purchases ongoing supplies of Proctor and Gamble products in many sizes. Moreover, Sam's Club stocks a full inventory of Procter and Gamble products. This means that when there is a limited production of merchandise, Sam’s Club will become the preferred customer and the other firms will have to wait. Costco purchases stock of merchandise on the grey market whenever it is possible. The company also handles only a single size of Proctor and Gamble products in sizes, which are not lucrative for Proctor and Gamble.
Actions of the Firms. The three companies (Costco, Sam's and BJ’s Club) share a similar business model. This involves selling large volumes of merchandise, using low prices in membership-only warehouse clubs. Most products in the warehouse club industry are practical and frequently used goods that people need. The firms have decided to concentrate on other products that are recession proof, for instance, wines, snack foods, tobacco and health related products in order to make up ground to avoid the economic decline. Besides, the firms’ expansions enable accessibility of their warehouses by many customers. Sam’s Club and BJ’s Club have taken into account the changing demographics by allowing small size packaging of products (McGregor, 2008). The industry has introduced racks of gift cards obtainable at discounted rates in an attempt to get new customers. They also have favorable return policies to ensure customer satisfaction.
The warehouse club industry will continue to blossom. This is because the current economic hardships will make new people start shopping in warehouses. Besides, many people will have access to warehouse clubs given the steady increase in the number of warehouses. However, achieving this future state requires the firms to mitigate the threatening issues like the decline in spending, changes in demographics and intercompany competition.
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