They're everywhere — Fedco, Costco, Price Club, and all sorts of other "club" stores that charge a membership fee and claim low prices. The other day I tried to join one of them, but there were a host of restrictive qualifications for membership: you had to work for the state, or be a federal employee, or be self-employed (and bring in tax returns to prove it — a business card wasn't sufficient). I remain a nonmember.
The membership fee I can understand. But I cannot for the life of me figure out why any business would choose to restrict its customer base. How can this be a profitable strategy for a retailer? Yet there are enough such businesses that there has to be a reason. What is it?
Illustration by Slug Signorino
What store did you go to? PriceCostco, formed from the merger of Price Club and Costco in 1994, is in fact pretty strict about who it lets in. But the other major player, Sam’s Club, a division of Wal-Mart, has a long list of eligible parties, including Discover card holders, Wal-Mart shareholders, members of the American Association of Retired Persons, even (sheesh) real estate agents. So obviously they’re not too fussy. Maybe the clerk at the service desk just had it in for you personally. Have you recently, like, brushed your teeth?
The reason club stores, better known as warehouse stores, limit potential customers isn’t that mysterious. These places are basically wholesalers, and they restrict their clientele for the same reasons all wholesalers do.
Warehouse stores started out with what was a novel concept in its own right — self-service wholesaling to small- and medium-size businesses. Unlike traditional wholesalers, they didn’t deliver and didn’t bill (though Sam’s now extends credit). Instead you drove in, got what you needed, paid cash, and carted it off.
Merchandise selection was broad but not deep. You could get everything from soap to snow tires, but generally you had a choice of one brand per item. A standard Wal-Mart might carry 70,000 items, but a Sam’s had only 3,500 to 4,000.
The stuff came in feed-an-army sizes only, it was often still piled on pallets, and in many cases you had to bring your own bags. There was minimal sales help, and the stores had the decorating flair of an unfinished basement. But so what? Prices typically were just 8 to 10 percent above cost, low even for wholesale.
Business-to-business sales being what they were, traffic at warehouse stores tailed off on weekends. So early on, the stores decided to let in selected nonbusiness customers to take up the slack during slow periods.
Why not just fling the doors open? Not possible. Warehouse stores don’t want to tick off their business clientele, who account for one-third of the customers but two-thirds of the sales. A lot of what small-business people buy at a warehouse store is intended for resale. A guy buying goods to stock his convenience store gets a little freaked if he sees his own customers standing next to him in line. He also doesn’t want to wait with $500 worth of merchandise behind a bunch of mopes buying a quart (OK, hogshead) of milk.
On top of that, warehouse store operators are under pressure from the manufacturers and other suppliers they obtain goods from as well as from traditional retailers such as supermarkets. Traditional retailers hate being undersold and give suppliers grief for trading with the enemy. The snootier suppliers also don’t like their products being sold for peanuts. Warehouse stores try to keep everybody placated by arguing that they serve a select clientele, not the hoi polloi.
Finally, warehouse stores limit their customer base to keep out the nickel-and-dimers. With their minimal markups the stores have to move a huge volume of merchandise to make money. PriceCostco averages a staggering $77 million in annual sales per store. You can’t generate numbers like that if you’ve got 50 guys in line buying a can of beans. Significantly, Sam’s, which lets in many more people than PriceCostco, has much lower per-store sales, around 44 million bucks. That’s the price you pay for being a nice guy.
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