What if wholesale clubs went mini-food?

June 08, 2012

If Walmart Express could be profitable quickly, smaller food-only versions of Costco and its channel might be even more compelling.

If supercenters can go small and succeed (ten Walmart Express stores profited in their first year) and supermarkets can distinguish with fresh foods in small formats (Fresh & Easy), The Lempert Report suggests that warehouse clubs spin off mini-versions of themselves that focus only on food.

They have the enormous buying clout and operating efficiencies to keep their winning formulas intact. They’d continue to show compelling value. And they’d be far more convenient in, say, 15,000 to 20,000 square-foot formats that could penetrate more markets. Moreover, TLR feels that any potential cannibalization of traffic to their larger sites would be far outweighed by their new, expansive reach into many more U.S. households.

The membership expansion we foresee would grow member fees, and give the mini-clubs a financial competitive edge against many kinds of food sellers—including supermarkets, drug, dollar and convenience stores. Indeed, in the most recent quarter, Costco’s 9.2% growth in fee revenues to $475 million helped drive 8.2% growth in Costco’s revenues to $22.32 billion and a 19% jump in net income.  That followed the 10% raise in membership fees Costco imposed last November.

Even though one-stop big-box retailers put many independents out of business over the past decade, “the marketplace evolves quickly these days, and the narratives that defined the 2000s will not necessarily hold in the 2010s,” says a TIME account describing the pressures Amazon places on Best Buy, following the pain it exacted on Borders, Blockbuster and Tower Records.  The Best Buy counter-plan, it describes, is to beef up online, “dramatically reduce the square footage of existing stores and open newer, smaller stores that focus on one product segment, like mobile phones.”

Given seven straight lackluster quarters, it’s no surprise that Walmart looked for good things from a small package. Based on early performance, president and CEO Bill Simon of the U.S. stores division, told a Morgan Stanley conference that Walmart might roll out the format hundreds of food-pharmacy-convenience stores at a time.  He said the two questions foremost on their minds are how big this could become and how densely they could cluster stores within markets.

Meanwhile, the Seattle Times reports, Costco is introducing new mobile apps in a bid to raise its online presence.  And BJ’s CEO Laura Sen wrote in the National Retail Federation’s Stores magazine that the private firm has “an extremely resilient model…In tougher economic times, members seek us out for saving money on everyday necessities. In stronger economic times they come to us for their expensive toys.”