Fierce competition may bring shakeout in warehouse stores

WHOLESALE SLAUGHTER

May 16, 1993|By Michael Dresser | Michael Dresser,Staff Writer

Wholesale clubs have gone from warehouse to doghouse.

Once hailed for their merchandising muscle, the sprawling members-only stores have staggered through several months of flabby sales. Stock prices in the major wholesale club companies have plummeted, and analysts have vied to see who can cut earnings estimates fastest and deepest.

Skeptics see the slide as an indication the concept was overrated from the start. They note that a counterattack by the nation's grocers has slowed the clubs' drive for food sales. So-called "category-killers," stores that specialize in office supplies, computers or other merchandise, are chewing into more product lines.

Meanwhile, fast-growing warehouse stores, which already have moved into the most fertile markets, face increasing competition from other wholesale clubs -- and from stores in their own chains as well. "All players want to position themselves to be in the good markets," said Otto Grote, retail analyst for Derby Securities in New York.

The result, analysts predict: a shakeout that could cut the number of major wholesale club chains from five to two or three.

A look at the trading record of the major wholesale club stocks reflects the gloom. Since the industry's glory days last fall, it's been wholesale slaughter on Wall Street.

* Price Club (82 stores, $7.3 billion in sales for fiscal year that ended in September), the San Diego-based company that pioneered the concept in 1976, has seen its stock slide to $29 a share Friday from $43.75 since Nov. 6.

* Costco Wholesale Corp. (89 stores, $5.5 billion for fiscal year that ended in August), the Seattle-based company that many analysts call the best operator in the industry, fell from $41 a share in January 1992 to $17.875 Friday.

* Waban Inc. (39 stores, $1.8 billion for fiscal year that ended in January), the Natick, Mass.-based chain whose BJ's Wholesale Clubs are gaining the tightest grip on the Baltimore market, plummeted in value from $25.75 a share last May to $12.875 Friday.

The slump is also hitting the discount retailers that operate warehouse chains.

Last month, Moody's Investors Service cut its rating on Kmart's long-term debt, citing poor prospects for earnings and sales growth at the company's 114-store Pace Membership Warehouse subsidiary as one reason. Moody's also downgraded the debt of Pace, which had $4.4 billion in sales for the fiscal year that ended in January.

Even Wal-Mart Stores Inc. has been hurt by weak sales at its Sam's Club division, whose $12.3 billion in sales at 256 stores accounted for more than 20 percent of Wal-Mart's $55 billion in revenue in the fiscal year that ended in January.

Since March, Wal-Mart's stock has fallen from $34 to $27.25 -- a 20 percent decline for a company that has barely recognized any direction other than up. Sam's is not entirely to blame, but it has contributed to the decline.

But these are not the agonies of a contracting industry. "This industry is in a full-out maximum expansion mode," said Mr. Grote.

Nationwide, wholesale clubs are in a race for real estate. Each of them want to be the first to put a membership card in the wallets of people like Henry H. Holder III.

Mr. Holder, who operates a tractor-trailer training company, emerged from the Price Club in Glen Burnie last week with a cart full of merchandise for his home and business. He's a loyal Price Club customer, even though a newer BJ's has just opened in Pasadena, closer to his home.

"I just don't want to spend an extra $25 or $30" for another membership, he said.

BJ's President Herb Zarkin is familiar with that sentiment.

"If you're the second one in and you don't bring anything new to the party, why should I leave the first guy?" he said. He said the Pasadena store is doing "OK," but not nearly as well as BJ's White Marsh store, which was the first in that area.

L But rapid expansion carries heavy costs. Open a conventional

store and the business will be in full swing within a year or two. Open a warehouse club and it might take five years before the store can build a membership base big enough to pay off, said Mr. Grote.

The rush to grab the best locations has led to fierce competition, and not just among different chains. BJ's for instance, will divert some business from its Pasadena and White Marsh stores when it opens stores in Columbia and Owings Mills next month -- becoming the first wholesale club to ring the city.

This strategy takes a toll on a chain's same-store sales figure -- a closely watched gauge that tracks sales at stores that have been open at least 12 months. BJ's same-store sales, for example, fell 9.7 percent in April after declines of 10.4 percent in March and 8.4 percent in February.

Cannibalization of existing stores is only one reason for those declines, Mr. Zarkin notes.

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