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Market saturation and intensifying competition could pose significant challenges and decelerate the pace of growth for warehouse club stores over the next five years, reports Retail Forward in a new study, Warehouse Clubs Industry Brief.

“The warehouse club sector has strung together several years of strong sales gains,” said Sandy Skrovan, author of the report and Vice President of Retail Forward. “New stores have been opening at a rapid clip and same store sales gains have been strong. But the party could be ending soon,” she said..

Retail Forward forecasts sector sales to grow at an average rate of 7.6 percent a year through 2006 (7.3 percent in real dollars) vs. 10.5 percent a year over the past five years (9.9 percent in real dollars).

The challenges that exist for the warehouse club sector, according to the Retail Forward report, include:

Market Saturation – The industry is approaching market saturation and the land rush is on. Retail Forward projects the number of warehouse clubs to cap at about 1,150 units by 2006, barring a big change in concept or competition. This translates into the addition of about 250 net new units over the five-year horizon.

Intensifying Competition – Head-to-head competition and three-player markets are on the rise, resulting in some cannibalization of each other’s businesses. The three club store operators, Costco, Sam’s and BJ’s, are each deploying defensive location strategies, filling in existing markets than entering new markets in an effort to defend or raise market share..

Sustaining Same Store Sales Growth – Following near double-digit same store sales gains in the growth economy of the late 1990s, warehouse clubs have demonstrated remarkable resilience in sustaining a solid level of comparable store sales growth. The addition of ancillary businesses and services, new categories, and more big-ticket items has been key contributors to the incremental sales gains. Going forward, this ongoing string of solid comparable periods will become tougher to sustain.

“Club store operators are reevaluating their businesses, revisiting location strategies, and reinventing stores to increase appeal to both the consumer and small business segments and tap future growth opportunities,” said Skrovan. “As the warehouse club industry nears market saturation, future revenue streams will be harder won than in the past. But the warehouse club sector has proven its ability to break through ceilings before. As players actively test new categories, new concepts, and new market opportunities, perhaps this time will be no different.”
KC's View:
The key to future growth, as Retail Forward rightly suggests, will be for the major players in this segment to reinvent themselves, coming up with new formats, new product selections, new services and new marketing messages with which to lure shoppers.

That seems to be what Costco, especially, is doing, as it experiments with stand-alone warehouse furniture and gourmet grocery stores. Sam’s seems to be taking a different approach, retrenching and refocusing its efforts on selling to small businesses. Quite frankly, the Costco approach seems more interesting to us, if only because it gives us more to write about. But there’s also something to be said for companies that use their marketing power to try to come up with new concepts and recreate the form; they seem, in some small way, more courageous than companies that just protect their turf.

(This is, by the way, an argument we’d make about all forms of retailing, not just the clubs. As powerful as Wal-Mart’s Neighborhood Market potentially is, we’ve always thought it a shame that the company didn’t use its power and strategic intelligence to really advance the supermarket concept, as opposed to just recreating a more efficient neighborhood store.)

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