Though sales are projected for a record $191 billion in 2017, growth is slowing, writes Managing Director Deborah Weinswig
June 13, 2017
NEW YORK (June 12, 2017) – E-commerce, which has been compelling traditional retailers to rethink their strategies, must now become a factor in the warehouse club sector as it adapts to changing demographics and growing competition, says “Deep Dive: Warehouse Club Stores-Time to Take the Treasure Hunt Online Part Three,” the conclusion of a series of reports from global think tank Fung Global Retail & Technology.
The sector is projected to generate a record $191 billion in revenues globally this year, three-quarters of which will come from the U.S. From 2001 through 2016, U.S. warehouse club revenues grew at a compounded annual growth rate (CAGR) of 7.2 percent, more than twice the 3.0 percent CAGR of the overall retail industry. However, growth in the U.S. sector is slowing, with researchers projecting a CAGR of 2.4 percent from 2016 through 2020, more than 1.5 points lower than the projected CAGR for the retail industry overall over the same period.
“The slowdown can be attributed to changes in demographics and the ways people shop and, of course, to the steady growth and encroachment of e-commerce,” writes Fung Global Retail & Technology Managing Director Deborah Weinswig in Part One of the series. “The warehouse clubs need to leverage their unique strengths, which include providing high-quality goods at low prices and providing customers with a strong treasure hunt experience, as well as offering strong private-label brands.”
E-commerce comprised 4.0 percent of Costco’s sales and 2.8 percent of Walmart’s sales in 2016, compared with 8.1 percent of all retail sales in the U.S. (The third major U.S. warehouse club, BJ’s Wholesale Club, is privately held and does not break out sales by channel.)
Warehouse clubs also must adapt to American urbanization, the report says. Younger generations are increasingly choosing to live in cities and forgo car ownership, leaving them no convenient way to bring large, bulk purchases home from a warehouse club.
“To meet these consumers’ needs, warehouse clubs should explore offering more of their goods in smaller quantities online and also explore delivery methods that e-commerce companies are using, such as click-and-collect and expedited shipping,” Weinswig notes.
As the number of older shoppers and single-person households continues to rise, fewer consumers will make a big weekly grocery shopping trip. These shoppers will likely favor buying “little and often,” Weinswig writes, and warehouse clubs may need to adjust to smaller basket sizes and expand their nonfood offerings.
Discounters such as Germany’s Aldi and Lidl present ongoing competition for the warehouse clubs, as do small grocery stores. Grocery e-commerce will also grow in the U.S. as store-based chains increase their multichannel offerings. And warehouse clubs must embrace the smartphone in order to appeal to the younger generations. Sam’s Club leads the sector in m-commerce, with a mobile app that lets users shop for items not in stores, access personalized coupons and take advantage of click-and-collect options. Costco’s app has fewer capabilities, and BJ’s has no mobile app at all.
Subscription services provide both competition and opportunity, the report continues. “The subscription market is estimated to be worth $3 billion. … [which] suggests there is huge market potential in offering subscriptions to businesses, providing office supplies, snacks, beverages, and other consumables such as paper towels and toilet paper,” Weinswig writes.
Other trends noted in the report include offering new products and, especially, services that cannot be replicated online, such as health screening, optical and pharmacy. The warehouse clubs are also looking at potential international expansion in markets such as Australia, Brazil, China, India, Mexico, Pakistan, South Africa and Turkey; the use of robotic technology to reduce labor costs; growing their private label brands; reshoring production to the U.S.; and focusing on product quality and safety.
Despite facing challenges, the sector continues to expand, and thus far has seen little cannibalization. Costco alone plans to open 31 new warehouses in 2017, and Fung Global Retail & Technology projects that the sector is unlikely to become saturated in the near term.
“Currently, economic conditions in the U.S. favor the sector. Unemployment continues to decline and consumer sentiment has increased,” Weinswig writes. “Locating stores in geographic areas likely to enjoy economic growth and withstand downturns is the key for increasing and sustaining club membership.”
Part One of the series, released May 29, discusses the strong growth and performance of the sector, and predicts trends through 2020. Part Two, issued June 5, examines the sector’s advantages and challenges. Part Three, released today, explores the 10 key topics influencing warehouse clubs and how the sector might respond, provides details on the three largest warehouse club operators and includes an international sector overview.
Other recent reports issued by Fung Global Retail & Technology include: “Deep Dive: Aussies, Get Ready for Amazon!“; “Deep Dive: US Consumer Survey-Amazon Prime Members Love Shopping Offline Too“; “Fast Fashion Speeding Toward Ultrafast Fashion“; and the “Deep Dive: The Mall Is Not Dead” series.
Fung Global Retail & Technology’s reports and analyses can be found at www.coresight.com and www.deborahweinswig.com. Subscribe here to receive Deborah Weinswig’s daily news and analysis on retail, fashion and technology.
About Fung Global Retail & Technology
Fung Global Retail & Technology is a think tank whose research team, based in New York, London and Hong Kong, follows emerging retail and tech trends, specializing in the ways retail and technology intersect, and in building collaborative communities.
The team, led by Deborah Weinswig, former top Wall Street and retail tech analyst and startup advisor, publishes ongoing thematic and global market research on topics such as the Internet of Things, digital payments, omnichannel retail, luxury and fashion trends, and disruptive technologies. More information can be found at www.coresight.com.