CPG Makers Aim for More Sales in Warehouse Clubs

By John Karolefski

Consumer packaged goods executives believe that most of their sales growth will not come from the usual suspects: grocery and mass merchandise. Nor will it be from upstart channels such as dollar store and e-commerce.

The highest growth will come from warehouse clubs, new research predicts. Nine out of 10 (89%) of CPG executives surveyed by Deloitte expect their company’s sales through the warehouse club channel to increase over the next three years.  Most CPG and retail executives expect warehouse clubs to increase the number of food, household goods, and personal care CPG SKUs (79%), expand their geographic presence (75%) and increase space allocated to health and wellness products (75%) in the next three years.

This channel is outpacing grocery in CPG companies’ focus. Less than half (49%) expect grocery sales to increase during that three-year period, while one in six (18%) expect sales in the grocery channel to decline.

“Consumer products companies are responding to the increased sales and branding opportunities in the warehouse club channel, particularly in expanding segments traditionally dominated by grocery and mass merchandise channels,” said
Pat Conroy, vice chairman and consumer products leader, Deloitte LLP.   “Club retailers have been remodeling existing stores, including allocating more space for food – particularly organic, healthy and fresh offerings – and personal care products.  These retailers also continue to provide a variety of services and benefits to members – whether it is for personal consumption or for the member’s business.”

The not-quite-recovered economy will attract more middle-income consumers to warehouse clubs. Conroy said the recent recession “left a scar, not a bruise,” and shoppers are clinging to cost-conscious routines developed during the recession.
“Economic uncertainty and consumers’ focus on value has made club stores a more important channel for many consumers, including those who are at the higher end of the income scale and represent a more lucrative target customer for retail and consumer products brands,” he said.

Indeed, Deloitte’s prior research into consumer shopping behavior, the American Pantry Study, found that warehouse club stores are most frequented by affluent, high-income consumers. Among all consumer survey respondents, nearly half (46%) shopped at a club stores. A much higher portion (71%) of affluent consumer respondents, those with over $100,000 annual household income, shopped at club stores.  According to the study, higher-income consumers spend 24 to 32% more on food, beverage and household goods than the average income club-store consumer spends.

“Costco has always been a higher-end club store,” Conroy told CPGmatters in an interview. “But the prices are fantastic. [Higher-income shoppers] are asking why would they go to a traditional retailer when they can save x percentage in a
club store.”

Deloitte’s report also found that channel conflict with traditional grocery and mass merchandisers – left unmanaged – will increase.  Nearly three of four (71%) executives surveyed believe that pricing differences between warehouse club products increase channel conflict. More than half (53%) of CPG execs view sales to the warehouse club channel “completely or primarily” a shift from other channels like grocery and mass merchandisers.
In addition to increased channel conflict,  the study found that the warehouse club channel presents CPG companies with additional challenges, including club-channel-specific product and packaging, pricing and margin management, and supply chain.  To address these challenges, the report outlines five distinct areas, identified by survey respondents, that will help CPG companies succeed in the club channel:
  • A channel- and often retailer-specific approach to brand, product strategy and innovation.
  • Unique merchandising and assortment strategies for the channel, and at the store level.
  • Pricing and trade promotion strategy that acknowledges potential channel conflict by providing unique product-price value propositions across channels.
  • Partnering with club retailers to tailor their supply chain, distribution, and operations to the unique channel logistics and distribution environment.
  • Channel focus and resourcing through strong account and support teams with marketing, insights, product packaging, pricing, and supply chain expertise.

CPG companies that tailor their business toward the club retailers can harness this important and profitable segment for future growth, the report said.

Twenty-five years ago, recognizing the potential for channel conflict, some national brands resisted offering products in the emerging clubs. Ironically, this compelled Sol Price and others to develop a portfolio of store brands – that today have developed to a significant proportion of their product offerings.

Times have changed. The warehouse club channel in the U.S. today is nearly a $148 billion industry with over 1,600 stores. Over the past decade – from 2001 to 2011 – revenue at club stores rose 7.1% annually and the number of stores increased 2.6% annually. In 2011, grocery and household goods accounted for approximately 57% of the channel sales. For CPG companies, the warehouse club channel generated 10% of sales in 2011, up from 9.4% in 2008. While grocery, mass merchandisers, and supercenters account for the majority of sales (72.6%), this share reflects an erosion of two percentage points in three years.

Deloitte’s research methods included an executive survey of 132 CPG manufacturers (79 respondents) and retailers (53 respondents) conducted from October 30, 2012 to November 6, 2012; in-depth interviews with consumer product and retail executives conducted from March to November 2012; mystery shopping trips across the club retailers in November and December 2012; and The American Pantry Study, a large-scale consumer survey of 4,086 active shoppers conducted October 6 to 21, 2011.

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                                                                               February 2013