BOSTON?— Charles Redfield, senior vice president in charge of apparel for Sam’s Club, runs a multibillion-dollar business and still makes weekly sales calls to manufacturers.
Redfield wants to shake off memories of sloppy clothing piles and cut-rate prices to position Sam’s Club, the $39.7 billion warehouse club chain owned by Wal-Mart Stores Inc., as a growth engine for established department store vendors of major brands.
He described his quest as a hunt for “wow” merchandise — the more prestigious, the better.
“There are not a whole lot of price points I’m scared of today,” said Redfield, who has run Sam’s Club apparel for two years. “A $500 coat is no problem. We can sell a $3,000 TV.”
Wall Street analysts estimate that apparel is 5 percent of Sam’s Club’s sales, or $2 billion annually. That’s about as big as many major specialty apparel chains, such as Banana Republic or Ann Taylor, yet Redfield said he operates with fewer than 10 buyers.
Clubs in competitive markets, such as Florida and Texas, stock premium denim from Seven For All Mankind, Lucky Brand or Paper Denim & Cloth. Even small town clubs will have a Prada purse or two, fragrances from Burberry and Marc Jacobs, organic cotton hoodies, Dom Perignon champagne, Opus One wines and fancy “outdoor kitchen” grills costing about $1,000.
Sam’s Club’s slow march upmarket — in apparel and other categories — mirrors efforts under way at its parent company. Persuading more affluent shoppers to buy apparel, electronics, home decor and other high-margin goods is one of Wal-Mart’s most pressing initiatives as it seeks to spur U.S. growth and boost its stock price.
Wal-Mart has launched pricier, more fashionable apparel under the Metro 7 label and opened a Plano, Tex., Supercenter that will serve as a laboratory for testing upscale concepts. Since Sam’s Club caters to a more affluent customer base on average than Wal-Mart, the warehouse division could be a major learning opportunity for the world’s largest retailer if Sam’s Club succeeds in forging more relationships with key apparel brands.
Sam’s Club president and chief executive officer C. Douglas McMillon, who was promoted last year from the division’s chief merchant, said apparel makers are realizing “the customer they want to serve is in Sam’s Club….Women with above-average income don’t think in terms of only certain shopping channels.”
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Jeff Beckman, a spokesman for San Francisco-based Levi Strauss, which began selling product directly to Sam’s Club when it launched Signature by Levi Strauss in Wal-Mart, said, “We are seeing a better mix of products at Sam’s Club. We’re seeing less private label and [more] better brands, including our brands.” Levi’s uses Sam’s Club as “a place to clear excess goods” and can sell at a price sufficient to achieve profitable “blended margins for first-quality and clearance goods.”
Analysts said that Sam’s Club, though improving, still lacks the level of rapport with the luxury customer of its top rival, $52 billion Costco Wholesale Corp.
The average Costco does $120 million a year in sales, while Sam’s Clubs average $70 million to $80 million, said Morningstar analyst Anthony Chukumba. Most of Sam’s Clubs moves upscale are efforts to catch up, he said.
“I don’t think these things will move the needle a whole lot against Costco,” he said. “But I do think it helps them steal market share from traditional supermarkets.”
McMillon acknowledged Sam’s Club has done a better job catering to small business owners’ working needs, but needs to be more adept with glitzy extras.
“On the affordable luxuries and personal needs side, we haven’t been as good at it as we want to be,” he said. “From a talent perspective, we are figuring it out.”
Another rival, Natick, Mass.-based B.J.’s Wholesale Club, runs a distant third, at $7.8 billion in revenue. There has been speculation that it might be a takeover target.
Three years ago, Sam’s Club, the smallest operating unit of the $312 billion Wal-Mart, was the company’s weak link. In fiscal 2003, Wal-Mart president and ceo H. Lee Scott Jr. characterized the performance of Sam’s Club as “extremely disappointing.”
No longer.
In 2005, same-store sales gains for Sam’s Club were higher than those of Wal-Mart Stores U.S. in nine of 12 months. Sam’s Club grew operating profits faster than sales, unlike the flagship division. The parent company considers that statistic to be the best indicator of a division’s health. Sales for the full year rose 7.2 percent compared with 2004 to $39.7 billion, and operating profit increased 8.2 percent to $1.4 billion.
The division is off to a strong start this year, too.
Sales in stores open at least a year rose 4.5 percent in March, outstripping Wal-Mart Stores’ 0.8 percent gain. Sam’s Club sales grew 6.2 percent in March to $3.8 billion.
The division, launched in 1983, is named after Wal-Mart founder Sam Walton. It operates 567 clubs — cavernous buildings with 12-foot-wide aisles and bulk merchandise stacked on towering metal shelving or piled on wooden palettes — primarily in the U.S. The chain has expanded in recent years to Canada, Puerto Rico, China, Brazil and Mexico, and is eyeing emerging markets such as India.
Its headquarters is in two boxy, midrise buildings that sit cheek-to-jowl with the sprawling Wal-Mart home office in Bentonville, Ark. Inside, staffers adopt aspects of the Sam’s Club culture, including its casual polo-and-khakis workday attire. Instead of a cafeteria, the office has the same red-and-white cafes, resembling beach shacks, found in the clubs.
What’s surprising, given its size, is how little notice Sam’s Club gets from Wall Street or the media. Its fiscal 2005 revenues would have put Sam’s Club 41st on the most recent Fortune 500 list, ahead of Microsoft, United Parcel Service and PepsiCo.
The division appears to be trying to step into the limelight. In November, Sam’s Club hired an outside public relations firm to help develop strategies for reaching new customers. On the first episode of Donald Trump’s “The Apprentice” this season on NBC, cast members had to sell Sam’s Club memberships. A Sam’s Club spokeswoman declined to say how much the division spent on the placement.
Several analysts said McMillon has kept the strengths of former ceo Kevin Turner’s vision, and brings more merchandising savvy to the job. Turner left to become Microsoft’s chief operating officer in September.
“He’s a merchant with an open mind,” said A.G. Edwards analyst Bob Buchanan. “He wants to know what the problems are and…fix them.”
McMillon recently spent a day unloading freight at a member’s restaurant in Boynton Beach, Fla., observing what came from Sam’s Club and what was purchased from outside suppliers. If he notices a Sam’s Club member in a Costco, “I’ll go up and introduce myself: ‘Hi, I’m Doug, I work for Sam’s Club and what are you doing here?”‘ he recalled at Wal-Mart’s annual media conference this month.
William DuBose, Sam’s Club senior vice president general merchandise manager in charge of jewelry, accessories, office supplies and seasonal goods, noted that McMillon “understands that, if we want to get better brands, we have to treat them special….You can’t treat Godiva chocolates like canned coffee.”
New clubs look better, as well. The unit in Plymouth, Mass., which opened in July, is bright and airy, with 50 skylights (older clubs average five) and a polished-concrete floor. Merchandise has been shuffled to expand electronics and jewelry, and to give media its own island in the center of the club for more leisurely browsing.
Sam’s Club is “barking up the right tree,” said Buchanan, who has visited what he believes is Sam’s Club’s highest-grossing domestic store, in Clearwater, Fla., where a $27,000 diamond sparkled in the jewelry case.
“It used to be a major bummer to walk out of a Costco and into a Sam’s Club,” Buchanan said. “Now it’s not so obvious.”
Wal-Mart and Sam’s Club “have clearly, in the last year, sent signals to the apparel industry that they want to be taken seriously as a retailer in terms of better quality and more designer apparel,” said Eli Portnoy, chief brand strategist of Orlando, Fla.-based branding firm The Portnoy Group.
However, Portnoy said the representation of “wow” brands is “piecemeal” across the chain and questioned whether an organization seeded with former Wal-Mart executives and ingrained in its penny-conscious culture can comprehensively cater to upscale shoppers.
“It’s inconsistent with everything they’ve built for years,” Portnoy said.
About three years ago, Sam’s Club refocused on small business owners. Executives decided merchandise needed to either address a work function (office furniture, bulk paper towels) or be part of the “treasure hunt” — surprising items that would tempt members into personal purchases. As a result, in came trampolines, big diamonds and Fender guitars. They were mirroring Costco, which sells Fendi purses, caviar and Dyson vacuum cleaners.
Some analysts wonder how closely Sam’s Club can, or should, follow Costco.
Mandy Putnam, vice president of Columbus, Ohio-based consultancy Retail Forward, said Wal-Mart’s strategy of building Sam’s Clubs next to Wal-Mart Supercenters means the audience is somewhat preselected as lower income than Costco households.
“They have small business owners and then they have Wal-Mart shoppers who are looking for bulk toilet paper for their large family at Sam’s Club,” she said.
Almost half of all Sam’s Club members, 48.8 percent, earn less than $49,500 a year, according to Retail Forward data. In contrast, more than half of Costco’s members, 64.7 percent, earn more than $50,000 annually, according to Retail Forward data. Of the three warehouse clubs, Sam’s Club has the highest proportion of shoppers, 20.3 percent, with annual income of less than $25,000 a year.
Still, Sam’s Club has had success upgrading. Fine jewelry, for instance, has thrived since the company focused on higher-quality, costlier stones. One-carat to three-carat diamonds are bestsellers, DuBose said.
The division is looking for the same sort of upgrade in apparel, Redfield acknowledged, saying sales were flat last year, but declined to give specifics.
He described 2005 as a “transition year,” during which he slashed stockkeeping-unit count in half and positioned the category for future growth.
In surveys, customers have indicated that quality of clothing is important in forming an impression of a club.
Redfield said his mission is not to comprehensively represent fashion trends, but to offer a misses’ customer, age 30 to 60, a surprising deal on a well-known brand. (He buys little juniors merchandise because teens aren’t the club’s end user and are more fickle about fashion.)
Brands are important so customers can better grasp the discount they’re getting and will be more confident about what size to buy since Sam’s Club has no dressing rooms.
The difficulty is that many top brands are reluctant to sell to a warehouse club for fear of angering department stores offering the same items at a higher markup.
Sam’s Club does not disclose its markup, but Redfield said he sells branded items at 25 to 90 percent below department store prices. Costco adds no more than a 12 percent markup to any item over its acquisition cost.
Both clubs make most of their operating profits from charging annual membership fees of $35 to $100.
When Sam’s Club is able to score the right merchandise, as it did on the day after Thanksgiving last year, customers respond. The Plymouth, Mass., club had a line of customers predawn, many clutching the eight-page glossy ad circular.
Kate Spade purses were among the featured items. Plymouth made its first sale, at 5:01 a.m., a $250 polkadot Kate Spade purse and matching wallet, a sales associate said. It was the first time in recent years, Sam’s Club has had significant sales increases on retail’s biggest shopping day, DuBose said.
Redfield said he is making headway with major apparel brands and has received unsolicited calls from major players.
“I was surprised, but pleased,” he said. “We are not looking to take anyone’s brand [down-market], but to have a relationship. I encourage companies to talk to other suppliers about how it’s working out for them.”
Redfield declined to say which companies have approached him or who is selling directly. All three warehouse operators get much of their prestige merchandise through diverters, third parties that buy and resell excess inventory, often flouting protections manufacturers try to impose on which classes of retailers sell their brands.
Retail Forward’s Putnam said publicly traded branded companies are under intense pressure to find new growth channels.
“Most of the big brands now have several tiers of merchandise serving different retail channels,” she said. “Wal-Mart has a big lever to say, ‘If you want this brand in my discount format, you are going to have to give me this brand for my club.'”
Sam’s Club is beginning to address lifestyle trends and to become a better mirror of the communities it serves. For instance, the Plymouth club had organic-cotton drawstring pants and hoodies for $14.82. The club also will begin stocking Celtic cross pendants and Claddagh rings for its predominantly Irish-Catholic customer base.
Sam’s Club needs to move quickly, because Costco is raising the bar. Costco.com, for example, recently had seven pages of handbags, lead by a $1,899 Fendi Spy bag, along with styles from YSL, Celine, Prada and Dolce & Gabbana. Samsclub.com had virtually no women’s apparel and a single handbag label of an unrecognizable maker.
On the floor of the Plymouth Sam’s Club, the assortment looked solid but unsurprising. There was merchandise from Anne Klein Sport, including two-ply cashmere sweaters; DKNY; Reebok; Everlast, and Champion. The most prestigious merchandise, a Cole Haan suede jacket for $99, was a men’s item only. Precious women’s wear space was given to Chaus and Lizwear, although Retail Forward’s Putnam said she’s found both brands — apparently having been resold by a diverter — in dollar stores. It’s an indication that Sam’s Club needs to reach higher — and Redfield needs to keep at those sales calls.
“We want customers to walk in and say, ‘Oh my gosh,'” he said.