Threat of Entry

- Absolute Cost Advantage

- Economies of Scale – High
The three players in the industry have extremely large stores
A unique experience, high sales with lower SKUs than
traditional
Supermarkets.
Rapid inventory turnover.
Low labor costs.
Consumers have different expectations when shopping at warehouse clubs, thereby
creating a unique experience which separates these retailers from competitors in other
channels. Warehouse clubs appeal to consumers’ sense of value and the convenience of
stocking up on certain items. A typical supermarket will stock 30,000-52,000 SKUs.
Supercenters normally stock up to 125,000 SKUs. Warehouse clubs by contrast typically
carry 4,000 SKUs.

Brand Identity – High

Membership increases each year
Wide array of products offered
Even though they carry fewer SKUs, the large number of product categories covered
means that warehouse clubs face a wide array of competitors ranging from drug stores to
florists.

Access to Distribution
Switching Costs
Government Policy

Degree of Rivalry
Number of competitors – Low
There are three main players in this industry: Costco, Sam’s
Club and BJ’s

Industry Growth - Moderate

Industry growth of 7.3% is below Market Median of 11.35
Same store growth does not show consistency
Location growth has risen to 32%
Store closings is rare

* Source Mintel: Warehouse Club Buying, 2005

Tracking of same store sales shows that growth in the market is varied from month to
month and does not display a consistent trend. In December 2004, sales increased a
combined 7.3%, however, earlier growth in April 2004 was much higher. In that month,
Costco, BJ’s Wholesale and SAM’S CLUB posted 16%, 12.1% and 11.8% gains
respectively.
Overall, membership revenues—which are excluded in market size data—represent only
a small share of total revenue, approximately 2-3% on average. Over the review period,
Costco’s membership fees as a share of net sales were 1.9-2.0%. Similarly, SAM’S
CLUB’s ranged from 2.5-2.7%. This indicates that membership revenues are driven, in
large part, by new store openings and by same store sales increases, to lesser degree.

In terms of warehouse club locations, the market has grown 32% over the review period.
Overall, 41 new warehouse clubs were added in the U.S. in 2004, following growth by 50
stores in 2003. Note that warehouse club locations is computed as the net value of store
opening minus store closings over the year. However, store closings in the U.S. are
relatively infrequent with only a few closings among the three industry leaders in recent
years.

Asset Intensity - High

Industry ROA of 4.7% exceeds the Market Median of 1.5%

Product Differentiation - High

Warehouse Clubs offer high value to customers in unique bulk
sizes. High appeal for small businesses. Differentiation exists
between the three players
Despite the companies’ similarities, there is a great deal of differentiation among the top
three warehouse clubs, both in terms of performance and strategic execution. This
differentiation exists in multiple areas, including SKU assortment, customer segments
targeted, distribution capabilities and manufacturers partnered with.

Exit Barriers – Low

The retail industry can easily apply inventory to other
locations or liquidate.

Threat of Substitution
Functional Similarity – Low
Warehouse clubs are hard to replicate because of the low cost
shopping experience for customers coupled with high value.
60% of warehouse club customers agree that channel is the most
time efficient.
New products are common – exciting for customers
Increased use of ecommerce
By offering a convenient, low cost shopping environment to consumers, warehouse clubs
provide a value to consumers that is not replicated in other channels. As such, across the
three main competitors, consumer satisfaction and member retention are high. Mintel’s
exclusive consumer research indicate that 80% of warehouse club respondent shoppers
agree that clubs provide an enjoyable shopping experience, while 60% of warehouse club
respondent shoppers agree that these retailers provide the most time efficient way to
shop.
Furthermore, by rapidly turning inventory, expanding selections, and stocking new items
quickly, warehouse clubs are among the most responsive merchandising channels, which
attracts consumers because there is always something new. This ability will remain one of
the key features to differentiate warehouse clubs from other retail channels.

The online retail channel is one of the most rapidly expanding markets. The following
figure details retail ecommerce sale sin the U.S. from 1999 through 2004.

Price/Performance Trend -
Product Identity – High
65% of BJ’s sales came from their private label in 2004.
Private label brand items are heavily featured because of the
undulating SKUs carried
Because of the vast differences in the number of SKUs carried, warehouse clubs typically
limit selection to items that are brand name leaders within their respective category or to
staple products in which private label brands can compete.

Bargaining Power of Suppliers

Supplier Concentration - High
# of Buyers - High
Switching Costs – Mod.
Substitute Raw Materials - High
Threat of Forward Integration – Low

Bargaining Power of Buyers

BuyerConcentration - High
#of Buyers - High
Switching Costs - Low
Substitute Products - Low
Threat of Backward
Integration – Mod.