How Walmart Is Revamping Sam’s Club To Take On Competition?

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In a recent interview with Fortune, the CEO of  WalMart‘s (NYSE:WMT)  subsidiary Sam’s Club stated that the retailer is making major changes to its business model which he described as a “reset for the business”.  As a part of the revamp, Sam’s club is increasing its focus on improving store foods, planning to open new stores in higher income areas and giving regional buyers more say in its gourmet and natural foods inventory. While it saw a 35% increase in membership renewals year on year, Sam’s Club’s comp sales declined by 0.5% in Q4 2016 (ending January 2016), compared to a 0.6% increase in comp sales of Walmart U.S. for the same prior-year period. Sam’s Club faces intense competition from Costco, which saw a 6% increase in comp sales in the U.S. for its fiscal Q1 2016 (ended November 2015).  Also a possible factor is Amazon Prime, which is now delivering fresh groceries. We believe initiatives to revamp its business model to attract higher income customers could be key in driving revenues for Sam’s Club in the future.

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Aiming At Households With Higher Income

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According to Sam’s Club estimates, the median household income of its customers is around $80,000 compared to the $120,000 figure for Costco. The company is focused on improving its food brands and opening new stores in wealthier locations, so as to increase the median household income of its customers to $100,000. Beginning 2016, Sam’s club will open eight to ten new clubs a year in more affluent areas. In order to attract customers in these areas, the retailer has hired product developers and quality testers to improve its food offering significantly.  As part of the new strategy announced for Sam’s Club during the Q3 2016 earnings call of Walmart,  it has taken certain significant steps, including: 1) the closure of under-performing clubs; 2) the review of merchandise categories; and, 3) the expansion of private labels in key areas. While the company’s expectation for comp sales in the first quarter of 2017 is flat,  it hopes to see the benefits of its new strategy in the coming quarters.

According to our estimates, Sam’s Club accounts for slightly more than 5% of Walmart’s valuation and we expect its revenue per square foot to increase from $683 in 2016 to $ 754 by the end of our forecast period.

Sam’s Club’s news strategy appears to be aimed at gaining market share from its competitor Costco, by opening new stores in affluent areas and stocking merchandise that will attract wealthy consumers. However Costco’s customer base is extremely loyal, with a membership renewal rate of nearly 90%. Sam’s Club is struggling to improve its comp sales and does not expect the new strategy to show immediate results. Apart from Costco, it also faces serious threat from Amazon Prime, which has an estimated at 54 million members, thus touching nearly 50% of U.S. households. We believe while the revamp of Sam’s Club is essential to drive revenues.  Whether it will be able to attract new customers  will depend on strong execution  of this strategy.

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