Costco reported softer-than-expected March sales. U.S. comparable-store sales increased only +0.9%; however, part of the explanation for the softer rate is multiple years of big gains. Compared to 2019, comps grew +37% versus +38% in February. Transaction growth remained solid at +3.6%, while the average ticket (excluding gas) was down -2.7%. The comparable average ticket has been decelerating over the past few months, being +0.4% in February, +1.8% in January, and +3.6% in December. Again, that deceleration also reflects multiple years of big gains, but sales may have also lessoned due to lower food commodities now rolling into produce and Kirkland grocery product. Food & sundries and Fresh were up mid- to high-single-digits reflecting inflation, whereas, home furnishings, toys & seasonal, majors, and jewelry experienced declines.
- The Western region was not called out as a regional outperformer. Is the Silicon Valley Bank fallout leading to a consumer belt-tightening in the market? Looked at in Placer, we see similar traffic trends between California and nationwide. Given the crazy storms out West this year and higher home price declines, we think it is too early to ascribe Costco’s California shortfall as a consequence of the SVB Banking fallout, or any associated media effect. However, we also see Sam’s Club outperforming Costco on a nationwide and California basis.
- During the past year, we have written about Sam Club’s gaining member share from Costco in the Los Angeles market. L.A. is Costco’s largest market with 53 clubs, or nearly 10% of its total U.S. locations. Moreover, these are powerful locations producing up to $400M each in annual sales, well above the $300M U.S. average and far above Sam’s Club L.A. average club volume range of $150M-$175M. And so, Sam’s only needs to take a little off the sales and membership from Costco L.A. to have outsized relative gains.
- Sam’s Club has made these gains by adding more high-quality products and items that appeal to more affluent and younger households (Gen-Z and Millennial) and by investing more in its digital business (curbside, faster shipping times, etc.) to create greater engagement. An example of success with a new digital technology is one in four shoppers now use Scan-&-Go (i.e., their smartphone) when shopping a Sam’s. The app also makes it easy to find reviews on items, which can lower the shopper's indecisiveness and purchase friction.
- Retailer/private label brands that reflect both high quality and high value are Costco’s and Sam’s key proposition to consumers and why households become members. (Sam’s believes that it beats Costco on both quality and price.) Sam’s brands are now 30% of its non-fuel sales mix, which is competitive with Costco. Given the strong membership retention that Costco and Sam’s typically enjoy (92%+ renewal rates), these gains by Sam’s are sustainable.
- We recently wrote about Sam’s plans for new locations and markets in the U.S.; at its recent Investment Community meeting, Walmart management sized that ambition as mid-single-digit growth in new clubs and memberships for the next several years. That growth builds upon the 30% membership growth that Sam’s has gained over the past three years, which outpaced Costco’s membership growth of 23%.
- Sam’s Club CEO Kathryn McLay shared her vision for driving future growth and club-format market share gains in the following graphic below. The top four points are what got them to better fitness over the past four years, the fifth point of using shopper data better to: (1) target offers to members; (2) influence new merchandise; and (3) generate revenue from suppliers (which Sam’s then uses to keep the membership rate lower and the offers higher). Sam’s increased its “Plus” fee last fall from $100 to $110, because it “earned it” with the better merchandise for members. Costco’s Executive Membership fee is $120. The last price increase by Costco was in June 2017. Most Wall Street analysts expect Costco to increase the membership fee this year; we would be shocked if it did.
Source: Walmart 2023 Investment Community Meeting
