After Sale, BJ's Sticking With Proven Strategy
Photo/Edd Cote
Photo/Edd Cote
Tisha, a trainee, rings up customers at BJ’s Wholesale Club’s Northborough store.
When it comes to warehouse-style club stores, there are really only three names out there: Costco, Sam's Club — Walmart's club-based division — and the home-grown MetroWest brand, BJ's Wholesale Club.
Costco has 608 stores, while Sam's Club has 611. BJ's total? At last count, 198.
"They're a baby," said Howard Davidowitz, chairman of national retail consulting and investment banking firm Davidowitz & Associates Inc.
Kelly McFalls, a spokeswoman for BJ's, sees it a little differently.
"We're scrappy," she said.
The company, which was taken private by Leonard Green & Partners and CVC Capital Partners in a deal worth about $2.8 billion in 2011, is fortunate to be part of a strong sector.
Now, as it pursues enough growth to justify that investment, its leadership is looking for a path that takes advantage of the growth in the warehouse club business while also differentiating itself from its larger competitors.
No Expansion So Far
When BJ's first announced plans to go private, much of the buzz was about the store's possible expansion beyond its East Coast territory. One frequently cited reason for companies selling themselves to private investors is the ability to take a longer-term view, making investments with an eye toward future growth rather than quarterly financial earnings.
In 2011, company officials indicated the long-term plan lay in a westward direction.
So far, though, BJ's has not made a move toward going national. It operates 198 clubs in 15 states, all along the East Coast, and McFalls said there are no immediate plans to move beyond that footprint.
"I know that's been talked about but there's nothing hard and firm right now," she said.
David Strasser, a retail analyst with Janney Montgomery Scott LLC, said if BJ's intends to go national, it would need to take about a year to build a real estate team and scope out the possibilities before moving forward.
"My sense is that they want to set up an infrastructure to grow the business from a regional to a national player," Strasser said.
Then, Strasser said, once the company is benefiting from that growth, it might go public again, bringing in a good profit for its investors.
But Davidowitz said he's not convinced BJ's is capable of making the jump to become a national brand.
"Competing with the other two monsters, I think, is going to be very hard for them," he said. "They have to be a little careful about where they go."
In particular, he said, the company may find it difficult to set up supply chains in places where Costco and Sam's Club have already established themselves.
"Costco can crush them," he said. "Costco can get better deals from suppliers. They're so much larger."
But McFalls said that's where BJ's scrappiness comes in. She said the company makes a point of finding vendors to work with who can offer distinctive products.
"Our buyers are so smart in how they do things," she said. "There's a lot of attention put on the creation of the package or creation of a product... Vendors look at us as a huge growth opportunity."
For now, McFalls said, BJ's is carrying out its growth within its existing footprint at an even pace. It opened five stores last year and plans three to five this year.
If BJ's is limiting itself to its current territory for now, Mark Keschl, national director of Colliers International's retail services group, says it's in a good spot. The Northeast, where the company has its strongest presence, has been doing fairly well economically compared with the rest of the country. And the fact that the region is more built out than other areas of the country also helps because it makes it hard for Sam's Club and Costco to find the large parcels they need to build.
"They're a little protected from competition there because they were there first, and the barriers to entry are high," Keschl said.
A Growing Club Market
Regardless of BJ's ability to grab or keep a good-size chunk of the warehouse club pie, it benefits from the fact that the pie is growing. While net sales at Walmart Stores U.S., the Arkansas giant's largest division, grew less than 2 percent between FY 2010 and FY 2012, Sam's Club grew 13 percent. Meanwhile, Costco's numbers were up 27 percent.
Davidowitz said the rough economy in recent years has pushed more people to take advantage of wholesale club deals, and that trend seems likely to continue.
"The segment is doing great if you go by Costco and Sam's club numbers," he said. "You have to assume if the segment is good [BJ's is] doing ok."
Where BJ's Sees Its Edge
But McFalls said the company is not just sitting back and letting the sector's growth boost its own fortunes. It's making a big push to offer more organic and natural foods at lower prices than the typical supermarket. It's also adding more private label brands, including a new line of recycled paper products called Generation Earth.
BJ's differentiates itself from both Costco and Sam's Club by the size of its packages and the number of different items it stocks. McFalls said the stores are focused on families, while she thinks competitors are more oriented toward small business customers. So BJ's offers smaller pack sizes and far more variety. The average club store stocks 3,500 distinct items, she said, while BJ's has 7,000.
Keschl agreed that the larger number of items is a big part of BJ's appeal because it allows for one-stop shopping. A typical Costco customer also has to make a stop at a grocery store, he said, but a family could do all its shopping at BJ's.
"That sort of positions them well for today's shopper (who) is certainly constrained by time," he said.
What that also means is that BJ's, more than the other warehouse club chains, is in competition with traditional grocery stores and with big box stores. And those are sectors that are facing a lot of pressure these days. The most recent example is Supervalu, the country's third-largest grocery chain, which saw its sales decline for the past three years. In January, it agreed to sell several of its store brands, including Shaw's and Star Market, to an investor group led by private-equity firm Cerberus Capital Management for $3.3 billion.
BJ's has faced its own setbacks, including closing five stores and cutting positions at its headquarters shortly before announcing its plans to go private. Still, the company increased its total number of stores and its net sales steadily through the recession. McFalls said it plans to keep that momentum going. In fact, she said, the company has changed very little since going private.
"One of the reasons we were acquired is we were a well-run company," she said. "We were running the business the way that they saw had great potential."
And, if that model has been particularly successful as families have become more cost conscious in recent years, McFalls said the company isn't worried about what economic recovery will mean.
"If you get used to paying a certain price for, say, a rotisserie chicken, would you ever go back to paying a higher price, even if the economy improves?" she asked. "People aren't going to revert to spending ridiculous amounts of money for a product they can get somewhere else at a better price." n
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