In the ongoing drive to figure out what millennial shoppers want, club stores don't usually come to mind. These retailers are lumbering giants whose bulk-sized products are decidedly unhip, and they offer a value many younger shoppers don’t yet appreciate. And because millennials typically live in apartments and starter homes, often in cities and without access to a car, the club store model just isn’t practical for them.
Or so the thinking goes.
In reality, both club stores and millennials are defying the labels that the industry attaches to them, leading to a surprisingly profitable relationship that has major growth potential. The three main players — Costco, Sam’s Club, and BJ’s Wholesale Club — have all seen an uptick in interest from millennials. They are responding with strategies aimed at growing their ranks of younger shoppers like tech investments, better pricing and fresher products.
“Millennials are on the rise at clubs,” Tim Campbell, an analyst with Kantar Retail who covers club stores, told Food Dive.
The challenge, sources say, will be for club stores to expand their appeal with millennials in an increasingly competitive industry, and to cement their loyalty for years to come.
Hitting the sweet spot
As club stores and many other retailers are discovering, the term “millennial” covers a wide age range that can make uniform markers misleading. Those at the younger end of the spectrum, aged 18 to 25, are more likely to be urban dwellers living in apartments. They also are more likely to rely on mass transit and other means for transportation — “the Lyft and Uber generation,” as Richard George, professor emeritus of food marketing at St. Joseph’s University’s Haub School of Business, calls them.
“These are what I call the true millennials... they’re more likely to have a garage, an attic, a pantry where they can store all the things they buy. This is the sweet spot for club stores.”
Professor emeritus of food marketing
George, who has studied millennial shopping habits over the past several years, said club stores typically don’t resonate with these younger millennials. Not only are the products too big and the typically suburban locations too difficult for them to access, he said, but these shoppers are also less likely to see the value in paying for 48 rolls of toilet paper at once.
Club stores are seeing significant gains with older millennials, those aged 30 to 36, George said. These consumers typically have more disposable income, have bought or are looking to buy a home, and are more likely to have young children.
“These are what I call the true millennials,” said George. “These are the folks that are forming households. They’re more likely to have a garage, an attic, a pantry where they can store all the things they buy. This is the sweet spot for club stores.”
Jeff Fromm, a partner with the ad agency Berkley and co-author of “Millennials with Kids,” noted that having kids is the key differentiating factor between millennials who shop at Sam’s Club and Costco and those that don’t. According to his firm’s research, the percentage of millennials with families who shop at club stores is higher than that of the overall U.S. population — 32% versus 26%, respectively.
“This is not an emerging target for club stores,” Fromm told Food Dive. “This is the center of the bullseye. There are more than 15 million millennial families in this country, and they’re more likely to shop at Costco than the general population.”
In the past, sources said, club stores banked on young shoppers coming to them once they had families of their own and moved into bigger homes. But with competition as heated as it’s ever been, and with e-commerce players like Amazon Prime closing in, clubs are now doing more to target young consumers where they live. According to Campbell, BJ’s Wholesale Club and Costco are putting more stores in close proximity to urban areas. Sam’s Club, meanwhile, puts out digital ads and other messaging targeting consumers at pivotal life stages, including marriage, buying a new home, and having a child.
“We especially see Sam’s market target new mothers with messaging around baby supplies and free or discounted membership offers for sign ups,” said Campbell.
Club stores may have a reputation for being big and bland, but sources note there's a lot going on inside these warehouses that resonate with millennials. According to George, product sampling, particularly when new, flavor-forward foods and beverages are available to try, is a hit with younger shoppers. He pointed to Costco as a leader here, and noted the company’s lively and ever-changing merchandise mix as a differentiator.
“Costco really reinforces the experience beyond price savings,” said George. “They really make it a treasure hunt.”
Focusing on its in-store offerings and pricing is how the Issaquah, WA-based retailer prefers to reach millennials, Campbell noted. To that end, Costco has made some significant changes to its product selection, like adding more organic and fresh items, which tend to appeal to younger shoppers. In 2015, Costco announced it sold more than $4 billion worth of organic products, moving it ahead of Whole Foods as the leading organic retailer in the country.
As a result of these and other efforts, Costco has seen an increase in millennials buying club memberships.
“I think we're encouraged when we see the level of millennials, if you will, that are signing up, when we see the average age of our membership coming down,” Richard Galanti, Costco’s executive VP and chief financial officer, said during an earnings call in December.
Sam’s Club, meanwhile, has also upped its stock of organic products and other popular items in an effort to reach millennials. The company has been under significant sales pressure recently, and last month chief executive Rosalind Brewer left the chain after five years at the helm. Sam’s new CEO, John Furner, a longtime company employee, “is a merchandiser by trade and well respected internally,” said Campbell.
“I expect John Furner will reinvigorate the focus on getting the right items for the right members, including millennials,” said Campbell.
“I think getting shoppers out of the stores as quickly as possible when they’re done shopping is an area for real improvement. When they're done sampling and buying, they want to be done.”
Kantar Retail analyst
But for all their sampling stations and merchandising prowess, club stores aren't exactly efficient. Their large, warehouse-style format means shopping trips are often long. Big crowds, particularly on weekends, can make the checkout process a slog.
According to Fromm and others, this is a big turnoff for millennials of all ages, who value an efficient shopping experience and expedited checkout. He noted that club stores could eventually do away with checkout stands like Amazon Go, especially since they already have shoppers’ membership cards and credit cards on file.
“I think getting shoppers out of the stores as quickly as possible when they’re done shopping is an area for real improvement,” said Fromm. “When they're done sampling and buying, they want to be done.”
Chris Peterson, senior partner and CEO of consulting firm Integrated Marketing Systems, also sees these inefficiencies as a barrier for millennial shoppers. He suggested a store app that could help customers build a shopping list, and then direct them through the aisles.
“Make the phone part of the store, for navigation as well as for offers and loyalty programs,” Peterson told Food Dive. “That’s what the warehouse stores aren’t thinking about.”
The biggest area of improvement for club stores trying to reach millennial shoppers, sources agreed, is their digital presence. This is a particularly glaring problem given the significant threat posed by Amazon Prime and other e-tailers like Jet.com and Boxed.
“So far, clubs have room to grow in spite of Amazon, but that could change down the road if clubs don’t innovate the value they provide,” said Campbell. “Amazon Prime is increasingly attracting club shoppers at a rate higher than all U.S. household shoppers, and the trend is particularly evident among younger shoppers.”
According to Fromm, the same millennials with families that are flocking to club stores are also the most likely to be intercepted by Amazon Prime, which excels at the targeted marketing that is still under development for many club stores.
So how are club stores responding? Costco, for one, has a mobile app that allows shoppers to build shopping lists, browse store specials, order online and send photos to a store printing center. When it comes to e-commerce, the company has been slow to evolve its capabilities as rivals like Wal-Mart and Target have steadily ramped up theirs. It currently offers fewer than 10,000 SKUs online, and according to Campbell, doesn’t include many groceries or household essentials. In a December earnings call, Galanti admitted the company should have ramped up faster, and noted Costco plans to offer more items online and improve its shipping times.
Sam’s Club and BJ’s, meanwhile, both offer online ordering with in-store pickup, but only Sam’s offers a mobile app. In addition to this store app, which includes store lists, photo uploads, and special offers, Sam’s also recently rolled out a Scan & Go app that allows customers to scan items as they put them in their cart, then pay through their phone and leave the store.
“There’s not a lot of opportunity for visualization at a club store, but why not have a QR code people can scan to learn more? Use their mobile phone as an asset to provide more information.”
Senior partner and CEO of Integrated Marketing Systems
Further steeling themselves against Amazon’s encroachment and holding on to millennial shoppers, sources said, will require more of this integration of digital and in-store capabilities.
For Peterson, who frequently consults on omnichannel retailing, this could mean building more features and content into stores’ websites and mobile apps. Club store sites tend to focus on selling products on store shelves, he said, and don’t offer many extra features that millennials, who typically gather information online first before they shop, enjoy. Stores could also round out the in-store experience through technology.
“There’s not a lot of opportunity for visualization at a club store, but why not have a QR code people can scan to learn more?” Peterson said. “Use their mobile phone as an asset to provide more information.”
Social media is another tool club stores can further leverage. Costco and Sam’s Club frequently advertise membership specials and offer product discounts through Groupon, Living Social, Zulily and other channels. Costco has stated that its rotisserie chicken offers and free merchandise vouchers often over-index with millennial shoppers.
At the same time, club stores and other retailers should make sure they’re tailoring their promotions to each channel.
“You have to think about which social media channels your shoppers are using, and also what the function of each channel is,” said Steve Rowen, managing partner at Retail Systems Research, told Food Dive. “Some are for entertainment, some are for information. You can’t always broadcast the same promotion on each channel.”
Ultimately, sources noted, millennial shoppers are not a force unto themselves. They’re also influencing other generations on issues like health and wellness, environmental awareness, and online and digital adoption. Reaching out to these younger shoppers, then, could ripple through other demographics, including the Generation X and baby boomer shoppers that club stores heavily rely on.
“Club stores have a very clear value proposition for a very large segment of consumers,” said Fromm. “The question is, can they make some improvements that would allow them to accelerate that advantage?”