the business member - club intelligence · pdf file2014 warehouse club industry guide...

2014 Warehouse Club Industry Guide

BJ’s Cost‐U‐Less Costco PriceSmart Sam’s Club

An Industry Foundation

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Marketing Money 2011 WAREHOUSE CLUB INDUSTRY GUIDE

Unauthorized Copying is Prohibited Published by HHC Publishing, Inc.

117

Marketing Money Successfully selling merchandise to warehouse clubs is not just offering buyers merchandise at the lowest possible cost. There are many factors to a successful warehouse club program and the complexity of the buyers’ requirements increases every day. One key factor in selling BJ’s, Costco and Sam’s Club is participation in warehouse club marketing programs. Club promotional programs are designed to increase sales, increase brand awareness and access vendor marketing funds. Although buyers want vendors to participate in these programs, they try to negotiate the marketing expense out of an item’s cost of goods. No matter how these initiatives are funded, suppliers need to understand how successful the program will be at increasing sales or brand awareness. This chapter includes four sections: effectiveness, marketing money use, marketing program focus and an overview of club marketing options.

Effectiveness In 2010, club manufacturers, club employees, brokers and third party service providers ranked the following four club marketing programs on their effectiveness at increasing sales: product demonstrations, price reduction, end caps and coupons. The marketing programs were ranked from one to four with one being the most effective. The results from 2003 (for a historical perspective), 2007, 2008, 2009 and 2010 can be seen in the chart on the right.

Over the past few years, warehouse club use and success with coupons has affected the results in this survey. In 2007, end caps were ranked as most effective followed by product demonstrations, coupons and price reduction. However, by 2010, there is a clear disparity between the top two marketing programs and the bottom two marketing programs. Coupons with a 2.1 average ranking and end caps with a 2.2 average ranking were the most effective while price reduction with a 2.7 ranking and product demonstrations with a 2.9 ranking were third and fourth.

Marketing Money Use

In 2009, club vendors were asked how their respective companies use marketing funds. Respondents discussed a number of different approaches on developing and offering marketing funds to club buyers (see chart on the left). One respondent said, “Strategy varies by brand and by account strategy. Focus is to drive incremental volume, increase household penetration and increase repeat purchases.” Another respondent stated that they work with club buyers to optimize the program. He said, “We believe that proper marketing programs can drive sales at club. We believe in working with buyers to optimize our programs and create synergies with broader programs wherever possible.”

The following respondent tied a fixed amount of funds to each pallet purchased. He said, “We tie a fixed $ amount of funding to a fixed shipment commitment to each club. This allows us to accurately plan our profitability and capacity.”

Marketing Program Focus In 2009, club vendors were asked what marketing program is most important to each club operator. The chart on the next page shows what marketing programs are important to each club operator. When selling BJ’s, 45% of respondents said the company’s big brand mailer program is most important followed by front of club coupons and product demonstrations which were cited by 28% of respondent respectively.

Type 2003 2007 2008 2009 2010Coupons 2.9 2.7 2.4 1.9 2.1End Caps 2.2 2.0 2.2 2.2 2.2

Price Reduction 2.7 2.9 3.0 2.9 2.7Product Demonstrations 2.8 2.5 2.4 2.9 2.9

Effective Program - Average Data

WCF Research, 2010

Must fit club go-to-market strategy, must provide ROI and must provide incremental growth.Strategy varies by brand and by account strategy. Focus is to drive incremental volume, increase household penetration and increase repeat purchases.There are a number of performance driven programs that work or have worked with the clubs: minimum SKU programs, quarterly pallet programs, quarterly volume targets and quarterly IRC programs.Planning process with brand team to build a plan to make sales target. Must remain within company standards of spend levels.

How Does Your Company Use Marketing Funds?Response

We will consider ANYTHING, including the potential for road shows to introduce products and/or help the buyer keep excitement in the department. Build the best program you can at the lowest member price. Use marketing $ for demos and keep the quality high.15 years ago the clubs wanted the best price available. Now we have to build the marketing funds into the cost of goods.

WCF Research, 2009

We believe that proper marketing programs can drive sales at club. We believe in working with buyers to optimize our programs and create synergies with broader programs wherever possible.All customers get a percentage allocation based on a fixed rate of purchases and a variable rate based on strategic partnership.We offer a percentage of marketing funds to be used any way desired by the buyer. Demos or a combination of demos and end caps are typical.We develop programs that position seasonally appropriate products to be top of mind with club members. Includes demos and in and out of club vehicles.We tie a fixed $ amount of funding to a fixed shipment commitment to each club. This allows us to accurately plan our profitability and capacity.It depends on the program. If it is a new item, we are likely to use a demonstration program to build awareness everywhere but BJs. BJs product demonstrations are not effective. If we are looking to drive volume, we go MVM and try to target items that are exclusive to Costco.



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When selling Costco, 39% of respondents said the company’s MVM coupon program is most important followed by product demonstrations at 31%, end caps at 28% and the company’s cookbook at 2%. When selling a Sam’s Club buyer, 49% of respondents said product demonstrations are most important followed by end caps at 21%, using money in cost of goods at 15%, online marketing at 12% and bonus packages at 3%.

Club Marketing Programs The following eight club marketing programs are the most likely vehicles used by a club vendor. End Caps – End caps are full pallet displays found on the end of an aisle. End caps can be located on the aisles facing the middle of the warehouse or on the sides facing outside walls. Vendors pay anywhere from $300 to $600 per period (one to two weeks) per location for this marketing tool

End cap items are selected based on seasonality, in-and-out items or good value. End caps are normally scheduled four weeks in advance to allow for proper planning by the locations. The warehouse determines compliance and vendors should spot check the end caps it purchases. Buyers are measured in part by how many end caps are bought by their vendors.

Costco offers vendors a regional end cap program that runs eight to 12 times a year, costs $1,050 per building for two weeks and is merchandised near the cooler and freezer. As can be seen from the chart on the left, respondent reaction to this program is mixed. A large food vendor said, “[The program offers a] poor return on investment with a lift of less than 20%.” Another large food vendor said, “It is difficult to justify the expense as the ‘lift’ is not measurable.”

However, companies that perform product demonstrations in conjunction with the regional end cap program produce improved results. A small food vendor said, “We’ve found that the program is extremely successful when run in conjunction with a demo, however, when you do this your $$ exposure is greater. If you are willing to spend … then doing an end cap with a demo is a good investment.” A small non-food vendor said, “[The program is] worthwhile if combined with demos and IRC [instant redeemable coupon] or coupon.” Product Demonstrations – Product demonstrations can be an effective tool for increasing sales, introducing a product to members and creating excitement in the clubs. The vendor needs to develop a good relationship with the demonstration company. Teaching the demonstration company how to cook or sell the product (using videos or printed information) can improve the potential sales of the product. The manufacturer and buyer should negotiate the number of product demonstrations for each item before the buyer accepts the program. The cost for a typical full day product demonstration is approximately $150, plus the cost of the product. Manufacturers are generally discouraged from performing the demonstrations themselves, as the clubs can retain more control. Buyers are measured in part by how many product demonstrations their departments generate.

Big Brand Mailer 45%Front of Club Coupons 28%

Product Demonstrations 28%

MVM 39%Product Demonstrations 31%

End Caps 28%Cookbook 2%

Product Demonstrations 49%End Caps 21%

Price/COGS 15%Online Marketing 12%Bonus Packages 3%

Marketing Focus

WCF Research, 2009

BJ's

Costco

Sam's Club

Large FoodSmall FoodSmall Non-FoodSmall FoodLarge Food

Small Food

Small Broker

Large FoodLarge Food

WCF Research, 2009

Worthwhile if combined with demos and IRC or coupon.Good but it depends on the success of the demo program.It is difficult to justify the expense as the "lift" is not measurable.

We've found that the program is extremely successful when run in conjunction with a demo, however, when you do this your $$ exposure is greater. If you are willing to spend the amount (knowing it will detract spend from other timeframes), then doing an end cap with a demo is a good investment.

Typically strong execution at the club level. We've had challenges with the number of sell units on a pallet and the time needed to sell through.Items featured on these end caps usually show increased volume during that period.

What Success Have You Had With Costco's Regional End Cap ProgramCompany Response

It depends on what I am trying to accomplish. Overall it is not a great investment.Excellent lift in sales.

Poor return on investment with a lift of less than 20%.

Small Broker

Small Broker

Small Food

Small Other

Medium Food

Medium FoodLarge BrokerLarge BrokerLarge Club Employee

Large Club Employee

Large Food

Large Food

Large Food

Large Food

Large Food

How Do You Determine Product Demonstration Effectiveness?Company Response

At Costco, the demo program is better executed. Always expect a 25 to 30% bump with at least a 7-10% retention of sales. Sam's is hit and miss. Their program is inconsistent and under flux at this time. However, you still need to participate because demo's are used as a profit center for Sam's.It's mandatory so measuring effectiveness is almost irrelevant. That being said, using door counts to measure appropriate levels of sample usage and sales is about all we do.Unit sales per person shopped (total unit sales divided by door count).Typically one demo is good to get the product out there in the member's hands. But once you get past doing two demos, you just don't get the additional lift for the dollars you are spending.Beginning of the week demos are not profitable. Operators should consider 1/2 price demo fees for Monday to Wednesday.We try to calculate an ROI. So far we have not shown them to pay out.We have not done demos in over 5 years. There was no ROI.Yes, but we approach it as a long term investment.Sales during and the following two weeks.

WCF Research, 2010

Sales two weeks before demos, sales during demo period and sales two weeks after demos to see growth.Same period dollar sales vs. previous year to determine how successful. Gross sales to determine break even point.Compare sales to non-demo day for immediate unit impact.I look for at least $1,000 a day and a ROI of 35% to 55% on the back end of the demo up to three weeks after it ends.Success is measured in length of time the product survives at the club. Volume in the weeks around the demo rarely pay the cost of the demo, but the overall support helps to keep items in distribution longer.There are so many ways to measure it and it's ultimately one of the few tools you have to grow sales and introduce products, so good or bad, we use it. We generally see $1 sales for $1 spent.



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In 2010, club manufacturers, club employees, brokers and third party service providers were asked how they determine product demonstration effectiveness. The chart on the previous page shows responses to this question. A number of subscribers suggested including door counts as part of the evaluation process. A small broker said, “It's mandatory so measuring effectiveness is almost irrelevant. That being said, using door counts to measure appropriate levels of sample usage and sales is about all we do.” Respondents said to truly measure the effectiveness of a product demonstration, a long term outlook has to be taken. A large food vendor said, “Success is measured in length of time the product survives at the club. Volume in the weeks around the demo rarely pay the cost of the demo, but the overall support helps to keep items in distribution longer.” Other respondents did offer some objective ways to measure product demonstrations. A large food vendor said, “I look for at least $1,000 a day and a ROI of 35% to 55% on the back end of the demo up to three weeks after it ends.” Coupons – All three clubs offer a coupon program. BJ’s offers merchandise coupons in its BJ’s Journal magazine and via bulk-mailing direct to members. The savings that have been offered in BJ’s Journal have not been as dramatic as the ones offered by Costco. The majority of BJ’s coupon items are supermarket-type SKUs. In 2009, Sam’s Club introduced a new coupon initiative called eValues. The program is only available to Sam’s Club premium or plus members. The coupons are customized for each member based on products each person purchases. Sam’s Club plus members can review their eValues coupons on samsclub.com, using eValues kiosks located inside the club locations or through a smart phone application. The coupon or discount is automatically applied at checkout on eligible items. Costco’s MVM (multi vendor mailer) coupon program is run 11 to 12 times per year for approximately 25 days each. Each MVM has approximately 90 to 110 items. MVM redemption rates are extremely high. Costco configured its register system to automatically apply a discount for every coupon item a member purchases as long as one MVM coupon is scanned. Costco and its vendors plan for those high redemption rates and order an appropriate amount of product prior to an item’s MVM period. As a result, MVM coupon items typically receive a free end cap. In 2010, club manufacturers, club employees, brokers and third party service providers were asked their opinion about Costco’s MVM program (see chart on the right). While many respondents were very satisfied with the resulting sales volume, some were less pleased with overall profitability. A large non-food vendor said, “[The program has a] significant impact on sales, 300% lift per week. [However] profit impact is a concern with new coupon coding methodology.” A small non-food manufacturer said, “Sales increase 8x-10x but fees to participate and 20%+ discount makes it a non-profit event. Everyday price is higher now because vendors must build the MVM expense into the everyday price.”

Respondents also expressed concern with the effect the MVM coupon program has on member buying habits. One company said, “Frequent couponing has trained members to seek out and expect the service; so much so that they withhold purchase while awaiting [the] latest mailer/coupon flyer.” A large non-food vendor said, “Costco has become too dependent on the MVM and it has resulted in conditioning their consumer to change their buying behavior on certain items given the frequency and pattern of MVM's.” New Club Openings – When the clubs open new buildings, expect club buyers to ask for special deals for that location. From the buyer’s perspective, he is providing the vendor with a new distribution point so they are looking for something in return for the added business. In addition, the buyer sometimes has to purchase product four to six weeks before it can be sold in the new location. Club buyers look for extended payment terms and maybe an off invoice percentage on the first one or two orders. Be specific and track the purchase order and other information so that the buyer does not inadvertently apply these deals to other locations. Television Advertising – Premier Retail Networks (PRN, www.prn.com), based in San Francisco, California, creates customized television programming and advertising for retailers nationwide. PRN has been providing high definition content in all Sam’s Club locations in the United States since 2000 and in all Costco locations in the United States since 2004.

Small Broker

Small Broker

Small Non-Food

Medium Food

Large Broker

Large Food

Large Food

Large Food

Large Non-FoodLarge Non-Food

Large Non-Food

Large Other

Large Other

What Is Your Opinion About Costco's MVM Program?Company Response

The buyers spend a lot of time working on getting participation. Since participation is national, all regions are required to carry the item. Good for large CPG companies, difficult for smaller companies that often drive more profit dollars. Competition for space is very high, these programs take away space for treasure hunt items.

I have a very hard time understanding how the MVM program melds with "best price" practices but they do get tremendous redemption rates.Pay-to-Play. Sales increase 8x-10x but fees to participate and 20%+ discount makes it a non-profit event. Everyday price is higher now because vendors must build the MVM expense into the everyday price.Excellent for volume. Gross sales jump, but P&L is impacted on the EBIT line. Transportation is a challenge with demand vs buyer projections a challenge.Very efficient program and sales increases are 10-14 x normal movement, has become costly due to it expanding from 17-25 days.The lift has decreased as the programs changed from 18 to 25 days.Excellent program as it allows us to drive volume when needed and communicate additional value to the member. Sam's has not figured out how to do this.Costco was founded on bringing the greatest value to the members and it isn't getting the best price if they demand MVM funding.Significant impact on sales, 300% lift per week. Profit impact is a concern with new coupon coding methodology.MVM's have been incredibly beneficial to our business without dramatic effect on margin.Costco has become too dependent on the MVM and it has resulted in conditioning their consumer to change their buying behavior on certain items given the frequency and pattern of MVM's.We see sales increases of 500%.Frequent couponing has trained members to seek out and expect the service; so much so that they withhold purchase while awaiting latest mailer/coupon flyer.

WCF Research, 2010



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PRN makes money in two ways: it charges a service fee to its club customers and it collects advertising fees from manufacturers and content partners. PRN’s programming can be tailored for club customers based on factors such as demographics, geography, club type and location within a club. The programming is beamed by satellite to the club locations. Each programming loop can last one to three hours and is updated every four weeks. Programming content includes categories such as health and beauty aids, entertainment, electronics, food and grocery, fashion, family and automotive. PRN has more than 150 advertisers, including consumer product companies, entertainment companies, consumer electronic companies, satellite providers and television networks. PRN advertisers have included: 3M, Black & Decker, Disney, Ferrero, General Mills, Heinz, Sony, Unilever and Warner Brothers. Road Shows or Special Events – Road shows or special events feature unique or high-quality merchandise that is not typically stocked in the clubs. This merchandise is available for a limited time, usually over a weekend, but can be stocked for up to 10 days. In many cases, the vendor or its representative will be present to demonstrate the product, with trade show-type displays used as a backdrop. The merchandise can be sold to the club or taken by the warehouse club on consignment.

These special events are used to create excitement and test member reaction. The product is guaranteed to the club and the cleanup of the event is the vendor’s responsibility. The road show travels from club to club based on buyer direction so members in different locations can experience the unique merchandise. Club Magazines – All three clubs publish a magazine. Costco’s is called The Costco Connection. BJ’s is called BJ’s Journal and Sam’s is called Sam’s Club Source. All of these publications are advertiser driven, with vendors purchasing the advertising space. In addition, each club can feature articles about its vendors, which is a great way for those companies to generate interest in their products. Costco Cookbook – The ninth edition of Costco’s cookbook (published 2010) is called Smart Cooking: The Costco Way. This book offers vendors a unique way to promote their company and their products to Costco members. David Fuller, publisher of the series, said, “We have created a cookbook designed to showcase the exciting array of foods sold at Costco … The book is designed … with sections for breakfasts, appetizers, salads and soups, side dishes, entrees, desserts and beverages … We have also included a supplier listing section … Every recipe has been identified with the supplier’s name and logo.”

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