kohl's

Ahead of the Curve and Staying the Course: Insights from Sam’s Club EVP Linda Hefner (Part I)

I was recently trying to remember when Sam’s Club EVP and chief merchandising officer, Linda Hefner, last addressed the supplier community at a Bentonville Bella Vista Chamber event, when, lo and behold, she opened her presentation this week by filling in the blanks for me.

It’s been about a year and a half since Hefner last spoke to the group, and the overarching themes in her latest presentation were consistent with the last, in which she outlined multiple new initiatives and approaches. In fact, according to Hefner, upon reviewing Sam's business, newly-minted CEO, Rosalind Brewer, issued a simple three-word directive: stay the course. That bears a bit of consideration at a time when so many majors, including Best Buy, J.C. Penney, Kohl’s, Lowe’s, and Tesco are embarking on partial or total reinventions. 

Sam’s may stand out by sticking to its story but it isn’t lost on me that it got ahead of change by setting its transformational course early on. Now, it has the advantage of adding layers to a well-built foundation while many of its competitors are revamping or tearing down and rebuilding from scratch.

Impressive results have been rolling in since Hefner’s 2010 presentation, with Sam’s two-year stacked comp growth sitting at over 8%. I should note that its U.S. ranking has gone up a notch as well. Hefner was quick to emphasize that Sam’s is now the eighth-largest retailer in the U.S., and the fourth-largest grocery store. The latter ranking is particularly impressive as Target continues its grocery-focused PFresh format rollout and as convenience retailers, dollar and drug stores continue to expand and refine their food programs.

Whether convenience stores morphing into restaurants, grocers pushing health, wellness, and beauty, or drug stores expanding their food offerings,  retailers in every tier have continued to opportunistically jump into new categories, rendering traditional boundaries all but obsolete and making the competitive landscape less than straightforward. Wholesale clubs have always operated in this everyone-is-the-competition position, since product offerings have traditionally been determined based on margin and customer value perception rather than limited by category. Wholesale clubs compete with grocers, drug stores, pharmacies, department and specialty stores, consumer electronics retailers, furniture stores, and basically everyone else, doing so under fairly daunting constraints.

As Ms. Hefner pointed out, every item in the store has to drive critical mass in order to earn its place on the shelf, since maintaining its value premise requires Sam’s to work on razor-thin margins, with limited SKUs across a broad range of categories, and in space-hogging pack sizes. Sam’s doesn’t have the luxury of endless testing and course correcting. If its buyers don’t do their homework and get it right from the get-go, productivity plummets. Adding to the pressure, members are paying for the privilege of shopping there and so expect thoughtfully-curated selections and extreme value. On average, Sam’s prices are 30% below those of grocers, according to Hefner, and day-in and day-out, they compete favorably against mass retailers, club competitors, and even food service providers. With so many competitors to be compared to, Sam’s can’t offer its members implied value. It’s got to be obvious.

Hefner’s presentation made it clear that Sam’s three key strategies have not changed: offer a relevant and unique merchandising portfolio, deliver superior member value, and create a preferred club experience. At the same time, she added quite a bit more color to these initiatives and brought in some interesting updates and examples.

Offer a relevant and unique merchandise portfolio

The next stage of Sam’s Project Portfolio project, launched back in 2010, has it taking a granular look at space decisions, adjacencies, and category shifts. Hefner cited ongoing expansion in the fresh category and additional investments in health and wellness as primary examples. With everyone from drug to dollar stores ramping up both categories, Sam’s has to offer more than great prices to resonate with choice- and convenience-spoiled shoppers. On the fresh front, Sam’s is taking pains to message expansive selection while ensuring that each store’s unique layout isn’t compromised in the process. In her presentation, Hefner hinted at localization without using the term, stating that the communities in which stores reside are being taken into consideration. During Q&A, she also referred to the creation of some kind of regional buying structure as an opportunity that Sam’s is exploring. To me, that points to Sam’s potentially creating a localization-enabling framework similar to those leveraged by Macy’s and Costco.

In his presentation to the Chamber last May, Dr. John Agwuonobi, Walmart’s president of U.S. health and wellness, provided great insights into the company’s wellness mission. Sam’s is also making considerable investments in health and wellness by providing free health screenings for chronic conditions, with the logic that they will drive awareness, not only for Sam’s pharmacies and health-related products, but also adjacent categories such as baby products and health and beauty. Given that drug and grocery stores continue to expand their health service offerings, and the recent announcements that dollar stores are waking up to the pharmacy opportunity, around-the-corner convenience will be an ongoing competitive reality for Sam's. Once members are in the store, however, Sam’s enjoys a captive audience in a comparatively focused and less cluttered environment, and its free screenings, in addition to acting as a lure, offer members an instant and unambiguous return on their membership investment.

Matching the right investment to the right category, based on customer demand drivers, is one of Sam’s key points of differentiation. Let others have their across-the-board margin rules; Sam’s is willing to drop margin requirements in order to drive value perception in key traffic-driving categories such as fresh. In pharmacy, on the other hand, resources are being directed toward driving outreach and awareness, which will in turn promote adjacent categories.

Part II will reveal some interesting updates to Sam’s merchandising structure and brand strategies, (including a sneak peek at a groovy new brand boutique).

Read Carol's coverage of Linda Hefner's last presentation to the Chamber. The initiatives that she outlined then are still guiding Sam's strategy.

Read Part II

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newmarketbuilders exclusive: Adding Fuel to the Fire

Fuel sales have become a hot spot for supermarkets and big box retailers of late, and the independent and small chain gas stations that are being pushed out of the market are not too happy about it. An independent gas station owner has filed suit against Safeway, claiming that the retailer is selling gas below cost in violation of California’s Unfair Practices Act. Meanwhile, Kroger is backing a bill that will make it a whole lot harder to bring such suits to court in the future.

If Kroger has its way, potential litigants would have to determine the price of every item that is sold in conjunction with a fuel purchase and factor in the costs involved in selling the items in order to prove that the fuel was sold at a loss. This would make it practically impossible for anyone who values their time and money to pursue a lawsuit.

A growing number of retailers, including Costco, Sam’s Club, Safeway, and Kroger, offer deals that either tie fuel purchases into those made in the main store, or link them to club and loyalty card membership. Safeway’s Club Card program, for example, offers three cents off each gallon of gas to holders of the card, and additional discounts kick in depending on grocery purchases. 

Whether wrapping fuel into value-loaded schemes or using fuel as a loss leader to lure customers to the main store, the field of fuel sales has become a battleground and now, a global retail game-changer.

In the UK, supermarkets now account for almost half of gasoline sales, with Tesco’s 15 percent share leading the pack. Brian Madderson, chairman of RMI, which represents petrol retailers, claims that unfair and predatory pricing is forcing the closure of 250 to 300 independent operators each year. Madderson is fed up with retailers using gas as a loss leader and stated in this week’s Telegraph that his organization wants “to stop supermarkets from selling petrol as if it was a can of beans.”

But why should anyone give a can of beans how retailers market gas? Protecting fuel retailers by making gas promotions off-limits for everyone else is like prohibiting Wawa, Sheetz, and other convenience retailers from promoting their food offerings lest they steal market share from grocers, or quick serve restaurants, or, these days, even drug stores.

And what about alternative fuel solutions?

A growing group of non-fuel retailers including Walgreens, Giant Eagle, Kohl’s, Ikea and, yes, Kroger, have installed electric charging stations in their locations. Walgreens plans to install them at roughly 800 locations nationwide this year, with the goal of becoming the biggest retail host of chargers nationwide. Walgreens charges for their chargers – In Florida, for example, the stations will impose a rate of about $2.49 an hour, which is more than the cost of charging up at home but still less than half the cost of gas for comparable mileage, according to the company. Kroger, on the other hand, is making its recently-announced North Texas charging stations free for the first year, and then converting to a pay system in 2013. That would seem to be the epitome of a loss leader, and yet no one is protesting.

Do you think that retailers should be able to tie gasoline prices to other purchases? 

Two Mighty Myths

Best Buy is the latest member of a growing group of retailers that have recently announced significant business overhauls. Clearly, retail is about to get a whole lot more interesting, as many of the majors, including J.C. Penney, Lowe’s, Kohl’s, and others make simultaneous big breaks from their pasts. Before the momentum builds any further, it’s time to debunk a couple of myths.

Multi, Not Just Mini

Retailers’ preference for small formats has gained traction, to the point where “small is the new big” is fast becoming a retail cliché – and one that begs for clarification. A bevy of big boxers, including Target, Tesco, Walmart, Best Buy, and J.C. Penney, are driving their store format portfolios in diminutive directions, but only one, Best Buy, is actually shrinking the size of its existing stores (by 20 percent in select locations). The majority of big box retailers’ store portfolios are still weighted toward, well, big boxes. Their small format forays have, by and large, been separate launches, like Walmart’s Express stores, J.C. Penney’s JCP Express concept in Chicago, Target’s City Target launch, or Best Buy Mobile, none of which have hit anywhere near the scale of their legacy footprints. For others, smaller versions of their original templates figure prominently in their go-forward strategy, but the revised versions are still far from tiny. Last week, for example, Kohl’s announced that its new store openings will be disproportionately tilted toward a version that weighs in at two-thirds of its original version. However, at 64,000 square feet, these new additions are far from “small” and at launch, they represent less than 1% of Kohl’s total fleet.

Takeaway: Consider small formats a trend, but, until wrecking balls begin banging away at a big box near you, multi-format remains the current retail reality.

Integrity and Clarity, Not Just EDLP

Who would have thought that a century-old, mid-range department store would create some of the biggest buzz in retail so far this year? J.C. Penney’s appointment of former Apple executive, Ron Johnson, to its top post was audacious enough – it’s his rip-off-the-Band-Aids renewal plan that has the retail peanut gallery weighing in right and left.

Penney’s pricing and promotions plan represents the most significant of its shifts in strategy, as it puts the kibosh on the shocking number of unique promotions it normally runs (almost 600 in 2011) in favor of a “Fair and Square” three-tiered pricing strategy. But don’t call it EDLP. Penney’s isn’t lunging to low prices, it’s meeting customers somewhere in the middle, between inflated markups on one end and rock-bottom clearance on the other. Ron Johnson summed up the situation by stating that "People are disgusted with the lack of integrity on pricing,” and he’s not the only one saying game over. This month, Stein Mart announced that it will reduce coupons by as much as 50 percent this year since, according to CEO Jay Stein, the company’s coupon strategy had gotten “out of hand.” In the wake of a highly-promotional fourth quarter, Kohl’s is working hard to make its pricing message“very, very obvious” to consumers as it moves forward, according to CEO Ken Mansell. Even the king of EDLP, Walmart, has made price consistency and integrity its dominant message as of late, while Lowe’s EVP of Merchandising, Robert J. Gfeller, has spoken of eliminating the “peaks and valleys” associated with promotions as part of its recent transformation.

Takeaway: “Value” and “low prices” are still very much in retailers’ vocabularies, but integrity and clarity are taking center stage.

This article originally ran on the International Licensing Industry Merchandisers' Association (LIMA) website.