Upcoming IP Investor Dialogues: Spirax Sarco, FAST, COST, CPRT, POOL, SNOW, DDOG - Register your interest at help@inpractise.com 

Anonymous

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:24} Can you briefly introduce your role and responsibilities while you were at Sam’s Club.

{audio:0:00:31} Absolutely, the elevator speech is that my first job at Sam's Club was handing out food samples. I was a demo associate at Toledo, OH. Mashed potatoes was the first thing I ever gave away; five-pound bags of mashed potatoes. I turned that into a career, so I went from being a demo associate to a regular associate to a team leader. I went into the management training program, became an assistant manager, co-manager, and then a store manager. I was an assistant manager in buildings that did anywhere from $30 to $160 million a year in that time frame. I was a co-manager in a $110 million store, and then I ran as a store manager in two stores specifically. One store was in Prescott Valley, Arizona, which was a $42 million box, and the other store that I ran was in Lakewood, Florida, and that was $72 million to $75 million when I took it over and when I left it was around $80 million. I got to see all the different ranges and volumes of customers, and it was a good experience for me.

{audio:0:01:41} Why were the sales per box so different between the two stores?

{audio:0:01:48} Sam's got multiple formats of what they're looking at. The store I ran in Arizona was placed there to take profit dollars from the Costco a mile and a half down the road. Sam's opened that store with the understanding that it would never make money. The first year that I was there, we were supposed to lose over $2 million, and we were able to lose only $2 million. Everyone was super excited. It was a weird experience; everyone was, you lost $2 million, great job. High five, keep up the good work. Much of the premise behind that was just a sales dollar that Costco doesn't get to the West Coast is a dollar that they’re not going to have to expand on the East Coast. It was in that same time frame when they were pushing more on the east coast. I think Sam’s was leveraging the number of sources they have and saying we can afford to lose $2 million in Arizona because that will take $20 million or $25 million in sales from a Costco. Then they can't use that to get their box in Florida per se, so they kind of take market share from Sam's Club on that.

{audio:0:03:03} Why has Sam’s historically built somewhat of a stronghold in the East?

{audio:0:03:07} I think a lot of it has to do with the demographic and clientele they generally tend to attract from the beginning. Sam Walton's story is the American dream. I'm going to go from a small loan; I will figure things out, do all the right things, make all the right moves and be super successful. The fact that he started in the Midwest, which was the breadbasket of America when he was kicking off, a lot of the factory workers and working men identified with him. They were thinking, that's a guy I'd like to be, someone I could see myself hunting with or sitting at a bar with. That was the American ideal. 

{audio:0:03:52} When I moved from Ohio to Florida, the interesting thing was that the Florida customer was really just a transplanted Midwesterner. If you’re a good northerner, you figure it out, and you move south eventually. I saw a lot of the same product mix, same purchasing, same purchase habits but with a slightly older demographic. Using the pharmacy more in Florida than they did in Ohio, but other than that, they were buying the same things in the same quantities. 

{audio:0:04:26} Sam's Club has an aging demographic, so their member base is slightly uptick, whereas Costco is the West Coast trinity, the fun pick. When I moved out to Arizona, it was really interesting. I had conversations with customers I'd talked to about shopping at the store. We were a new store; we'd only been in the community for three years, and I had a lady who said, I just call it going to Costco. I said what do you mean? She said, we just call it Costco; we come here now, but I call it going to Costco. So we're fighting the name. When people want a Coke in the US, they might get a Coke or a Pepsi, but Coke gets the name brand. Costco owns that West Coast customer, and even when Sam's Club was going in and taking market share, they're not changing the vocabulary or changing the vernacular; they're just taking some houses.

{audio:0:05:25} The shoppers were shopping in Sam’s but saying they’re going to Costco?

{audio:0:05:30} So how do we establish the brand in a location where the customer we're trying to beat just refers to us as the competition?

{audio:0:05:42} Why do you think that is?

{audio:0:05:44} I think it's just because Sam's never pushed to the West Coast. It’s always been that Sam's Club owns the Midwest; Sam's Club owns the southeast. BJ’s has a pretty strong footprint in the northeast, but Costco had the West Coast for the longest time. That’s where they started, out there in Washington, Kirkland. As that area grew, you saw the income level in those western states continue to grow faster. At the same time, you saw the midwestern states lose that income. Costco became the high-end version of Sam's Club. They're the Target to the Walmart, or they're just a slightly better version of Sam’s Club. While your parents might have belonged to Sam’s Club, you want to belong to Costco.

{audio:0:06:37} What do you mean by the high end?

{audio:0:06:39} As a general rule of thumb, Costco will be considered a step above Sam’s Club. 

{audio:0:06:54} In perception; some in price but just in the offered merchandise.

{audio:0:07:01} Yes; not that it's better because there are many things Costco doesn't do better than Sam’s Club. Still, generally speaking, the public's perception is that Costco is the nice version of Sam’s Club.

{audio:0:07:17} Sam’s has roughly 600 stores.

{audio:0:07:24} What's the rough split, in your mind, between the East and West Coast?

{audio:0:07:32} I would say the vast majority is Midwest and East Coast, probably to the tune of 400, so it would be two-thirds, and a third over on the West Coast. There has always been a big push for them to get further west. The drawback is that the land costs more, so you've got to increase your distribution network. You've got to establish new sources for your locally based products. There are many things beyond the concept of, I’m going to start shipping the same things that sell in Florida and sell them in Colorado; it’s not how that works.

{audio:0:08:05} How do you compare the format of Sam’s versus Costco in terms of square footage and layout?

{audio:0:08:14} For the most part, they’re generally the same. They're generally between 115,000 to 140,000 square feet, depending on the age of the building, location, and projected sales buy-in when they built this floor. The layouts are similar. You walk into Sam’s Club, you walk into Costco, and you're hit right away with high dollar big ticket: giant TVs and the jewelry counter with the colognes that you shouldn't be able to buy and the diamonds. They hit you right off the bat with the big-ticket items. The big draw, the high margin items being your produce and bakery, you’re generally going to see Sam’s Club make a more impressive push at what they would call a pod or a feature towards the front so they can add a bit of fresh basket that's going to drive their margin, drive their sales. And both of them carry the majority of their cold and perishable goods in the back or on the side of the store, which gives them the ability to get it in and out of a refrigerator to frozen prep faster so they can maintain the quality of presentation longer.

{audio:0:09:26} Why are the sales per store lower for Sam’s Club versus Costco? I think it's around $110 million on average versus $230 million-plus for Costco.

{audio:0:09:36} A lot of that comes back to where Costco has decided to build and how they laid out what I think is their footprint. When I was in Arizona, the Sam’s I was at in Tucson was a $100 million Sam’s Club. There was a $300 million Costco that was five miles from us. There was another one that was $200 million, and they were building a third one that they were projecting to do anywhere between $150 million to $200 million. They also have the clout of being Costco. On the West Coast, that’s again considered the premium brand membership club. They just do a really good job of catering to that and ensuring that they are unashamedly Costco. 

{audio:0:10:32} They don't come to a Sam’s Club to see what Sam’s Club is doing most of the time. They’re not even worried about it. Sam’s Club tries to beat Costco, has tried to beat Sam’s Club for years, and Costco is focused on being Costco. The biggest thing that’s held Sam’s Club back is they’re so focused on beating their competitor that they’re losing their own brand image across their entire chain.

{audio:0:10:59} How would they try to beat Costco?

{audio:0:11:00} There’s a lot of emulation. If you look at Costco, Costco has done a lot with, and was an early adopter of, cobranding their store brand. They'll have Kirkland’s with Campbells. They had their own wines and liquors. Before Sam’s Club almost even considered having a liquor store, Costco was already doing their store-branded liquors and getting rave reviews on them from the magazines. Being in that game ahead of time helped them view where the consumer was going. If you told me 10 years ago that a box of Kraft macaroni and cheese, even at Sam’s Club, was going to have 16 new boxes at $20, I would have said you're crazy. That price used to be $10 or $11 for a 12 pack. Sam’s Club would make the pack sizes bigger. In contrast, Costco would focus on their cobranded store brand. Their version of Kraft macaroni and cheese was already considered a premium over just the regular Kraft. It was a lower price and usually had more quantity than the Sam’s Club.

{audio:0:12:20} How much is quantity different?

{audio:0:12:23} A lot of times, from the information we would get at our meetings and the group sessions that we would have, in blind taste tests, the Sam’s Club version would win hands down, simply because the average consumer, or the consumers that Sam’s Club was profiling, said that it tasted better. Again, Costco has that impression with so many people that it was better than Sam’s Club because it was Costco. 

{audio:0:12:55} One of the things I think was interesting with Sam’s Club is they're affiliated with Walmart. As much as they try to fight it, Walmart is not considered a high-end grocer. I could walk into Walmart right now, and I can buy wagyu, and I can buy bison, and I can buy all this stuff. But I'm not going to because that person that wants that isn't saying, I'm going to go to Walmart and get a good deal on bison. No, they’re going to Costco, they're going to a meat market to get the bison. The Sam’s Club affiliation with the Walmart brand, more often than not, is detrimental to the average consumer because they have that carryover of hey, this is the low income, low-quality brand. If they weren’t together, I think you could see Sam’s Club probably excel a lot as far as the perception and the public opinion of a Sam’s Club relative to a Costco. We need to have a more level playing field. 

{audio:0:13:54} How would you compare the average household income per member of Sam’s and Costco?

{audio:0:14:02} When I was at Sam's Club, the big title was the CEO mom. The female who ran her own business, a mom who did all the grocery shopping for the kids. She's buying that macaroni and cheese, and she's also buying the $40 bottle of wine; she's buying baked goods to take to her business and things like that. They were constantly pushing, trying to get them what I would say, the six-figure, 120-and-up group. They're constantly fighting to get that. The main issue is that customers are generally firmly entrenched if there's a Costco available; that's where they're going. A lot of that comes back to societal pressure. Their friends are going to Costco because if you’re making six figures plus, that’s where you’re going because that’s the trendy West Coast on-brand brand. 

{audio:0:15:00} Back to the point on sales per store, similar-sized stores, by my numbers, Sam's is a third of the sales per square footage than Costco? 

{audio:0:15:14} What explains that? Costco has been on the West Coast for longer, and they're more entrenched, but how would you compare, say, a Sam's that's been in their market just as long as Costco has been in the west in terms of the sales density?

{audio:0:15:27} My Sam’s Club in Arizona, for example, was built and opened the same year our entire real estate economy collapsed, and America had a micro recession, I guess you would call it. The Sam’s Club was in Prescott Valley, which was not quite as nice an area as the Prescott Costco. Prescott was where the money was, where the more fluid customers shopped. A lot of what Costco has had the privilege and luxury of doing is looking to see where the trends went with the money. At my store here in Lakeland, as an example, the Sam’s Club that I ran is on the north side, which is not where the new money is at. When they built a Sam’s Club on the south side of Lakeland, that one, by default, is doing about $30 million more than the Sam’s Club six miles away from it. 

{audio:0:16:32} Costco had the same approach. When they came over to the West Coast, they could buy land and build where the customer was going. A Sam’s Club, an older facility in an older location, was left with where the customers used to shop in the 90s or the early 2000s, and had since progressed to these outdoor mall areas. There aren't many of those areas on the West Coast, so Costco is already in the ideal location. In Tucson, Costcos that were doing $200 and $300 million, like I said, were surrounded by these neighborhoods of million-dollar homes. In contrast, the only land left to buy for Sam's Club was closer to the downtown area, which allows Sam's to be more focused and involved with the small business aspect, and it helps them from that aspect. As far as the actual dollar bring, instead of having the average customer come in and spend $300 at a Sam’s Club, you will have a Costco customer dropping $500 because their net income is double that of the average Sam’s Club customer. 

{audio:0:17:41} The long of it is the historical location decision and where they’re building.

{audio:0:17:45} Yes. So, great call for Sam’s Club in the 80s and 90s, that's what let them have 600 stores. But it's also about working towards the future. If you go back a couple of years, Sam’s Club made the news when they closed 30 locations. At the time, they said these are all great stores; we're going to turn these into mini fulfillment centers and distribution centers, which they use today. But they didn't say that every one of those stores they closed was like my store in Prescott Valley. They were losing millions and millions of dollars. They were at the right spot at one point but then they said, this is no longer where our customers and the money is coming from, and the average purchases aren't meeting up to what we need to run the facility, so they pulled the plug on those. Hindsight being 20/20, they did the right thing. Now those stores are all doing the Sam’s Club same-day delivery, micro fulfillment, and hotshots to local stores still open around it. It was a good call at the time to say, these stores were great 10 years before we closed them, but we can't lose $20 million over 10 years. 

{audio:0:18:58} That Prescott store was doing over $100 million?

{audio:0:19:03} No, the Prescott Costco was. The Prescott Valley Sam’s Club was a $39 million store.

{audio:0:19:12} You were losing a couple of million dollars a year.

{audio:0:19:15} Yes, and getting high fived for doing it.

{audio:0:19:17} I read something interesting in the last Costco earnings report; it said that when they add new stores close to existing stores, total sales for all of the sales increase. This seems to entrench the brand and entrench Costco in a certain area. How did you experience that when trying to break into a Costco region? How would they react to that entrance?

{audio:0:19:47} A great example is when I took over the Sam’s Club in Prescott Valley. Before we opened that Sam’s Club, the Costco was $150 million; they dropped to $120 million. In the three years our store was open, they went through five general managers. It was definitely, what's happening, what are you doing, because they were losing market share. There will always be people who are given the option of driving by a Sam’s Club or driving to a Costco, they will choose Sam’s Club. That’s where Sam’s Club wins because they have the more basic or simple demographic because they can win that customer. 

{audio:0:20:27} The guy that doesn’t care if he’s getting prime beef or choice beef or just beef. That guy is going to go to Sam’s Club. In my time when I was at the store, I took a more grassroots approach to grow that business. I made it a point to be a part of anything possibly that I could within the community because people were calling me Costco. I had to get my Sam’s Club name, brand, and image out there. I bought the Little League scoreboards; I started working with the chamber of commerce. I got on the chamber of commerce board of directors. This was a huge win because then I knew all the open businesses and everything happening from a promotional standpoint.

{audio:0:21:13} I had t-shirts made for the whole store saying, this is Sam’s Club, to represent to the community that Sam’s Club is not just a company in Arkansas that’s taking money out of Arizona. There are just 130 people working there. I took a real grassroots approach. When I started doing that, it was interesting because Costco, after about the first six months, started taking notice. I started seeing Costco going here, Costco going there, and Costco having a tent at the fair. I'm sure someone at Costco that’s further up the food chain said Sam’s Club just bought scoreboards, they're sponsoring every event in town, and you need to do stuff, so they got more involved. That's where I think Costco gets lazy where they don’t check on a Sam’s Club, if they're not worried about what a Sam’s Club is doing. If you have a motivated manager and have the capacity, time, and ability, you can dramatically impact that Costco. You can almost engage some of it, but you're never going to overtake the fastest runner in the world. You can get closer.

{audio:0:22:26} Why do you think that store failed to sustain itself?

{audio:0:22:33} A lot of it came back to the fact that Sam’s Club was so focused on offering everything. When I was there, one of the big challenges that I had was trying to figure out how to make it profitable as much as I could to budget. In my experience, Costco doesn’t talk about labor pressure; they're not trying to drive a percentage of sales; they're saying, we're going to spend the money we need to spend. They unabashedly and unashamedly say, I'm going to pay my cashiers $40,000 a year; they're good people, and they deserve it. Where at Sam’s Club, they'll do an earnings call and talk about how there's been pressure on wages, pressure on labor hours and units per hour, and blah, blah, blah. Sam’s Club will try to drive that down. 

{audio:0:23:24} I was trying to get Sam’s Club to let me shut down some of my ancillary businesses when there was nobody there because it wasn’t impacting customer service, but it was driving up customer wait times. I didn’t need someone standing at the one-hour photo at 7:30 at night; I needed an extra cashier. But they wouldn’t let me shut down that one-hour photo because that's a service that we provide. But nobody is using it, so I would have to drag customers over to the one-hour photo to check out. Whereas Costco made significantly more dollars, they had already shut down their photo because nobody in Prescott or Prescott Valley needed a photo after seven o’clock; it just wasn't that community. They were already addressing the needs. Sam’s Club was so focused on this being a service that we need to offer. Even though it wasn't a value add to that customer base, Sam’s Club was going more to the cookie-cutter aspect and was less involved with what I was trying to do. I was trying to make it a store in the community that reflects what the community needs when they need it.

{audio:0:24:32} Like more of an old-school grocer.

{audio:0:24:36} Correct. There's a reason why mom-and-pop businesses in America work so well. They usually know what their customers need. Suppose you let business owners run the business the way they want to, as long as you do it for the right reasons. You can have more success than you can if you're doing the same thing that a store in Florida does that maybe is doing five times the sales volume because it's not an apples to apples comparison. 

{audio:0:25:06} What was the difference in the SKU count at Costco versus Sam’s roughly?

{audio:0:25:12} At my store in Arizona, that Costco, I would say, had roughly 2,000 more SKUs than I had, which was quite significant. Part of that came from the fact that I couldn't sell enough stuff to keep it fresh and in stock. When 40% of your business is food, there are expiries to worry about. When it goes out of date, you're not going to sell it, and it becomes a loss. Costco being able to leverage its size and its capacity, was able to say, I'm going to get three pallets of X, Y, and Z product, and I'm going to get three different varieties of it. At my store, I'd have one pallet of each, maybe. Probably only the top two varieties; I don't want to have that third variety. When Costco is larger and selling more volume, you can bring in more products because you're leveling your field. If something goes bad, you've got more other products that can negate that margin loss.

{audio:0:26:17} The mix is not that different between food and sundries and hard goods, but the scale of the volume of goods gives Costco more SKUs and more depth, which also drives the terms. 

{audio:0:26:35} Right, and making sure if you walk into Costco, you can say, this is my favorite macaroni and cheese. If you walk into a Sam’s Club, it's often, I'm out, I'm waiting for another shipment to come in because I can only sell one pallet at a time, while Costco has five pallets.

{audio:0:26:50} Is that a broad problem for Sam’s versus Costco, or is that more specific to your store?

{audio:0:26:56} That's obviously an issue now; if you fast forward to today, nobody has anything. But any Sam’s Club that's doing less than $60 million a year in sales will struggle with that immensely. The way Sam’s Club, Costco, and BJ’s get the pricing is that they say, I'm going to guarantee you 12 pallets of your product on every shipment for this next quarter. If the store only sells two, now you have all this extra cost for your backflow, or you merchandise back to other stores or throw it.

{audio:0:27:28} How did you price versus Costco? 

{audio:0:27:33} I would say 5% to 10%. Not significantly, and again not enough to make you think, I'm going to make a conscious decision to change my shopping habits, but enough to where if you actually might, you would be saying, this is cheaper. There were times I would comp shop at Costco. I would help customers load things into their cars when I was there. I would be putting stuff in their cars and they would say, this is nice; I've never been to Costco where they do that. I would say, I don't work for Costco; I work at Sam’s Club; this is just what we do for customers all the time.

{audio:0:28:12} And you still couldn’t win customers.

{audio:0:28:13} I won a couple of them over. I thought I’ll just try coming over there because that Costco was crazy. It was a classic Costco, and it was a madhouse. You could leave that Costco and have people honking horns and flipping each other off, not being pleasant. And you could come to my Sam’s Club, and people are, how are you doing? Walking customers from product to product and talking to them. It's one of those things where pricing wasn't so good where you say, I don't care, I'm going to go to Sam’s Club. But again, the more affluent your customer is, it doesn't matter. It doesn't matter if you're saving $2; that customer doesn't care.

{audio:0:29:03} How can Sam's compete with Costco?

{audio:0:29:03} In my opinion, it comes back to what I alluded to earlier. They need to stop trying to be Costco. I've yet to see a competitor succeed while being better than the person they're trying to be. 

{audio:0:29:20} If you look at the customer base right now in this current economy, if I'm Sam’s Club and I'm trying to figure things out, I need to leverage my experience with the vendors and say, I would love to have a 20 pack of macaroni and cheese, but it puts it at a price point that my customer can’t afford. If I'm in the $50,000 to $70,000 range for most of my customers, I need to get that same value on a 10 or 12 pack. A customer's not going to spend 7% of their weekly food budget on a box of macaroni and cheese that lasts them two weeks. They just don't have it. The average person is getting paid every other week or getting loaded up on the EBT card at the start of the month. You've got to find a way to reduce your package size and reduce the percentage of goods you need because you're going to still need $200 to $300 to get the volume through, so you have to have smaller packs. 

{audio:0:30:25} When I was in that price range for my salary, there were plenty of times I didn't shop at Sam’s Club because I couldn't afford it based on what I was spending on groceries for the week. Yes, I could go to Walmart, and I could go to Target, and I'd be paying a little bit more, but given the option of putting $30 into toilet paper or paying $6, I'll pay the $6 because I need the 24 because that's where my price range is. The Costco customer doesn’t care; they’re like $50? Great, I’m going to pay even more for my toilet paper. And that’s kind of where Sam’s Club is when their average customer doesn't have the expendable income, so Sam’s Club tries to push up that dollar bring, the per-item brings, and their customer just doesn’t have the money. 

{audio:0:31:16} The only way I think they can move ahead is to angle to the customer they have, and a small portion of you needs to ask how I get the customer that I want. But if you're focused on the customer you want and leaving behind the customer you have, next thing you know, that customer is now shopping at Aldi or any of these other small grocery stores popping up. These stores are offering the same value as Sam’s Club but without the high price point because it's not a four-pound box of strawberries, but a one-pound box of strawberries.

{audio:0:31:49} When you move into smaller packages, how does that impact your scale advantages in procurement versus Aldi and Walmart itself?

{audio:0:32:00} This will sound bad, but most of America is stupid. We struggle with math, doing percentages and numbers; we just can't do it. If somebody's not doing it or we don't have our phone, we can't do it. When you're saving a customer 10¢ per box of a 12-pack, and you're saving $1.20, the customer doesn't realize they're saving $1.20. They'll pay 6¢ more because it's not that big of a difference. Where Sam’s Club wins on that is okay, I sold 200 of these 12-packs where I saved the customers X number of dollars. The smaller you make it, I think the easier you make it for them to see that they are saving. Aldi's isn't always cheaper, Walmart isn't always cheaper, and Sam's Club isn't always cheaper. The closer those pack sizes relate to what the customers are getting in the smaller grocery stores, the easier it is for them to see that. You make it a 24 pack, and you're trying to compare it to a six-pack, if you're good at math you can say well that's four times as much. You can kind of figure out where it's at. If you're at a 12-pack, and let's say it's $10, and the six-pack is $8, I can say, wait a minute, I can pay an extra two bucks and double the quantity instead of trying to figure out the difference. Keep it simple. 

{audio:0:33:19} Effectively, you're saying that Sam's is operating somewhere in no man’s land between Costco's high-end customer and the low price customer just doing a grocery shop. Sam's is somewhere in between trying to push people up to a higher dollar amount, but then it makes the customer feel uncomfortable to spend a lot of money. You're suggesting to potentially reduce the packaging size and maybe go down to smaller dollar items. 

{audio:0:33:54} Make it easier to understand that they're saving money. That's what it boils down to. I was at Publix the other day, and it was buy one get one free on raspberries. The raspberries were $4.99 each, three for $10. People were loading up on the three for $10, and I was thinking, just buy the $4.99, buy one get one free. I couldn't believe I was seeing it, but it was, hey, three for $10, that's a deal!

{audio:0:34:26} That’s a lot of raspberries.

{audio:0:34:27} My daughter likes to do them on her fingers, and she's got raspberry fingers; she gets all excited. But that's an example where the average shopper isn't going to do the math. 

{audio:0:34:40} Why did they feel as if they had to stick to, let’s call it, the Costco way?

{audio:0:34:46} Costco was doing $200 million per store. If a Sam’s Club did a half-million dollar’s its opening week, people were high fiving each other, and there were congratulatory emails. If a Costco ever opened at $500,000 in its first week, heads probably would roll. They would get deleted off of LinkedIn; they'd be not allowed to mention Costco in their life. Costco has that expectation. If they don't open a store at $150 or $200 million, they're like, what happened? I was at a Sam’s Club that we opened in Cuyahoga Falls near Cleveland, Ohio. I think a store ended up doing $42 million, but there was a Costco that had opened up, again, on a better side of town closer to where the money was, and that store did $138 million in the same time. 

{audio:0:35:36} On that point, Costco, when they move into the area, is building in the affluent areas, and Sam’s is consciously building into the less affluent?

{audio:0:35:49} Yes; Sam's is a business for small businesses. That's how they started. If you build away from the small business, you're not going to be in business for small business. I understand Costco opened up with, hey, we’re not going to make more than 7% on anything we sell, so whatever it is, that’s what we’re making. Sam’s Club has started to go down the road of, we're in business for small business. Still, the business customer takes a lot of effort and energy and a lot of face to face time and productivity, and it's a low margin, so let's deleverage that and let's try to focus on how to get the high-end customer that Costco has. Well, Costco has them because they built close. They’ve engaged them as a high-end brand, and they’re not in business for small business, they're in business for, they charge you, we're going to make X dollars, and you'll get X money, and everything's good.

{audio:0:36:46} But when Sam’s does enter a new market, they’re still buying downtown next to businesses.

{audio:0:36:54} It’s interesting that Costco is almost an affordable luxury brand.

{audio:0:36:59} Yes, 100%. It’s like what Hyundai has become. Five years ago, Hyundai was basically giving you a car. We'll give you a car; it's cool. And now Hyundai is selling $60,000 cars, and the quality of their cars is rivaling the Audis of the world.

{audio:0:37:24} But Sam’s Club has an even margin, 2.8%, 2.9%, and 3%, which is somewhat similar to Costco, specifically in the US. How do you reconcile that they're making fewer sales per store at a cheaper price but the same margin?

{audio:0:37:46} I think a lot of what Costco has been successful at is one, they take care of their employee. They pay their employee well, and they talk about it, so they fully embrace the new. Two, if you watch movies that involve big-box shopping, it's always at a Costco. Never at a Sam’s Club. So pop culture is saying, hey, Ryan Reynolds is shopping at Costco. Why aren't you? Again, because they're West Coast, they've done a good job of positioning themselves so people are always shopping at Costco when you turn on the TV. And that’s just not Sam’s Club.

{audio:0:38:29} The lower labor cost keeps Sam's margin higher? 

{audio:0:38:34} Yes. At Sam’s Club, traditionally, the highest-paid employees are furthest away from the customer. Outside of the salaried managers, the highest-paid employees are working the Monday through Friday, they’ve been there long enough to be in the offices, and they're doing that type of work. It’s only been in the last few years that Sam’s Club has pushed those high paying, long-tenured people with good knowledge of Sam’s Club's products and offerings out of the offices and into customer-based roles. Costco, for years, some of their highest-paid people are their cashiers. It's the opposite payroll construct, saying we're going to take our best, tenured, most knowledgeable staff and, if you’re Costco, you put them in front of customers, and if you're Sam’s Club, you stuff them away in offices, and they work Monday through Friday, and they leave the store at three o’clock.

{audio:0:39:32} If you look at Costco’s numbers, they also have a policy of sticking to the gross margin, and strictly every product is not any more than 14%. How did Sam's compare on a gross margin basis? Do you have similar rules?

{audio:0:39:50} At Sam’s Club, the bakery, all the bread and the cookies and the muffins, that's 40%, 50%, 60%, 70%, 80% margin, and the TVs are only 2% and 3% margin. They get buying allowances, and they strike it that way. But Sam’s Club has never operated under those rules. The only time you see anything pressing from Sam’s Club as far as it relates to margin is if I’m going to cancel it or remove something from their inventory; if this isn't something that sold well so now I'm going to cut the margin and hold onto it. I can remember being in my electronics aisle at Sam’s Club, and Apple had switched from the 30-pin connector to the lightning connectors. I remember seeing five pallets of electronics merchandise that I'm emailing the buyer about, saying this doesn't work. There's no point. We've got five pallets, and you've got this stuff full price. No, we can't take the margin loss, but okay, we're going to take 100% loss, so we can either take that 80% or 85%, or we can take 100%. Do you want to lose 100% of everything or just 85%?

{audio:0:41:09} What was the average gross margin per box, roughly, for Sam’s Club?

{audio:0:41:12} When I was first working there, we were excited if we were running a 12% or a 13% margin. When I left, that margin percentage had turned into 19%, 20%, or today we did 22%. There was this celebration that you did it, whereas, in my understanding that I see with Costco it's, this is the margin we're making.

{audio:0:41:46} Are you including membership fees in that?

{audio:0:41:49} Excluding membership fees.

{audio:0:41:50} You have 20% on the store inking up the gross margin products.

{audio:0:41:54} At Sam’s Club, membership was its own budget. You have your P&L and so on and membership was its own budget.

{audio:0:42:03} BJ’s is 16%, so a lower product margin than Sam's. How do you compare BJ’s and Sam’s?