The Wholesale Club cracks the Midwest mystery - wholesale club retailer finds secret of success in the Middle West - company profile

The Wholesale Club Cracks the Midwest Mystery

INDIANAPOLIS -- After truning the corner of profitability in fiscal 1989, The Wholesale club announced plans to expand store count, introduce front-and back-end scanning and debut a new credit card for customers.

The profit, the 18-unit membership warehouse company's first black ink after seven years of growth, totaled $4.6 million on sales of $402.1 million. That compares to $48 million in sales from three warehourses in fiscal 1986, and translates to some 61 cents per share of preferred stock and 58 cents per share fully diluted. Last year, the company lost a little less than $1 million.

Same store sales rose 19 percent for the year and 24 percent for the fourth quarter, and membership renewals among business members ran at 83 percent.

"It took a long time to break the [Wholesale club] concept in the Midwest," said The Wholesale Club president and chief operating officer James E. Berk in an interview with DSN at company headquarters here.

"Unlike, for instance, the West Coast, the Midwest had a long distribution network history and ties of loyalty to suppliers that just doesn't exist in other areas of the country. It was difficult to explain our price structure [vs. discount stores, which can sometimes offer lower prices on a promotional basis] to our audience."

The firm will grow to 22 units by opening four new stores in the first half of 1989, the first of which will be in Appleton, Wis., on April 6. Stores in Youngstown, Ohio, Grand Rapids, Mich., and Duluth, Minn., will follow, with possibly two later in the year.

Introduced last month, The Wholesale Club's credit card, costs members $20 a year and The Wholesale Club nothing.

"We found a very progressive bank," Berk noted. "We can't afford even a hald a percent of slaes in fees, but the bank aready has tghe machinery in place to accept Visa and Master Card sales, so why not build some incremental business? The $20 covers the bank's expenses, and they'll get add-on business from the interest charges."

Becuase most wholesale customers are already creditworthy, risk for the bank is reduced, and everyone, theoretically, comes out ahead.

The Wholesale Club hopes to generate additional sales per transaction and more transactions. Customers (particularly small business operators) receive previously unavailable credit on consumable and perishable items like cigarettes, candy and food, and the bank makes at least a modes amount of incremental sales on very little investment.

The biggest gainer, according Berk, may be purchasing agents for municipal and non-profit organizations. As it stands now, they must either bring a check with them, or fill out a blank check for their buyers to use at the store. Neither is a pleasant prospect for agents. The affinity card enable purchasing agents to obtain a credit card in the corporate name, easing paperwork and provididng them with the net 30 terms that many wholesalers currently supply on durable goods.

This of course, will probably increase The Wholesale Club sales overall, and at the consumer level will probably Stimulate personal purchases of durable goods such as refreigerators. Few people walk around with $900 in cash in their pockets, Berk noted.

The interest rate on The Wholesale Club card past-due (25 days plus) accounts is 16 percent for businesses, 16.8 percent for personal customers, about 2 percent lower tahn average Visa rates.

"This will mark the fist time tha small businessmen have been able to get credit on a wide range of goods, including meat, produce, candy and soda," Berk said. "Most of those are sold for cash off the delivery truck."

Bar scanning, which was introduced to a pilot store in late February, will be introduced to all stores by Aug. 4, according to vice president, MIS, Ken Crawford. Crawford noted that the company covets the system more for its backend (receiving) capabilities tha its chekout features. "We're already pretty fast at checkout," he said.

Price Savers, the Salt Lake City, Utah-based warehouse club, was the first club to introduce scanning, primarily as a front-end technology. "We saw their system, and it gave us ideas about our operations," Crawford said.

The Wholesale Club's IBM system will differ from Price Savers' in that "their system is self-contained: ours is on-line, real-tim, so that we can receive constantly updated information on sales and inventory all day long," said Crawford.

The main value of the sysem will be in the eceiving department. "We'll be able to scan product as it comes in, then verify it aainst both the purchase order and the packing slip," Crawford said. "If there's a poblem, we can contact the buyer and he can contact the vendor, so a decision can be reached right away about any discrepancies."

Additionally, a locator code will be added to each pallet as it comes in the door. "The floor people will scan each skid's UPC code into the system to tell us where it's located," Crawford explained. "That way, we know what we have, where it is, and when it was put there." That will help te company's first-in, first-out sysem of selling goods.

At present, about 80 percent of Wholesale Club goods are pre-bar coded, with more coming on line all the time. "Vendors will like the system, because it wll mean they can get away rom pre-marking for all the clubs to one sku number," Crawford said. "It'll be useful as a negotiating tool to get better prices, because we'll be savng them time and effort."

System insallation is expected to cost some $70,000 per warehouse (about #1.5 million total), but Crawford said paybac (in avings to the company) will be achieved in less than a year.

Along with the hardware will come Telxon hand-held scanners for inventory and receiving control, and a mixture of slot scanners and hand-held models for checkout. "At the fron end, we'll see some speed ains, but not to a significant degree," Crawford noted. "A 15 percent gain would be good."

The real savings for members will be in instant price look-up. "This could mark the end of delays due to price look-up, freeing supervisory personnel for other duties." Crawford also foresees "slight" savings in the number of "callers" needed at any one tme and greater savings in shrinkage due to misrung sku numbers.

Also, the company will be more aware of product that isn't moving, and will notice immediately if product on the shelf has been priced incorrectly. "Warehouse clubs have very distinct needs" compared to traditional discount stores, Crawford said.

"We move faster and get in and out of products more often than do most retailers; we have to account for the cost of a product on a daly, not yearly, basis. This technology wll allow us to do that," he said.

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