Successfully selling merchandise to warehouse clubs requires more than offering merchandise at the lowest possible cost and in the biggest package. There are many factors to a successful warehouse club program and the complexity of the buyers' needs increases every day. Since Warehouse Club Focus was first published in July, 1997, we have covered the basics of selling products to the warehouse club industry.

In furtherance of our mission to not only help you sell your first product to the clubs, but to also help you grow your existing club business, we recently spoke with a number of industry insiders and subscribers about their opinions, strategies and success stories in the warehouse club industry, including Glenn Llopis of the consulting firm, Power Insights ( www.powerinsights.com, 714-540-8620,) and Suzann Desmond, a sales and marketing executive for a non-food company. This article discusses nine concepts highlighted by the industry experts which can help your company sell products or increase sales at BJ's, Costco and SAM'S Club.

Outsource Product Development

WCF recently participated in a conference call with a large, international branded manufacturer and Myron Y asiejko of New Jersey based RTL Services, a contract packaging company ( www.riverterminal.com/logistics.htm, 609-499-8388). RTL has worked with small, medium and large sized manufacturers supplying the warehouse club industry since 1996 and provides supply chain management services, including warehousing, packaging and transportation to all manufacturers. RTL services both food and non-food manufacturers.

One of the warehouse clubs approached this particular manufacturer with an interest in purchasing one of its items. However, in terms of packaging, the product was not ready for the clubs. The manufacturer faced a common problem among larger sized companies, as there were internal hurdle rates (sales, margin, return on investment goals) that had to be analyzed before the company would commit to allocating capital for packaging materials and product development. This analysis would normally take six to nine months to complete. That time frame was too long for the warehouse clubs and the manufacturer was faced with losing an opportunity to develop an item that their club buyer requested.

The manufacturer approached RTL, which designed a sample package for the buyer's approval, and committed to production, packaging and delivery within six weeks. RTL believes in limiting costs associated with product development and packaging as much as possible. RTL engineered the product, display case and pallet design to reduce packaging costs. RTL disclosed all the packaging component costs to the penny to the manufacturer. The item was approved by the manufacturer and the warehouse club buyer and sold very well. The interesting aspect of this example is that the large sized company was handcuffed by its own size and meeting the "speed to market" needs of the warehouse clubs was not possible. Large companies should realize that there are options for meeting the needs of club buyers such as using RTL Services to design, package and ship a newly designed item to the clubs in a short period of time.

Product Launches in Warehouse Clubs

In the past, larger sized manufacturers rarely launched new products into the market through the club channel first. For large manufacturers with internal rates of return and other financial issues to consider when developing new products, it was easier to introduce products in retailers with which their organization, operations and philosophies were more closely aligned. Manufacturers were geared to what Wal-Mart, Kmart and other large discount and grocery stores needed from a new item in terms of pricing, packaging, coupons, advertising and distribution.

Developing those new item concepts for the clubs was vastly different from what the majority of the other retailers needed and it was easier for manufacturers to ignore the club channel initially. Once the item was successful, then manufacturers would devote the time and capital to developing a club package and program. We spoke with one subscriber, however, who indicated that this philosophy is slowly changing, especially among larger sized manufacturers. This subscriber recounted how one manufacturer used the clubs to introduce a new item by more closely aligning its promotional dollars with the needs of club buyers. Most medium and large sized manufacturers have two types of promotional dollars:

Trade Dollars - These are funds which are normally internally generated from the sales of an item. Trade dollars can be used for item allowances, rebates or special packaging.

Marketing Funds - These are marketing funds which are divided into two categories: brand equity and consumer. Marketing funds can be used to increase the product's brand equity, which means that the company spends money to increase consumer recognition of the item. Building brand equity takes time, does not affect short term sales and is normally done by advertising on television and radio, in warehouse club magazines, such as The Costco Connection or BJ's Journal, or promoting the item through product demonstrations inside the club locations. Marketing funds are also used to persuade consumers to purchase the item. These "call to action" concepts include coupons, end caps and product demonstrations and can affect sales in the short term.

The manufacturer approached the warehouse club before the product was introduced into the market and presented its club program and the promotional budget and discussed the percentage of sales the warehouse club would potentially generate from the item. By understanding all facets of the product introduction, the buyer could make informed suggestions on how to best introduce the product into the club. Since the club was going to potentially generate "X" percentage of overall sales of the item, the club buyer wanted the same percentage of promotional dollars. The manufacturer agreed and the promotional dollars were divided between trade dollars and marketing funds.

On the marketing side, the manufacturer advertised in the club magazine to build brand equity and "demoed" and "end capped" the product to generate immediate sales. On the trade dollar side, the club and manufacturer designed a special package and pallet configuration that more effectively promoted and displayed the item. The item introduction proved to be a great success. The manufacturer made a conscious decision ahead of time to involve the club in all facets of the product's introduction, which helped to ensure that the product received the best possible promotion, packaging and placement inside the club location.

Product Awareness

WCF spoke with a large branded manufacturer regarding a problem that it has encountered with some of its items inside warehouse club locations. This particular manufacturer includes consumer focus groups as part of its ongoing research and development efforts. One of the questions asked at different focus groups concerned one item that was not selling well. Consumers were asked whey they were not purchasing the particular item and the response was that they did not know the clubs were stocking that item. Consumers indicated that they would purchase it if they noticed the item or knew where it was stocked. The manufacturer knew that product demonstrations and end caps were two ways to increase product awareness inside the clubs, but it came up with another unique way to make manufacturers aware of its slow selling item. The manufacturer affixed rebates directly on the package of a highly successful item that offered a discount on the slow selling item. This alerted consumers to the fact that somewhere in the club, the slow selling item was being stocked.

Plant Tours

One manufacturer told WCF that it could not emphasize enough the importance of taking club buyers on a plant tour. Showing buyers your offices and manufacturing operations allows them to they take ownership of your plant, process, internal workings and strategic goals because they experience these things first hand. One of the great advantages of taking buyers on a plant tour is that you get their individual attention for a few hours. Manufacturers must make the tour interesting and be prepared to bring critical issues to the table so the buyers do not think that the tour was just about the manufacturer. Focus on the issues that are important to the club buyer and demonstrate that your company is working on his behalf and is trying to meet his needs.

One subscriber suggested that manufacturers should not offer any free merchandise or paraphernalia as it may make the buyer uncomfortable when he has to refuse the samples. Also, if the tour will be during lunch, offer a low key lunch of sandwiches and cold drinks. The clubs are constantly conscious of cost reduction and taking the buyer out to a fancy restaurant may give him the wrong impression of your company.

Club Buyers Exclusivity

WCF spoke to a few manufacturers who indicated that one of the more difficult aspects of dealing with the clubs currently is their need to have different packages for an item stocked by all three warehouse club operators. The clubs want to differentiate their own operation from their club and retail competitors by designing a product's package that is targeted to meet the needs of its own memb ers. For most manufacturers, this means stocking up to three different packages of the same item, which in turn means three different SKUs to track. Logistically, this can be a major problem, but for manufacturers who understand and prepare for this situation, there are tremendous opportunities to take business from their competitors. One option is to use supply chain management companies like RTL Services which can not only design three unique packages for the same item for each different club, but can produce, inventory, track and ship that item for the manufacturer.

Focus Groups (Suzann Desmond)

Manufacturers are constantly searching for data and market information on changing trends and consumer preferences in the club marketplace. This information helps manufacturers not only to understand what products to bring to market, b ut more importantly how to enhance existing product with value addition features and benefits that can help to increase club sales. Although there is market information to be purchased on the Internet, we determined several years ago that in order to satisfy the needs of our club buyers, we would increase our credibility if we had actual consumer feedback in the form of qualitative and quantitative data, as well as video responses. Some of the data that we like to obtain from focus groups is how a member perceives that product and the value that the clubs are offering, as well as what prompts them to purchase a product. The focus group information helps us convince buyers of certain product, packaging and program components. By allowing buyers to see the results of focus groups comprised of their members, the points that we make carry that much more weight.

BJ's Half Pallets

A typical BJ's location stocks 6,500 items compared to a typical Costco or SAM'S Club location which stocks 4,000 to 4,300 items. In addition, a typical BJ's location is 15,000 to 35,000 square feet smaller than a typical Costco or SAM'S location. To be able to fit the extra 2,200 to 2,500 item in a smaller footprint, BJ's utilizes shelves for merchandising above pallet displays. However, since pallets can be up to five feet high, stacking product on a shelf above a full pallet is not practical as many members will not be able to reach the merchandise. In many categories, BJ's will either reduce the size of the pallet itself or have a manufacturer do it at their production facility.

As can be seen in the picture on the top of page five, the cereal pallets on the floor are only three levels high which is below the normal delivered height. This enables BJ's to put a shelf above the items and stack additional SKUs which members can access easily. In this particular case, BJ's merchandises the same item on the floor and on the shelf, but in most cases, BJ's will have another SKU on the shelf. The product on the shelf, in many cases is merchandised and inventoried on a pallet, but the pallet is hidden behind a green, shelf like piece of trim. Manufacturers should be prepared for BJ's to ask for different pallet configurations than are requested by Costco and SAM'S.

Cross Manufacturer Package

One subscriber with whom we spoke provided a very unique concept which he believes will emerge as a club sales strategy in the near future. In an effort to provide unique products and packages to club buyers, manufacturers of complementary products will partner to create a unique item. For example, a pasta manufacturer will partner with a pasta sauce manufacturer to create a combination package. This type of SKU can be created to focus on both consumer and business members. Companies that provide contract packaging development and fulfillment services, like RTL Services and California based Diversified Re-Packaging (310-855-1946), can create custom packages for these types of items. In addition to combining products from different companies in the same package, Suzann Desmond says that manufacturers can offer coupons, rebates or free complementary items. By cross promoting complementary products, manufacturers can enhance sales without a large capital investment or large resource allocation.

Product Management (Glenn Llopis, Power Insights)

Product management with the warehouse clubs begins with SKU rationalization and the identification of new product strategies. SKU rationalization is defined as the identification of what products can generate the required turns to exceed minimum club performance thresholds. Due to variations in demographic, regional and membership profiles among the different club locations, product managers must work diligently with the marketing, logistics, research and development and sales teams to identify products that the organization can profitably create for club introduction.

There have been many instances in which the club buyer and manufacturer created what they perceived to be a successful SKU, but it did not meet the minimum performance thresholds. Power Insights Consulting identified the following five factors for this performance shortfall and these are key points to consider when developing new items or trying to enhance existing items.

Package - A product may not create the most optimal perception of value to entice trial and repeat sales. If a 62 ounce jar is sold for $8.99 (14.5 cents per ounce), the price per ounce may be very attractive, but the price point may be too high to induce an initial purchase, especially among consumers. Perhaps a package of two 26 ounce bottles at $7.99 (15.4 cents per ounce) is the best alternative. Even though the price per ounce is higher, the twin pack will be more attractive to retail members and may still be an attractive item for foodservice members. Understanding that there are always alternatives with regard to packaging is important, especially when selling to Costco, as a product may have different packages in Costco's different regions. Therefore, research the market carefully before introduction. If you have been a victim of poor sales performance, reevaluate the product's package. The clubs are opened-minded to re-test an item using a different package.

Introduction Period - If you know that your product does not sell well during a particular season, encourage the buyer to wait and rotate the product during a more optimal seasonal cycle. It is best to have a track record that reflects success and buyers appreciate objective opinions. The off-season period is a good time for your management team to evaluate product performance and find ways to enhance the product's features and benefits. It is important to be proactive and display not only an understanding of your product, but of the goals and needs of the club buyer.

Product Description - Many times, new products are so different that their descriptions do not truly represent the product. While it is important to be innovative, it is smart to keep your product description simple. The club member wants to purchase something new; however, he must be able to identify the value of what he is purchasing. Identifying a key feature on the package that can describe the product's use is critical. In addition, the package should include a photo of how the product should be used. This sounds simple, but most manufacturers ignore the basics.

Nutritional Facts - Club members are nutrition information sensitive. They read everything, especially with new products. While the product may taste great, nutritional factors may not generate repeat purchases. If you are not certain, participate in product demonstrations. Members will be forthright with their comments regarding nutritional information. Work diligently with dieticians, research and development and quality control teams to evaluate the nutritional content of your item. In fact, conduct member focus groups to understand what ingredients members want and do not want in a product.

Product Damage and Appearance - How the product is presented in the warehouse clubs is critical for stimulating purchases. When manufacturing products in mass quantities, the percentage for product defects (especially with a new item) increases. Due to differences in packaging compared to traditional retail and foodservice items, manufacturers encounter unforeseen problems with product damages and appearance. For example, popped lids, ripped bags, labels that fall off, black marks on plastic and improperly cut corrugated boxes are all possible. All of these examples have occurred at one point with the warehouse clubs and members take notice. It is recommended that the proper due diligence be performed prior to the first shipment. Whether you are a large or small company, do not take any chances. Your buyers walk the club locations and will inform you of any problems they detect. Be proactive and avoid any problems. They can be easily solved, it just takes patience and stron g communication with your warehouse club management team.