Warehouse clubs have changed the landscape for the sales & marketing of specialty food products. As retail consumers and foodservice operators continue to spend more (and more frequently) at warehouse clubs, this expands merchandising opportunity for specialty foods. According to AC Nielsen, the dollar basket ring at Costco, Sam's Club and BJ's in '2000 averaged $82.97. This is in comparison to grocery retailers at $33.58. This comparison / contrast depicts how channel spending / purchasing behavior is changing and why the warehouse clubs cannot be ignored. In addition, it illustrates the "power of household income" amongst club shoppers, that in '2000, income of 70k+ represented 66% of household penetration.

What significance does this represent to the specialty food business? It represents an opportunity for specialty food companies to market products whose high-end positioning, premium quality and seasonal demand is appreciated, not ignored. Unlike traditional grocery retailers who have focused on private label development, SKU consolidation (through category management) and merger & acquisition activities to gain "purchasing power and short-term financial stability," the warehouse clubs focus on satisfying their members (consumers) long-term. The clubs continuously strive to satisfy their members through innovative products & pack-sizes, new products, seasonal offerings, exclusive merchandise & services at a value to stimulate purchase frequency and membership loyalty. In simple terms, warehouse clubs have led to the acceleration of channel fragmentation by redefining value for consumers by offering products & services that represent better quality and value versus traditional grocery retailers.

Retailers will be challenged to stimulate growth in specialty foods
As consumers shift their purchasing dollars away from the grocery retailer to warehouse clubs and other emerging alternative channels, it will become more difficult for traditional grocery retailers to stimulate the growth of specialty foods. How does this affect the overall sales of specialty foods? We will analyze the following two points: 1) why retailers must take corrective action to sustain (if any) consumer loyalty to specialty foods; and 2) why warehouse clubs can offer a distinct value for specialty foods versus traditional grocery retailers.

Retailers must take corrective action to sustain consumer loyalty to specialty foods
As grocery retail chains have assumed category management initiatives to consolidate category SKU's to reduce inventory and operating costs, this has changed how specialty foods are purchased, distributed, marketed and sold. Once a "warehouse-direct" item, the responsibility of specialty foods has been designated to "specialty distributors" who are contracted by grocery retail chains to purchase, distribute and merchandise products into designated "shelf-space allocations." While this arrangement has allowed grocery retailers to sell specialty foods at lower handling costs, the consumer has absorbed these costs through inflated retail shelf prices without any "real" added value. In fact, several grocery retailers have further complicated how specialty foods are managed by contracting more than one specialty distributor thus fragmenting specialty foods merchandising, product selection & choice. Finally, the arrangement with multiple specialty distributors further complicates matters as they too carry their own private label products (in addition to the retailers private label offerings). As a result, consumers are forced to purchase specialty foods that are private label / control brand dominant, are merchandised in multiple locations and are sold at prices that mainstream grocery shopper cannot afford. As one consumer put it, "I no longer shop for my specialty foods at (name of grocery retailer). I now shop at Bristol Farms because the products are easy to find, and I can chose the product and / or brand I want to purchase at affordable prices. Quality brands stimulate my specialty food purchases. I do not want to be forced to purchase my specialty foods under a private label / control brand whose quality I cannot trust."

This consumer shares what many in the specialty foods business believe -- that specialty foods require distinct purchasing and merchandising strategies that are specific to specialty food products that fulfill consumer culinary needs. Instead of approaching specialty foods as a "cost-savings vehicle for category management," grocery retailers should leverage its inherent upscale profile & niche characteristics. As a result, they should support merchandising strategies that compliments product usage and applications vis-à-vis promotional themes and events that truly captures the experience of specialty foods and "one-stop gourmet basket shopping." This is what many gourmet retailers have done successfully to optimize total basket sales and to communicate their image / positioning as a "culinary retailers." This success has led to the development of new channels that continue to emerge. One channel in particular is the warehouse clubs by offering the members with high quality products at a good value.

Warehouse clubs offer high quality and good value with a distinct advantageToday's consumer seeks high quality at a good value. This is what the warehouse clubs offer and they recognize this as their distinct advantage versus traditional grocery-retailers. Unfortunately for traditional grocery retailers, their operating infrastructure is focused on "financial-driven (ie. slotting) vs. consumer-driven (ie. consumption)" initiatives that limits their ability to maximize the features & benefits that are associated with specialty foods. Instead they are focused on selling high volume / frequently purchased goods at high margins to reduce high debt ratios. While traditional grocery retailers continue to manage through the "woes" of consolidation, the warehouse clubs have revolutionized how high quality products are merchandised and sold, and offer a profitable channel outlet for specialty foods.

Building a consumer-connection with quality is what has made the warehouse clubs successful. For example, today a consumer associates Costco with quality. In other words, Costco is the BRAND. Thus consumers have the confidence to know that when they shop at Costco they will find high quality at a good value. Warehouse clubs have associated themselves as a "quality-retailer." While quality is a clubs "trademark," one alternative channel retailer still views the clubs as "too commercial - with an appeal to the masses, not the gourmet consumer." This point of view stems from the original club strategies that sought to purchase commercial size products from national brands at lower than retail prices (ie. per pound / per ounce) in exchange for high volume purchases. While some reminisce of this original approach still exist, the warehouse clubs have matured to focus on quality regardless of brand. While national brands are still important, regional brands as well as "unknown brands that have become recognized brands" are now also important club vendors. Small / medium size companies have stopped investing in the "high-cost" of traditional grocery retailing in exchange for "partnership-building" where the merits of ones product quality, service and organizational capabilities become the equitable points of difference that lead to profitably sales activities. As one small / medium size club vendor put it; "the warehouse clubs have made our organization perform smarter and more efficiently. They have assisted us with product development and have enhanced our package design to sell more product."

While many view club buyers as "margin controllers," they are truly attempting to collaborate with companies to enhance product offerings for their membership. It is this type of attention to purchasing and selling product that offers specialty food companies tremendous opportunities for growth. As club buyers seek "specialty food products" they are primarily concerned with two variables: supply and cost. Because specialty foods (in many cases) service a niche consumer base, vendors have become accustomed to sustaining inventory requirements for traditional grocery retailers' consumer demand. The clubs do not want to find themselves dealing with an inventory management / service problem. As a result, they seek (though not required) vertically integrated companies where cost of goods, quality management and manufacturing is highly monitored and controlled.

For specialty food companies, the warehouse clubs offer a unique ability to test new product concepts, packaging strategies and holiday merchandising strategies - distinct strategies & tactics that specialty food companies are known to execute successfully. In addition, the warehouse clubs offer a membership profile and cross channel reach that allows to expand specialty foods product awareness. Finally, the clubs do not use a intermediary (specialty distributor) to service their gourmet food needs. As a result, warehouse clubs create incremental purchase impulse by "passing on" their purchasing power that results in a high percentage of vendor financed inventory to create savings for their members. Thus, the sales price for specialty foods can represent margins that are nearly 75% less than traditional grocery retailer margins for the same product.

The warehouse clubs offer a profitable channel options for specialty food companies. Warehouse clubs are equity builders, where product, quality and innovation is valued & promoted to expand consumption.

Power Insights Consulting is a Brea, CA based consultancy that specializes in warehouse club sales, marketing and organizational strategies for specialty food companies.