BJ’s Wholesale Club Holdings (BJ-NYSE, $71.51) Scoops Costco on the Hottest Retail Development Site in North Carolina.

The 100 + acre Southern Pines retail development is preparing to add BJs Wholesale Club to the list of prospective tenants.

https://www.bizjournals.com/triangle/news/2023/09/13/bjs-wholesale-starbucks-morganton-park-south.html

When completed, BJ’s Wholesale will report more locations in North Carolina than does Costco.

Of perhaps greater competitive importance are two announcements, one indicated to the media; another largely unnoticed by analysts of the membership warehouse club sector.

The proposed next Tennessee location of BJ’s has been commented on by the press.

https://www.supermarketnews.com/retail-financial/bj-s-wholesale-club-will-open-new-club-tennessee

A decision by BJ’s to enter an entirely new state, Kentucky, has not been picked up on by mainstream investment news. That new location is a former Sears retail store in Louisville. Costco has long considered Kentucky to be a well protected market with two locations in Louisville. The population of the 27th largest US metropolitan region is capable of serving at least 2X the number of Costco warehouses, yet management have chosen to direct their expansion capital elsewhere, opting to develop a warehouse in Scarborough, Maine, serving a market area of about 80,000 persons. An unwillingness to capture 100% of potential customers in multiple retail markets leaves very large openings; potentially the majority of many regions already assumed to be completely locked may be fully open to the retail format of a new entrant. This is the business risk that comes from the deliberate strategy of only building new locations when an existing store is pushed beyond its point of capacity.

https://www.bizjournals.com/louisville/news/2023/08/24/bjs-wholesale-club-to-take-over-former-sears.html

The growth in Tennessee by BJ’s Wholesale, from zero stores to three, within an 18 month timeframe, represents more than an accomplishment in planning and execution.

It confirms a belief by management that the state was highly underserved by the incumbent membership warehouse operator.

On the heels of the very successful Tennessee rollout and the momentum underway in North Carolina, one might look to BJ’s for an acceleration of proposed new locations in those states as well as official announcements on expansion in Kentucky, and likely into West Virginia, in 2024. West Virginia is another state lacking any Costco warehouse and the northern tip of the state is largely a bedroom commute to Washington, DC; a push by any membership warehouse company to set up a cluster of locations seems, by definition, to be a no-brainer.

Serviced by the Burris Logistics cold storage warehouses in the region, BJ’s looks to be evolving their cluster model of market penetration in new states, rather than taking a “ build 1 test store and let’s evaluate” model practiced by competitors. Expansion through tighter clustering of locations benefits a warehouse specializing in perishables and fresh produce far better than it would serve a warehouse focused upon hard and soft lines. Membership warehouses prioritizing fresh foods and staples have a far better chance of earning the weekly shop from consumers than do the more hard and soft line focused warehouses. Brand recognition improves with clusters of stores and a territory can be better insulated against external competition from the competing membership warehouses by saturating a market. I consider it a smart expansion plan by a nimble company.

The persistence of food inflation and the whopping wage hikes being paid out that provide the means to afford groceries, suggests a fresh foods and perishables oriented membership warehouse may have a considerably longer runway than the investment industry as a whole was modeling. A torrid pace of expansion by BJ’s Wholesale Club in Tennessee indicates great initial success by the brand. There appears to be a pent up demand for membership warehouse clubs in regions and states inadequately stored by the #1 name in the space. There also appears to be increasing consumer acceptance of a membership warehouse alternative that isn’t overcrowded to the point of parking lot rage incidents.

Finally, EBITDA margins at BJ’s, being closer to double that of the largest competitor, provide plenty of capital firepower to further accelerate expansion as management chooses. Hundreds of former Sears locations exist with the appropriate square footage, essentially empty, quite suitable for a BJs Wholesale format. The executive of BJ’s Wholesale, with the strategy of accelerating retail store openings in North Carolina and the proposed location in Kentucky, seem quite willing to take on the #1 warehouse store in the world right at their front door.