BJ’s Wholesale Club, the 3rd largest wholesale club format in the United States, behind Costco and Sams’ Club (Walmart), has now declared an intention to cluster stores in the wide open market of Texas.
BJ’s differentiates itself from the two better known names with an emphasis upon obtaining the weekly grocery shop. The BJs SKU contains far more produce, meats and daily staples for households than does the SKU of Costco. BJ’s accepts manufacturers coupons, which may be stacked on top of store promotions and BJ’s does not lose hundreds of millions of dollars annually on the subsidizing of “loss leader” hot dogs and rotisserie chickens. The absence of a “money-thrown-out-the-door” subsidy provides BJ’s with incremental cash, cash put towards the opening of new, domestic, locations at a faster pace of growth than Costco.
Furthermore, BJ’s has a concentrated and focused growth approach, designed to reduce logistics expense, improve name recognition and capture market share immediately.
The Costco approach to store openings is glacial in pace; a store is announced, it takes an average of 5 years, as long as 7, to be built from declaration and the company deliberately under-stores any new region. The purpose of any new Costco store is to create a hype, a buzz, to make any individual store so packed that customers get angry with the line-ups, or shop in terror of having their vehicles dented in parking lots, from errant carts pushed by visually or physically impaired seniors. Costco markets the shop as an experiential treasure hunt. An increasing number of Costco customers simply describe it as frustrating. All that, for a $1.50 hot dog?
BJ’s, not in the business of losing money, does not carry permanent loss leaders, no “entitlements”.
Americans shopping at BJs are not paying additional markup to subsidize a money losing hot-dog, a money losing rotisserie chicken, profit reducing expansion into China, a solitary outpost in Iceland. So, the BJ’s shopper grocery basket is lower in price overall. Perhaps California Costco members are fine with supplying $1.50 hot dogs as daily meals for homeless drug addicts, paid for by higher prices in their personal shopping basket, but that policy doesn’t wash with most of the USA. At BJ’s you get what you pay for, your grocery basket doesn’t contain a hidden markup to subsidize another member, another societal class, another state, another country.
BJ’s operates a cluster store system; when they enter a market, they, in very short order, build out as many stores as are effectively required to best capture all available market share in that region. Recently, BJ’s has been noted to have scooped prime locations in fast growing markets in the Carolinas, right under the nose of Costco. BJ’s entered Tennessee and in a little longer than one year, opened multiple locations, with more to come, effectively capping the market share of Costco in that state.
The typical BJ’s “location announcement to grand opening” is about 24 months, often as little as 18 months.
Differing from Costco, BJ’s doesn’t nickel and dime cities for subsidies, leading to interminable delays in build-outs when politicians and local officials are changed via election. No, BJ’s decides to enter a market, secures real estate and opens stores.
The warehouse operator has now set their eyes on the biggest prize of all, Texas.
Multiple locations are determined to be in line for Dallas-Fort Worth. After that?
Unbeknownst to investors holding Costco, BJ’s has absolutely obliterated the share price return of the better known retailer over the last 5 years.
Shareholders of BJ’s have been rewarded with a share price increase, since the start of 2020, in the range of 5.8X their original investment. Costco shareholders have earned a 3.1X times return on their holding over that same timeframe.
The reason for the share return differential is blazingly simple.
1. BJ’s doesn’t lose hundreds of millions annually on permanent loss leaders, considered sacrosanct to Costco.
2. BJ’s does not rely on the remainder of their store network to subsidize California residents with periodically below cost gasoline and other entitlements. Each region of BJ’s is expected to earn what other regions earn.
3. BJ’s goes after the weekly grocery shop.
4. BJ’s expands far more quickly in the United States than does Costco. While only having a store footprint of 252 locations at present, BJ’s intends to open a total of 30 stores in the United States in the coming two years. That is about a 40% higher store count growth rate than is planned by Costco in the USA, and BJ’s is doing it with EBITDA generated by just 42% of the total number of USA locations as Costco.
5. BJ’s store opening criteria is universal. Most analysts presume Costco requires about 200,000 persons to justify building a new warehouse location; save in California, where, curiously, cities such as Elk Grove (population 17,000), Eureka (population 26,000) among many others, feature Costco warehouses. One might even postulate a number to be located in close proximity to the dachas of those highly placed within Costco corporate ranks. It seems, to me at least, that there are two sets of Costco policies operating at all times; one highly flexible for California, while a separate, exceptionally rigid, policy exists for the remainder of the United States.
6. BJ’s policy of clustering a series of new locations as quickly as possible satisfies the needs of the customers far better than the Costco policy, which is to understore in every market save California. BJ’s goal is to capture all possible market share, rapidly.
7. BJ’s does not engage in regular and periodic capital misadventures, such as the purchasing of container vessels to move their own freight, acquisition of chicken farms that hinder capital return, purchases of capital dilutive hot-dog factories or investment in multi-billion dollar, money losing logistics companies to deliver furniture. All the BJs EBITDA goes into front end retail, and distribution centers, to service retail warehouses.
8. BJ’s does not hoard billions in cash, earning minimal interest, for multiple years, money that could be better used towards store expansion, only then to pay out periodic one-time dividends to assuage shareholders. BJ’s takes every dollar earned and devotes it to new store expansion as quickly as locations may be found.
9. BJ’s seeks out the top talent in the executive divisions, logistics divisions, marketing and real estate procurement as may be found. As a merit based employer, they have no issue with external hires. Costco, in contrast, predominantly hires locally and promotes from within. This creates a hardening of the Costco mindset, for better, or for worse. There are never any changes in the way Costco does business, because to suggest improvement is deemed a critique of the status quo and removes one from consideration for ascension. The Costco chain of command is neither nimble, nor responsive, but bureaucratic. Like any other bureaucracy, promotions are primarily based upon tenure and DEI: individual merit is “OK”, just do not have too much.
10. BJ’s emphasizes perishables, less durables. This reduces the retail return risk by those who have learned how to game the merchandise offerings and seasonal lines of Costco, essentially “borrowing” an item for a period of time, only to return it for a full refund, post-season, one year, three years, five years or longer, well after the item has become obsolete or broken. The return policy at BJ’s for durables is reasonable, not absurd to the point that it is abused at the expense of other shoppers, who subsidize aberrant behaviors as part of the membership fee.
A better mousetrap by BJ’s earns a higher EBITDA margin, which goes towards further store expansion.
BJ’s is likely to make capital expenditures of about $2 billion US in the coming 24 months, almost all for warehouse expansion. A modest extrapolation of revenues, once ramped up to steady state business, suggests that 282-285 total warehouses in the United States are capable of total sales exceeding $27 billion annually, a 32% approximate growth rate in sales, once completed. At the higher EBITDA margins reported at BJ’s, as much as a 50% EBITDA increase could result, upon completion of the present capex plan, all else being equal.
Every additional new warehouse location diminishes overall profit margins until sufficient membership has been signed up to generate a profitable level of sales. Normally, the opening of too many new stores in any given year poses a drag on profit growth. The results posted at BJ’s indicates that membership growth at existing locations is such that the business model is capable of overcoming an acceleration of the new store EBITDA margin hit, even when faced with an absolutely high level of warehouse buildouts compared to peers.
The tight groupings of new locations in new markets, with rapid infill buildout in existing markets, is proving to be a major winner.
Membership count is soaring at BJ’s, with more than 7.5 million individual memberships reported, up from just 5 million a couple of years back. At the end of 2027, about 28% of the store count will be newer than 5 years of age. Warehouses are very high capital cost builds and take about 1/2 a decade to become seasoned performers, from a profit perspective. At current rates of membership signup, the additional warehouses should fuel, when coupled with seasoning of the newer stores, paid memberships likely to cross 10 million, at some point in early 2028.
A 6% annual forecast growth rate in the BJ’s store count, for the next 2 years, is extremely ambitious, when contrasted against Costco standards. But then, the bar is low; investors are comparing what seems to be a Politburo, California-centric style of management, against that of a modern retailer adopting best practices.
Nimble vs glacial.
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