How Walmart’s $90 billion Sam’s Club is aiming to take down Costco

Sam’s Club is riding the dual waves of Walmart’s (WMT) rise as budget-conscious consumers flock to wholesale retailers.

Led by CEO Chris Nicholas, who started in September 2023, the wholesale club founded in 1983 by Walmart founder Sam Walton has been a beneficiary of inflation-weary shoppers.

In its most recent fiscal quarter, same-store sales, excluding fuel, jumped 7%, compared to a 3.8% increase in the same time period a year ago. Through the nine months ended Oct. 31, Sam’s Club has hauled in $67.2 billion in sales and $1.8 billion in operating profits.

Walmart’s third largest business segment behind its namesake and international division is on track to post close to $90 billion in sales this year, according to analyst estimates.

“We are the essence of the Walmart culture,” Nicholas said. “We’ve spent the last year really getting after this really exciting growth agenda.”

Experts contend that one key aspect that differentiates Sam’s Club from rivals like Costco (COST) and BJ’s (BJ) is its investment in technology.

“Costco is clearly the market share leader in the club space, … we think Sam’s Club is a formidable competitor,” CFRA analyst Arun Sundaram told Yahoo Finance, “One area where Sam’s Club is better than Costco currently is related to their technology, and that’s because it’s backed by Walmart, which is very technology savvy, unlike Costco.”

Sam’s Club’s Scan and Go technology, now rolled out in most locations, allows members to skip the checkout line. Shoppers scan items’ barcodes on the app as they go along, pay in-app, and a member checks a few items to ensure they match the customer’s order upon walking out. The Just Go exit arches do that job for the employees, using computer vision to quickly scan items as shoppers exit.

Costco posted e-commerce growth of 13.2%, compared to Sam’s Club 26% gain in the latest quarter.

“You need to be technology savvy to win younger generations,” Sundaram said.

Nicholas has been in the retail industry for more than two decades. He started pricing goods at a grocery store in London as a 14-year-old.

“The first day I was there, the store manager said to me, ‘Listen, Chris, you’ve got to take this cage of goods and hide it because my regional manager is coming around this afternoon, and he doesn’t know I bought all of this inventory,'” Nicholas recalled. “So I tell that story to my managers. I’m like, ‘I’m watching you. Please don’t do that.'”

In 1983, Walton opened the first Sam’s Club in Midwest City, Okla. His intention was to help other small businesses access products and services. It was also shortly after its competitor Costco (COST), then known as Price Club, made its debut in the 1970s in San Diego.

As of November, there are 599 Sam’s Club locations in the US. Costco and BJ’s Wholesale operate 625 and 266 stores in the US, respectively.

Sam’s Club also has 50 locations open in China, under the leadership of Walmart International CEO Kath McLay, with plans to open more in the country, Walmart CEO Doug McMillon told Yahoo Finance executive editor Brian Sozzi.

Here, Nicholas shares his thoughts with Yahoo Finance on Sam’s Club’s growth potential, what’s working, and how it’s investing in tech to compete.

The interview has been edited for length and clarity.

SAMs Club CEO Chris Nicholas stands inside the Bentonville club on Tuesday, September 12, 2023.Photo by Beth Hall · Beth Hall

Yahoo Finance: September marked one year since you became Sam’s Club CEO. How would you describe your year?

Chris Nicholas: Sam’s Club is this little $90 billion business hidden in the corner of Walmart. You get to see the essence of our culture, and you get to do things as a pioneer, as an innovator, that you can only do because you’re the little $90 billion company in the corner.

[Our] growth agenda is focused on getting digital engagement with our members. … Probably the thing that stands out most there is the digital engagement in the clubs and e-commerce, … Scan and Go, and those Just Go arches. The third thing is great items, great value. [Private label] Members Mark would be the pinnacle of that.

Sam’s Club had quite the year. Same-store sales in the recent fiscal quarter were up 7%, excluding fuel. What were the main drivers of growth?

In the club business, the best health check you can have is how many members you’ve got and are they renewing.

We’re really happy that we’ve got all-time highs in membership and in renewal rates. … [What] helped us grow even faster is this idea of experiences. … There’s been this idea … that you can’t have great experiences because it costs money.

We really disagree with that. We’ve been investing really hard, whether it’s leveraging the Walmart platforms or e-commerce and supply chain to building these new technologies that people are engaging with in unprecedented ways.

In e-commerce, specifically, what is driving growth there?

I’ve been in the e-commerce, retail business for more than 20-odd years now. It’s not a new thing.

Here’s the thing, people want you to give them what they want. They want more. They want better items. They want more quality. They want lower prices. And they want you to serve them however they want to be served. Our job is to give them all of that, so if you have the choice, … you can come into the club and shop, but if we can pick it for you, and you just pick it up, or we can deliver those items from the club to your home, or if you want an extended assortment, we can send them from the fulfillment center, but you still get Sam’s Club prices.

Sam’s Club would be 20% to 25% cheaper than retail. You can get e-commerce delivered to your home, or you can pick it up, without the friction of shopping, at club prices. That’s just an incredible value proposition, and we think is unmatchable.

Are people still mostly going to Sam’s Club for groceries?

The tradition of the club model would be: You come with a flatbed or a big car, and you fill everything up, and you do it once a month. That’s not the way that people shop us. Now, people are much more prone to come to us for the top-up shop, for the lobster mac and cheese and the bottle of Russian River Pinot or whatever that you want and hopefully pick up some GM [general merchandise] on the way.

We think that we are not just a grocer, but we do enjoy that frequency of visit with our amazing fresh business and food businesses. On top of that frequency driver of grocery, … you get the treasure hunt of general merchandise items, whether that’s technology or wares or seasonal items or apparel. … We want to be a GM business, a services business, and a grocer.

Sam’s Club is a membership model — who is its audience?

At the heart of it, the Sam’s Club member is [the] better-off-than-average family. … We see great growth in our business members, we see exceptional growth with small, young families that are just coming through and starting their journey. Whilst we might tether on the wealthier shopper with family, we want to serve everybody.

How is Sam’s Club competing with rivals? Of course, Costco is such a prevalent player in the space.

If you take a look at the whole of the club channel, that’s less than 7% of total retail in the US. … Whilst you can get better always by looking at your competitors and looking at what they’re doing better than you, your main focus better be what your members are asking for.

Trust is more important in the club model than anywhere, and the reason is because I’m asking you to pay me up front for the promise of value in the future.

We spend a lot of time working on “How do you build an ecosystem that just takes all of the decision making away from you?” Because you just know you get the right value from Sam’s Club, and then you go tell your friends, and then they come join.

How is Sam’s Club investing in technology?

Think about the back end of your technology and the member-facing [part].

The back end is really difficult to invest in, [it] takes a long time, and it’s really great that Walmart has already built a lot of those platforms.

What we’re doing is leveraging on the back end of the supply chain technology … automation, the e-commerce technology — that’s all of the stuff that they do in the fulfillment centers and the clubs but also the app that members use and our associates use. All of that takes a lot of time and a lot of effort. I’m really grateful that we’re part of Walmart, so we get to leverage that.

That means the Sam’s Club engineers are able to focus on creating disruptive, pioneering, delightful experiences for our members that we wouldn’t be able to do if we didn’t have that backbone, that back end.

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[At] CES last January, … we announced that we were going to roll out these computer vision arches … if you use Scan and Go, you can walk out [of the store] and there’s zero friction.

This year, we’ve used technology that’s computer vision … to take 100 million tasks out of our associates hands in clubs. We don’t have fewer associates. They just don’t have to do the mundane things they used to do: the paperwork, the clipboards, the how do you find the inventory? How do you solve problems for members?

Are you thinking about artificial intelligence in that capacity?

AI is everywhere. We’ve been working on AI for a long time. … The Scan and Go is a great example of AI. We’re using AI to help with search. We use AI to help with recommendations on the app, … recommendations if you may have forgotten something. … We’re using AI to look at how you transacted with us before.

AI is becoming rooted in everything that we’re doing, but we’re doing it in a way that’s human, and I think that’s a really important nuance for us.

Sam's Club new cashier-less checkout at a store in Bentonville, Arkansas. Customers scan items as they put them in their basket and the technology seen here detects that, allowing you to walk out of the store with ease. — Sam’s Club new cashier-less checkout at a store in Bentonville, Arkansas. Customers scan items as they put them in their basket and the technology seen here detects that, allowing you to walk out of the store with ease. Source: Yahoo Finance executive editor Brian Sozzi. · Yahoo Finance executive editor Brian Sozzi

How are you thinking about potential issues ahead — like tariffs — under the new administration?

We’ve got a limited assortment in Sam’s Club, so that gives a lot of agility and flexibility, and our exposure to imports is insignificant.

How about the reacceleration of inflation? What are you seeing there, and do you expect any change in 2025?

My merchandise team [fights] every single day to reduce prices for our members. … That is what the club model does. This is the moment for the Sam’s Club business model.

The Sam’s model and the club model, in general, shouldn’t make any money on what we sell, so the lower you can run your operation in terms of cost, the lower you bring your prices down and you make your profit from membership. It’s a really cool model because what it means is that you get better items and sell them cheaper, you get more engagement, and those members then renew with you, and they tell their friends, and they come and join your club. This is why the club model is such a great place right now, and that’s not just in the US. … We see that globally.

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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