BJ’s Wholesale Clubs Competes Based on Sheer Supply Chain Efficiency

There has been much written about how ecommerce giants like Amazon are stealing market share from traditional retailers. But when it comes to the challenges that traditional brick-and-mortar stores face, supercenters and warehouse clubs are a bigger scourge than Amazon.

In a New York Time’s article – Never Mind the Internet. This is Killing Malls. – an analysis done by University of Chicago economists four years ago was cited. During a span of 14 years, Costco and Sam’s Club revenues greatly exceeded Amazon’s online retail revenues. “Amazon had the higher growth rate, but the bigger problem for most brick-and-mortar stores was other, larger brick-and-mortar stores.”

While Amazon gets well deserved plaudits for their supply chain innovation, companies like BJ’s Wholesale Clubs don’t get near enough credit for the extremely efficient supply chains they run.

BJ’s Wholesale Club is the leading warehouse club operator on the east coast of the United States. In their annual report – their 10-K – they claim they offer “25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors.” The annual report describes the methodology they used to document these significant savings.

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BJ’s Wholesale Club Stores Offer a No Frills Approach to Cost Savings

The BJ’s Supply Chain

The savings they offer their customers, come in large part, from a very efficient supply chain. BJ’s buys most of their inventory directly from manufacturers and routes the freight through cross-dock distribution centers (DCs). In short, the mostly do not unload trucks, store the inventory in a warehouse, and then must use labor to subsequently pick the goods.

These DCs receive large shipments from manufacturers and quickly ship these goods to individual stores. This process creates handling efficiencies and lowers inventory carrying costs. Further, a large majority of the shipments move by full truckload. Buying in truckload volumes generates procurements savings.

The 10-K adds that “merchandise selections are generally limited to items that are brand name leaders in their categories alongside an assortment of private label brands.” In other words, the number of stock keeping units (SKUs) they offer by product category is somewhat limited. BJ’s limits the items offered in each product line to fast selling styles, sizes and colors. The company carries 7,200 SKUs whereas supermarkets normally carry an average of 40,000 SKUs, and supercenters may stock 100,000 SKUs or more. Limiting the number of SKUs also reduces handling costs while increasing the volume of sales by SKU, which contributes to inventory turns and the ability to buy in truckload volumes.

The annual report adds that “because of their higher sales volumes and rapid inventory turnover, warehouse clubs generate cash from the sale of a large portion of their inventory before they are required to pay merchandise vendors. As a result, a greater percentage of the inventory is financed through vendor payment terms than by working capital.”

The handling savings extend into the stores themselves. Warehouse clubs like BJ’s store merchandise on the sales floor in cases, rather than putting individual units on the shelf. The company works with manufacturers to develop packaging and sizes that are best suited for selling through the warehouse club format. “By operating no-frills, self-service warehouse facilities, warehouse clubs have fixturing and operating costs substantially below those of traditional retailers.”

BJ’s Invests in Advanced Supply Chain Software

BJ’s is also investing in supply chain software to further improve their inventory and customer service efficiencies. In December of 2018, Blue Yonder (formerly JDA) put out a press release that mentioned BJ’s investments in a variety of advanced demand management applications. Further, in their annual report BJ’s noted that “our level of net sales could be adversely affected … (by an) inability to procure and stock sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales.” BJ’s has worked with Blue Yonder across demand planning, store replenishment and transportation management for more than 10 years.

In some ways the BJ’s supply chain model is the opposite of Amazon’s. Amazon offers huge numbers of SKUs, prioritizes service and speed of delivery, has high last mile and returns costs, and not surprisingly, low gross margins. Amazon Prime members tend to be wealthy. BJ’s attracts many self-service shoppers at the other end of the economic divide and use their efficient supply chain to drive higher margins.

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