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BJ's thrives in tough times

While other retailers struggle, consumers hit the wholesale club to stock up on necessities

By Jenn Abelson
Globe Staff / November 16, 2008
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NATICK - A few months ago, Ken Naumes began boycotting high prices at grocery stores and switched all of his shopping to BJ's Wholesale Club.

Now, he makes weekly trips to the Dedham store to feed his family of three, spending $200 on milk, meat, vegetables, along with prepared foods. Naumes, 52, is spending almost three times more at BJ's - but he's still saving about $40 a week overall by avoiding grocery stores.

"We can get everything we need for lower prices and it's more convenient," said Naumes, of Westwood, who dropped his membership to Costco last year. "Some of it is bulk, but it's smaller bulk than at Costco."

It's customers like Naumes that have helped BJ's Wholesale Club emerge as one of the rare bright spots in this abysmal retail environment. While many merchants are biting their nails, closing shops, and shedding jobs in the midst of one of the worst retail seasons in decades, BJ's Wholesale Club, with its discounted goods, is pretty giddy.

The 177-store chain saw sales soar 11.6 percent to $739 million in October, a stronger performance than its much bigger rivals Sam's Club and Costco. BJ's reported traffic increased 6 percent last month and the average ticket increased 1 percent, modest, but significant gains in this tough environment. Meanwhile, BJ's, which has no debt, is capitalizing on the woes of other chains and planning to accelerate its store openings, including taking over a shop near Scarsdale, N.Y., that was supposed to be occupied by struggling Home Depot.

"It's uncanny how much wholesale clubs have benefited," said Laura Sen, BJ's chief operating officer. "There's been an overall migration to value by consumers, and the current economic environment has just accelerated that."

In some ways, BJ's is outperforming its peers because of its increased emphasis on consumers, according to analysts. Costco and Sam's Club draw a larger base of business shoppers, while BJ's attracts more consumers who shop more often for everyday grocery needs.

But BJ's also had more room to grow than its competitors did.

Just two years ago, the company battled a seemingly endless series of problems with its sales, pharmacy business, and leadership. In 2006, BJ's, a distant third to Sam's and Costco, shuttered its pharmacy division and brought Herb Zarkin out of retirement to take the reins at the beleaguered discounter, a job he last held in the early 1990s.

His focus on efficiencies and more fresh foods has helped strengthen the retailer and prepare it to take advantage of the tough economic conditions that have shoppers flocking to its stores.

Since Zarkin's return, BJ's has made the back of the store a top priority. He cut prices on traffic-driving merchandise such as milk and butter, which were no longer competitive with larger warehouse rivals. The company shaved its store hours, operating from 9 a.m. to 9 p.m. instead of 8 a.m. to 10 p.m., and invested the savings from fewer operating hours into getting more profitable and better quality produce, fresh meats, and baked goods - the items that are attracting customers like Naumes - and making sure these more profitable offerings stay stocked.

Zarkin also brought back executives like Sen, who had worked with him during his first stint with the company, to help reform the Natick chain. BJ's slashed its unwieldy assortment of merchandise, narrowing its selection to the most profitable and best-selling items, and improved its brands, offering lines from Liz Claiborne and Kenneth Cole. In recent months, BJ's has added popular brands to its prepared food section, including Boston Market roasted garlic mashed potatoes, Panera Bread soups, and Legal Sea Foods chowder.

Meanwhile, Sen said the growing number of retail collapses has enabled BJ's to make strategic buys, most recently some OshKosh merchandise from the department store Mervyn's, which filed for bankruptcy protection last month.

Over the summer, BJ's received a big boost from rising gas prices that lured customers to its stores that offer gas at a lower cost than most gas stations, according to recent reports by Daniel Binder, a retail analyst with Jeffries & Co. This enticed members to stock up on merchandise after filling up on fuel. And as gas prices dropped in recent weeks, BJ's was able to widen the price gap with local competitors who were slow to respond and generate better-than-expected double-digit increases in gas sales in October, Binder said.

During these difficult economic times, consumers looking for bargains - but who don't have families of five or six to feed - are increasingly pooling their resources with friends or family to shop together at warehouse clubs, according to Wendy Liebmann of WSL Strategic Retail in New York. These are not only middle-income shoppers, but higher-income shoppers as well, Liebmann said.

"No need to have the entire 24-pack of paper towels or tissues, no need to have the whole crate of oranges or multipacks of household chemicals. Instead, they are combining their lists and dividing up the big shop into more affordable (but still great value) little shops," Liebmann wrote in a recent retail report.

Indeed, BJ's is looking to capitalize on this group, featuring in its holiday preview newsletter siblings and roommates who shop together and save on gas, time, and money. BJ's says new memberships are up, along with renewal rates, though the company declined to provide specifics.

Despite BJ's success, analysts remain concerned that lower gas prices will eventually slow traffic to BJ's and that rival warehouse clubs will step up the competition. Binder said it is likely that Costco could become more aggressive about lowering prices as consumers continue to slash spending.

BJ's knows the good times may not last forever. The company is preparing for a weak holiday season, with less inventory and tepid expectations. Sales for general merchandise, like televisions and jewelry, have declined in recent months. But company officials are hoping the expanded holiday food selection of tiramisu, imported cheeses, and high-end appetizers such as chicken satay will drive business and that other irresistible deals will force BJ's customers like Greg Sanborn to open his wallet a little more.

"I am much more conscious about my shopping," Sanborn said. "I don't run through the aisles and grab stuff I don't need. I get stuff strictly on my list."

Jenn Abelson can be reached at abelson@globe.com.

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