Wal-Mart may be the world's biggest retailer, but its Sam's Club stores haven't claimed star billing--until now.

In recent memory there were many Club retailers in the US, but the players have now come down to three: Costco, Sam's Club and BJ's.

Costco may be the largest US warehouse-club store chain, but its fourth-quarter sales rose only 11 percent, lower than analysts previously forecast. And the buzz is that the dip was due to competition from Sam's Club.

According to BusinessWeek online, "A revived Sam's is taking a toll on Costco and its investors. On August 5, Issaquah, Washington-based Costco told investors in a sales update that price competition from Sam's is hurting margins, as are rising overheads. It warned that earnings per share for the quarter ending August 31 would be closer to $0.46 to $0.48, down from its original projection of $0.54 to $0.56. In the two days following the lowered guidance, investors pushed Costco stock down by 21 percent, to $29. The stock now trades at around $31. (Editor's note: As of press time, Costco stock was still trading at around $31 per share)

So how has Sam's come up from its previous position as a quiet division of Wal-Mart to become a major player in the Club wars? More importantly, how does all this impact wine sales?

How is Sam's Club Different From Wal-Mart?

Within the Wal-Mart empire--begun in 1962--there are independently-run divisions:

• Wal-Mart "Super Centers"
• Wal-Mart Neighborhood Markets (smaller groceries primarily in the Southeast)
• Wal-Mart International (including ASDA in the UK)
• Wal-Mart dot.com
• Sam's Club

Sam's Club formed in 1983 and now boasts an amazing 47 million members. That translates to one out of every six people in the US as being a Sam's Club member. Now that's a captive audience.

The Club concept is a wholesale members-only operation providing goods and services at a price as close to cost as possible. To be a member you pay a fee, and that gives you access.

Costco focuses on families. Sam's Club focuses more on small business owners:

The needs of a small business itself;
The personal needs of the small business owner;
The needs of non-business owners, the rest of the membership

Wine clicks in on points two and three.

But the differences in appearance are slim. If you were blindfolded and taken to a warehouse club, you could not tell the difference between a Sam's Club and Costco. Sure, in Costco you see Kirkland signs and packaging. But the space looks the same--from the arrangement of wine stacks to the ladies handing out food samples, even the layout of the whole store.

Who Captains the Wine Ship?

A new management team has been brought in to run the Sam's division over the last year or so, people with a different vision than before. One person in particular will give focus and diversity to the wine program, Master of Wine Bob Paulinski.

Costco may be perceived now as having a more high-end image, but that could be changing. In the last few years, goods in selected areas have moved more upscale at Sam's--jewelry, electronics, fresh foods. Paulinski said, "We need a treasure hunt, a wow thing, a surprise, in most departments. That's where wine comes in."

Paulinski was hired by Sam's Club late last spring to run its wine program, and relocated this summer from Traverse City, Michigan to Wal-Mart land, Bentonville, Arkansas.

Paulinski owned a successful retail wine store in Michigan for 22 years. He sold it in 2002, the same year he became a Master of Wine. He sent his resume to only one retail company (Wal-Mart), albeit the largest, and was quickly hired, making him the only Master of Wine working for a major US retailer.

Sam's Club Wine Program Today

Sam's Club boasts 500-plus clubs; 387 of them sell wine. The top-selling Clubs (for wine) are Dallas, Texas; Hilton Head, South Carolina; Freehold, New Jersey; and Plano, Texas.

Merchandizing is based "on everyday low prices," said Paulinski. "No gimmicks, no coupons, no rebates, essentially no ads." And wine sales growth is healthy. He continued, "I cannot give you exact wine sales data, but growth has been in the 12 percent to 14 percent range over the past few years."

The average Club sees about 120 to 170 wine SKUs. (The clubs in total have about 5,000 SKUs.) The mix is about 65 percent red and 35 percent white, but can vary by location and season.

Like Costco, wine is split into two groups; the pallet wines, generally for bottles under $10 for a 750 ml size; and the laydown bins for wines priced over $10, with the bin end "caps" reserved for wines over $30. There is a price progression, with the lowest priced wines in the bottom bins; higher-priced wines in the higher bins. The wines are grouped by type, as well.

The selection of wines at the Clubs will soon begin to change under Paulinski's leadership. The number of SKUs will remain largely the same (although some stores have expanded selection due to increased demand). However, there will be more diversity in the mix. California will remain important, but Paulinski will seek out more specialty sources. He said there will be a prime focus on Spain, Italy and the Pacific Northwest, and a much bigger representation of Southern Hemisphere wines.

There will also be more wines selected by Paulinski on a national level, with input from the regional buyers. Different from Costco's approach, the wine buying will be more centralized with Paulinski.

The core list for each Club will be about one-third of the selection: so-called "hard brands" to cover the basics. But Paulinski wants diversity--more variety--established, but not from huge production sources. He said he wants the bin wines to be "more like the selection in specialty shops and the better restaurants." He is seeking more one-time buys, unique and hard-to-find wines, with value across a range of price points. "I want to play up the treasure hunt and instill a sense of urgency," he said. The remainder of the selections will be up to the regional buyers to keep the focus a "Club of the community" that reflects and meets local needs.

Recently, in a Seattle-area Sam's Club, the selection was very strong, including: Jolivet Pouilly-Fume, D'Arenberg Dead Arm Shiraz, Grange, Chateau St. Jean Cinques Cepages, 1999 Chateau Pichon Baron Pauillac, 1999 Lynch Bages Pauillac, Far Niente red and white, Rosemount Balmoral and 1988 Dom Perignon.

Paulinski's Goals

The wine industry is becoming more mainstream. Paulinski thinks "that the perceived barriers can actually be opportunities." He explained:

• The fragmented market doesn't have to hurt--the consumer is hungry for more detailed information on choices. Wine buying is a voyage of discovery.

• Members know they are getting great prices.

• There is a need to exceed the members' expectation of value and diversity.

• Sam's Club goal is to show value across all price points, from a $7 Navarra wine to a $97 California boutique bottle.

• There is a need to play up treasure hunt mentality.

Paulinski said, "I want Sam's to be the number one wine retailer in the US."

He continued, "My job is to take the current growth and success to the next level. But I'd like to think of my role as part of the evolution of the wine industry. I am not looking to revolutionize Sam's programs. Even though we are showing sound growth, I am convinced we are just skimming the surface."

Besides more diversity in the wine choices, Paulinski also wants to make the experience more personal, to give the consumer more confidence. Towards that end, he is developing Point of Sale (POS), descriptor tags, providing basic bulleted information on aroma, flavor and food pairings, including pairings specifically linked to foods sold in the Club. He also will write for the Sam's Club publication. And he plans an e-newsletter to target core customers. That way Paulinski can offer wines of limited availability to those he knows covet them.

Paulinski wants to experiment a bit, too. He is looking at bilingual POS tags, and is considering offering an online wine selection that would extend Club offerings, not duplicate what is on the floor.

Competition with Costco

"Competition keeps you motivated and focused," claimed Pauliski. "No one has an exclusive on the market demographics; we all have varying demographics.

"It is a tired, outdated cliché to say that Sam's does not have the right membership base for upscale wine sales. Just look at the solid sales growth of fresh produce, top-quality meats, specialty cheeses and fresh pasta. This is in perfect synergy for growing wine sales. Other luxury goods like jewelry have performed well, too."

Paulinski is not focusing on Costco as his competitor. He said, "This is a false path. Our focus is entirely on the needs of our current membership and growing it. Even with our continued successes, there is always an attitude that we can and will do better. We are never stagnant."

For Costco, the competition looks like it is heating up. But competition is healthy and ultimately good for everyone, especially the consumer. wbm