By almost any business standard, the latest new merchandising strategy about to hit this area would seem a sure-fire recipe for disaster.
Its ingredients are conspicuous by their absence. They include:
*Little, if any, advertising.
*No credit cards.
*A limited assortment of merchandise, with less than one-quarter of the variety offered by typical discount stores and with no one item guaranteed to be available from one day to the next.
*No fancy fixtures or sales help.
*No delivery service, even for such large appliances as refrigerators and washing machines.
What's more, in some cases, customers must pay just to get in the store.
Yet mixed together, these ingredients have been cooked into one of the most successful formulas to hit the retailing industry in the last decade. The concept is called warehouse clubs or membership warehouses, and next month, it will be coming to the Washington-Baltimore area in full force, with four new warehouse clubs scheduled to open their doors.
Price Co., the Colorado-based originator of the concept, will unveil its warehouse in Glen Burnie, Md., in mid-November.
Meanwhile, Pace Membership Warehouse Inc., one of Price's many imitators, will open two warehouses later this week -- one in Landover and the other near Baltimore in Woodlawn. Another Pace warehouse is slated to open Nov. 15 in Laurel.
Their entry into this market comes four years after Makro Inc. quietly opened a warehouse in Largo, Md. The three companies all express interest in opening more stores in the area, with Pace setting a goal of eight branches in the Baltimore-Washington market by the end of 1987.
Although the concept's execution varies from company to company, the basic ingredients are the same. A wide assortment of goods -- everything from potato chips, imported cheese, toys, tires, televisions and office supplies to underwear and, at one club, mink coats -- are displayed in a warehouse-like setting. For the most part, that means there are no fancy chrome fixtures -- just concrete floors, cinderblock walls and steel shelves where goods are stacked to the ceiling.
Despite the assortment, there are only a limited number of items in each category: five or six coffee pots, for instance, instead of the 20 or more offered in department stores, discount houses and catalogue showrooms. The same principle applies to the food and health and beauty aids, which together account for about half of the warehouse clubs' sales.
"We don't offer five or six brands of the same product in five or six different sizes," explained Henry W. Haimsohn, Pace's chairman. "We only want to carry the most highly demanded product -- the number-one-selling laundry detergent in the most-popular-size configurations. And we buy only on deal. If the makers of Ivory dishwashing liquid offered 40 cents off per bottle, we will sell that as long as it represented the best price value. If next month Palmolive offers us a bargain which we can pass on to our customers, we'll carry Palmolive."
Makro, a subsidiary of a privately held Dutch company, operates a bit differently from Price, Pace and the others. Not only does it offer a greater depth of goods -- such as a dozen coffee pots and some designer women's apparel -- but it also has a slightly less spartan atmosphere, with carpeting, display racks for clothing and a sophisticated escalator ramp that permits customers to push their shopping carts anywhere in the two-story warehouse -- without fear that the cart will roll away.
Yet like its counterparts, Makro sells only to card-carrying members. At all the companies, eligibility is limited to business owners or buyers, who purchase goods for personal use or resale, and to group members, who either are employed by the federal, state or local governments or belong to participating credit unions. (While Makro used to accept only business customers, it is beginning slowly to branch out to credit-union members.) In some cases, there is no fee to join. In others, business members must pay a yearly fee -- from $15 to $25 -- before they can shop. Individual consumers also must pay a fee or add 5 percent to their bill at the cash register.
At first glance, the operating principles of these new warehouse clubs "look like a laundry list on how to go into business in a dumb way," said Alan Pennington, president of Pennington Associates, a New York retail-consulting firm. "But all it does is make money."
The reason is simple, according to Joe Ellis, an analyst with Goldman Sachs & Co. The warehouse setting creates "inherent efficiencies, . . . and these inherent efficiencies, when adhered to, are reflected in an absolute minimal gross margin resulting in prices that are hard to beat," Ellis said in a detailed report on the warehouse-club industry.
According to Pace's chairman Haimsohn, the gross margin, or markup, is the difference between what a retailer pays for a product and what it sells it for, and for a typical discount store is equal to about 30 percent of what the manufacturer charges for the product. Markups for grocery stores are close to 20 percent, while those for department stores are double that, he added. For the warehouse clubs, on the other hand, the gross margins range between 8 and 10 percent, Haimsohn said.
"You may not get everything you want -- but you will get a hell of a price," said Fred E. Wintzer Jr., an analyst with Alex. Brown & Sons. An Infant Industry
Since its inception in 1976 with a single Price Co. unit in San Diego, "the warehouse-club industry has developed into a major and rapidly growing segment of the retail/wholesale distribution sector," Ellis wrote.
More than seven other companies have entered the warehouse business, including such retailing giants as Zayre Corp. (which owns B. J.'s Wholesale Club) and Wal-Mart Stores Inc. (which operates Sam's Wholesale Club, named for the chain's chairman, Sam Walton).
Together, these retailers are hustling to stake out major metropolitan areas in an effort to be the first to offer the concept. In 1983, there were only 13 warehouse clubs nationwide. In 1984, that number more than tripled to 43. By the end of this year, analysts expect there to be more than 100.
"We see the warehouse-club industry as being in only the early to middle stages of its development, with enormous potential ahead for its major participants," Ellis predicted in his report.
"It will generate perhaps $4 billion in volume in 1985 and grow geometrically over the rest of the decade," perhaps reaching $10 billion in sales as early as 1987 or 1988. By 1990, analysts predict that warehouse clubs will be a $20 billion business.
"It is not a hard concept to copy, so imitators spring up quickly," said Wintzer of Alex. Brown. "You don't have to predict fashion or be a genius to cherry pick the best-selling items in other stores and offer them to your customers."
But the ease of setting up stores concerns Wintzer. "The thing that will do this industry in will be overstoring too many stores ," he said.
"No one will be able to do $1,000 per square foot, and that will edge prices up." Korvettes Concept Faltered
Analysts recall Korvettes, the discounter that started out as a membership-only store a generation ago. Beset by competition, Korvettes went out of business several years ago.
Yet for now, optimism about the industry prevails -- so much so that last summer, when Pace was only a year old, investors eagerly paid $15.50 a share for 3 million Pace shares to raise nearly $47 million in the company's first public stock offering.
"People believe this industry is real and here to stay," said Haimsohn, 38, who had been a vice president of the California do-it-yourself Handyman chain before creating Pace.
The stock, sold over the counter, now is selling for $13.25. Price Co. stock, also sold over the counter, is selling for $55.25.
Haimsohn said Pace needed the $47 million to help it carry out its ambitious expansion plans. "When the company was founded, we planned to open 10 warehouses in five years," he said. "The first one was more successful than we ever hoped, taking in $44 million in its first year. We had projected less than half of that. As a result, we determined we wanted to grow faster. By the second full year of operation, we will number 16.
"This is a major metropolitan area with approximately 7 million people," he added. "It represents a tremendous market for wholesale and retail sales."
The warehouse concept hasn't always been so successful, recalled Price Co. President Robert Price, who launched the idea with his father Sol nine years ago. "It didn't work at first," he said. "Almost everything we did, we did wrong. We almost didn't make it at all. When we started out, we wanted to sell only to wholesale customers."
For one thing, Price officials figured that small-business customers were likely to be most in need of the company's services. As wholesale distributors began focusing more and more of their attention on larger accounts, small-business executives -- the mom-and-pop grocery stores, the small restaurant owners, the gasoline-station operators -- were being passed by.
"These are the guys the traditional wholesalers don't care about -- they are forced to buy minimum orders and are charged exorbitant fees for service," Wintzer said.
Additionally, Price officials figured dealing with a more limited clientele could be more cost-efficient because it could save advertising fees and reduce the wear and tear on the stock and warehouse.
At the same time, business customers, buying merchandise by the case, could be expected to spend more per visit than individual consumers.
But, Price said, "much to our surprise, people weren't flocking to join. We were in trouble, but luckily . . . we did not run out of money. We went to group membership and stopped selling by case lots."
Business members still are important to Price. Although they represent only 25 percent of its total membership, they account for 60 percent of its sales.
Will the discounts offered by the warehouse clubs prompt area retailers to begin cutting their prices? Most financial analysts think not, noting that the clubs offer a limited amount of merchandise.
Besides, analysts said, by offering everything from groceries to hardware to clothes, the clubs pose no serious threat to any one segment of the retailing industry.
"They will not put any good, sound retailers out of business," said William R. Davidson, chairman of the retail consulting firm Management Horizons.
Still, local retailers are watching the warehouse clubs closely even as they remain convinced that traditional stores will continue to prosper because they offer a full line of goods.
"There will be room for both of us in the marketplace," said Sheldon W. Fantle, chairman of Peoples Drug Stores Inc. "A lot of people will continue to want the convenience of a smaller store -- to be able to drive up to the door, march in and get what you want and get out quickly."
Hechinger Co. President John Hechinger added: "We will rely on our category dominance and our power assortment. . . . The fact is, at the warehouse clubs, what you find today, you may not find tomorrow. And you may find a garden hose, but not the sprinkler at the end of the nozzle."
Nonetheless, Hechinger did not dismiss the new phenomenon lightly. "We will not let these new people get a headway in our business. . . . When they overlap us, we will meet them or beat them."