Warehouse Club Study Leaves False Impressions about Costco, Sam's, BJ's

Last Updated Jul 14, 2009 10:29 AM EDT

Many media outlets have picked up a report by two professors, Michael Norton of the Harvard Business School and Leonard Lee, of the Columbia Business School, contending that warehouse clubs aren't necessarily a bargain for shoppers because they encourage them to purchase more than they intended to buy, however, what the stories don't say is that the report concedes shopping at Costco and its brethren can save money.

The Feesâ€"Savings Link, or Purchasing 50 Pounds of Pasta report posits that membership dues that warehouse clubs charge "can lead consumers to infer a fees--savings link, spurring them to increase their spending independent of the actual savings afforded by such clubs." The report is based on field studies and shopping models that look at warehouse club operations. While fees fascinate the profs throughout the report, one of the field studies reveals something interesting about bargain retailers:

Indeed, when we visited both a Costco store -- which charges a fee -- and a Wal-Mart store -- which does not -- in New England and recorded the prices of a selection of 20 common consumer products ranging from Lipton tea bags and Goldfish crackers to regular household products such as Duracell batteries and Tide laundry detergent, we discovered two things. First, the two stores generally did not offer the same sized products. Second, when we extrapolated prices to calculate the volume discount, Costco had an average price advantage of 9.5 percent per unit across these product categories compared to Wal-Mart. Thus discount stores like Costco do allow consumers to enjoy lower unit prices due to volume discounts compared to other regular stores that do not charge a fee.
So, while stories that cite the report may not have analyzed much past the opening abstract and final conclusion, the study contains some interesting information in its main body â€" more on that in the near future â€" including the underreported observation that warehouse clubs indeed can be a bargain for shoppers who consider what they are buying carefully and even for those who don't. Just because consumers visit other kinds of stores doesn't mean they aren't looking to be convinced to buy more than is on their shopping lists. Costco makes no bones about its treasure hunt product presentations strategies, and, in the end, from the conspicuous placement of ice cream at Wal-Mart to the strategic position of fashion accessories at Macy's to the "would you like fries with that" chorus that comes in response to fast-food restaurant orders, any business offering products to consumers will try to sell them a little more, whether or not it charges a membership fee. By looking at warehouse clubs in isolation, the reporting on the study doesn't take merchandising strategies of other retailers into consideration and creates the erroneous impression that the shopping experience provided by Costco, Sam's and BJ's is somehow more perilous than that at other stores.