Thursday, May 21, 2009

The Wholesale Club Trap

For the first time in a decade, I actually went to the local wholesale club. It was an interesting experience, but I am not sure they are such a bargain as they make themselves out to be.

To begin with, unless you can take advantage of a free trial membership (look for coupons), you have to pay $45 to join. One former manager told me once that this membership fee makes up a large part of their profit base, as hard as it is to believe.

But unless you do a lot of shopping at such a club, the membership fee can be pretty pricey. Spending $45 to buy $300 of groceries is not a very good bargain.

In addition to the membership fees, there are three main problems with such wholesale clubs. First, they encourage overconsumption. Second, they encourage impulse shopping. Third, often the prices can be higher than at conventional stores, unless you shop carefully.

Overconsumption:

By buying things in bulk, there is a tendency to consume them in bulk as well. This is human nature and a phenomenon that any economist will recognize. Scarcity is a fundamental aspect of economics, and your consumption of a commodity often depends upon how scarce you perceive a commodity to be.

Some simple, everyday examples are illustrative. You are in the bathroom and realize that there are only a few sheets of toilet paper are left on the roll. Suddenly, faced with scarcity, you conserve that commodity, using less than normal. On the other hand, if there are 20 rolls under the sink, chances are, you won't monitor consumption very much.

If there is a case of beer in the fridge, you are more likely to have that second or third beer. But if there are only a few left, you may be more inclined to save them for later. It is a very basic human reaction to the concept of scarcity.

By buying in bulk, your brain is encouraged to consume in bulk. So any savings by bulk buying may be somewhat or totally negated by increased consumption.

There is also the ancillary issue of waste which is related to bulk buying. Large quantities of product are difficult and awkward to store. Many a modern home has a garage full of commodity items bought in bulk and poorly stored. If you forget where you put something, it is like not owning it at all. And if a product is water damaged or otherwise wasted, there is no savings.

In a typical scenario, the consumer goes to the buyers club and comes home with an enormous case of toilet paper or paper towels. In addition to encouraging overconsumption of such items, if these paper products are not properly stored, they can go to waste. Oftentimes, those 50 rolls of toilet paper, if left under the sink, will get wet and mouldy long before they are consumed.

If you buy in bulk, make sure you have a good place to store in bulk, and can ration your use of such bulk products. Otherwise, any savings are negated.


Impulse Shopping:

In the television cartoon, The Simpsons, Marge visits the local shopping club, where she remarks, famously, "Say, that's a great price on 14 pounds of nutmeg!".

The quote is funny and realistic, as oftentimes the bargains at shopping clubs are for enormous quantities of product (in this case, more nutmeg than one can consume in a lifetime) that seem like such a deal, that they are impulse bought.

It is tempting to "get a good deal" on something, and shopping clubs thrive on this concept. They count on you being greedy (See, "They're BAITING you!") and wanting to get a "bargain", even if it means buying things you really didn't need.

Compounding this problem is that many shopping clubs do not carry consistent merchandise from week to week. They often get large lots of product at good prices, but cannot guarantee to always have that product at that price. I've been to a shopping club before where I've seen a product and thought "I should get that someday" only to return the next time and find the product no longer available - ever.

So shoppers are conditioned to buy and buy now, rather than reflect and think about what they really need or want.

Crazy pricing schemes also feed into this. During our recent visit to the shopping club, we were given a book of "coupons" for products. While most coupons are printed by manufacturers to promote products and gain new customers, it appeared to me that this coupon book was little more than a road map to shopping. Not surprisingly, the products promoted in the coupon book were extensively merchandised and displayed. The trip through the store took on the air of a treasure hunt, as each shopper went from section to section looking for the promoted items.

In many instances, I regret to report, we ended up buying things (e.g., Potato Chips) that we had not intended to buy, simply because the promotional price seemed "too good to pass up."

Score: Shoppers Club 1, Bob 0.


Prices Can Be Higher:

This leads neatly into the next point. We noted that a lot of the promoted items had higher prices that other items, even with coupon discounts. Not only that, some items were higher in price that competing items at the local grocery store.

Take paper towels, for example. The promoted item, with coupon, was nearly TWICE as much than another national brand (which was superior in quality as well). The promoted item was higher in price than at Wal-Mart or even Wegmans.

(Stingy Tip: When I was growing up, my parents fell into the habit of using paper towels to dry their hands in the kitchen, and we did likewise. Hand towels, while perhaps not quite as sanitary, serve equally as well, can be laundered over and over again, and have a lower impact on the environment. Save paper towels for other chores and use less. Hand towels worked for Grandma, they'll work for you as well.)

But there can be bargains. For example, the local BJ's had Mobil-1 motor oil at a reasonable price - not much less than competing outlets. However, Shell Full Synthetic was several dollars cheaper per case, came with an instant $3 rebate, and also was cross-promoted with a free bottle of Blue Coral Car Wash ($10 value) if you bought the case. Here is a clear example of a manufacturer trying to promote its products with a price promotion. While Shell has a stellar reputation in the aviation field (AeroShell) they have yet to make a dent in Mobil's lucrative synthetic oil business.

The shopping clubs count on you not checking prices - making the blithe assumption that everything at the shopping club is a "deal" merely because it is at the shopping club. So you end up spending as much if not more than at a local grocery.

Compounding this problem is that many products sold at the shopping club are in sizes or versions not offered elsewhere. So comparing prices becomes difficult, sometimes even by the ounce. Laundry Soap is a great example. Due to different levels of concentration, the price per ounce often is least indicative of value. Rather, one needs to compare the number of loads each container will wash in order to compare prices. If you can't do basic long division in your head, bring a calculator.

And if you don't have a handle on local prices for goods, it is nearly impossible to determine whether you are getting a bargain or not. Perhaps someone will someday invent an iPhone app or a handheld device which will scan groceries and tell you the best prices from the five leading markets. That would be handy. But in the meantime, you need to have in your head what the average prices are for milk, bread, cheese, meats, paper products, soaps, and the like, in order to understand whether the shopping club products are really a bargain or just a mammoth-sized ripoff.


So Are Shopping Clubs a Rip-Off or Not?

The verdict is mixed and depends on how you use them.

If you make a shopping list (always an essential thing to do in any shopping excursion) and stick to that list, chances are, you'll buy fewer impulse items.

Know competing prices for similar goods in other stores and compare prices before you buy.

Do the math and compare price per ounce or serving or load or use, before you buy. Sometimes the promoted sale brand is actually higher in price than another brand.

Check out the promoted items (there is usually a display by the Service Desk at BJ's for example), make sure they really are a bargain, and not just a come-on.

If you buy in bulk, make sure you properly store the products you buy, and resist the temptation to increase consumption accordingly.

On the whole, I would say that there is probably not too much of an advantage of shopping at a shopping club. If the shopping club is not conveniently located and you have to drive 20 miles out of your way to go there, chances are, the cost of fuel and car wear will negate most savings. And if you shop there sporadically, the cost of membership will negate the remainder of the savings.

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