Despite discounts, travel not an easy sell for warehouse clubs


BJ VACATIONWarehouse clubs like Costco, Sam’s Club and BJ’s Wholesale Club have come to dominate sales of some consumer products: Costco, for example, is now among the biggest wine retailers in the U.S.

But despite aggressive discounting and, in some cases, rebating, they have failed to grab much market share in retail travel sales.

It turns out that travel is not a natural for warehouse clubs. In fact, Sam’s Club stopped selling travel last year, explaining that it did not enhance “the core club shopping experience.”

Moreover, interviews with individual agents, suppliers and agency marketing groups revealed that traditional travel agents can easily leverage their personal relationships with clients and their deep knowledge of preferred suppliers to beat the Godzilla discounters on value and even on price.

To be sure, the warehouse discounters sell a significant amount of travel — volume, after all, is key to their business model. A Costco executive, for example, said recently that the warehouse discounter would definitely be on Travel Weekly’s Power List should it choose to be included (it chooses not to). Clearly they are huge players.

One tour operator lumps them in with online travel agencies (OTAs), arguing that Costco Travel is, for all intents and purposes, an online agency and online tour operator.

BJ’s Travel is a white-label program operated by World Travel Holdings, which white labels about 25 travel websites for the likes of Best Buy, hotels and many airlines.

The warehouse clubs’ raison d’etre is discounting, and, said an executive with one retail travel group who asked not to be identified, “Every consumer is out there looking for the best price.”

Costco has built a $100 billion empire on that assumption.

According to Stephen Hoch, a marketing professor at the Wharton School of the University of Pennsylvania, warehouse stores compete two ways: by keeping their margins tight and by charging membership fees.

For example, he said, Costco’s margin is about 11%, well below that of more traditional retailers, whose margins might range as high as 25% to 40%, depending on their business model.

The other key to the warehouse giants’ business model is membership fees. The clubs focus on delivering the lowest price in order to attract consumers who pay annual membership fees. In a self-sustaining cycle, the fees, in turn, enable warehouse clubs to afford slim margins.

Proof that the cyclical model works is clearly evident in the warehouse clubs’ bottom lines, Hoch said.

“Costco’s net profit is slightly less than [what it charges in] membership fees,” Hoch said. “That has been the case ever since they were around. Their total profit is dependent on how many people are members.”

Hoch said all three major warehouse clubs have the same model, but Costco has so far executed it most successfully.

Warehouse customers are an attractive demographic because even though they want value, they’re not afraid to spend money. The clubs’ parking lots are filled with BMWs as well as Hondas, some of whose owners are buying diapers while others are buying flat-screen TVs or expensive wines. They willingly pay their membership fees, knowing that whatever they buy, it will be tough, if not impossible, to find it anywhere else at a lower price.

But travel is different from flat-screen TVs, wine and groceries. For one thing, it’s tougher to price shop, because changing just a few variables can significantly alter the price.
On the other hand, any agent, big or small, can tap into group pricing for a cruise, add a few amenities or services and have a unique product. Or they can get unique, value-priced products through a host, consortium or franchise.

Beyond that, said Jeff Sherota, senior vice president of house brands for World Travel Holdings, a flawed vacation isn’t something you can return to the store, the way you can a flat-screen TV.

As a consumer, Sherota, whose brands include CruisesOnly,, and several others, said he loves to shop at Costco.

“I drink the Costco Kool-Aid,” he said.

But as travel retailers, he asserted, warehouse clubs are “not a good story,” because they market on price only, thereby commoditizing the products. And for many consumers, he said, travel is too complex a product to sell on price.

It works for some shoppers, who know what they want, do their research and call or go online to book because they know all the answers, Sherota said. But if it’s complicated and involves something as invaluable as a family’s once-a-year vacation, “you want to speak to a professional who can help you make the right decision, as opposed to just giving you the lowest price off the shelf.”

One such professional is home-based agent Lesley Egbert, owner of LiveLongitude in Helena, Mont., and an independent affiliate of Avoya Travel. She said she regularly beats Costco, not by selling travel cheaper than the warehouse discounter, but because consumers come to her for advice.

Egbert said she turns to VAX VacationAccess, Funjet and, in particular, Gogo Worldwide Vacations because she finds its PriceBeat program easy to use.

Besides, Egbert said, she can sometimes even beat Costco’s price simply because she knows her suppliers and what they have to offer. She recalled securing a room upgrade at a Ritz-Carlton in Hawaii for one client who was considering Costco, and saving a high school buddy $1,000 on the honeymoon she and her fiancee almost bought from Costco.

Jim Tedesco, marketing director at Gogo, said Costco is becoming a bigger player in travel, but he sees the personalized service that agents offer as the great differentiator.

Not every travel supplier sells through warehouse clubs. Carnival Cruise Lines, for example, does not sell through Costco, although BJ’s Travel sells Carnival.

Interviews with executives at both Costco and BJ’s Travel suggested that the bulk of their sales are for more mass-market types of vacations.

Costco, for example, sells some very high-end vacations, such as Adventures by Disney and Beautiful Places, a villa rental company that is a preferred supplier for Virtuoso. And it offers high-end products such as Ritz-Carlton, Crystal Cruises, Seabourn and other luxury products. But most high-end products typically are not sold directly from its online platform. Instead, they are offered as pass-throughs. Customers call the suppliers directly on a toll-free number unique to Costco.

A Costco Travel executive who asked not to be identified said that the warehouse giant primarily books vacation packages, cruises and rental cars.

It’s also interesting to note that the company keeps its travel business very low profile. Travel is hardly mentioned in its annual report, and two analysts interviewed for this report who cover Costco were barely aware it even has a travel business.

As for travel products, the Costco executive said, “We’re not going to have something around too long if it’s not selling.”

Jorge Boone, senior vice president of private-label partnerships for World Travel Holdings, said that BJ’s Travel sells everything from a $500 Carnival Cruise to high-end cruises and vacations and even African safaris. But those sorts of sales, he said, are the exception rather than the rule.

In addition to discounts, warehouse clubs offer members incentives for buying travel. Book a cruise starting at $179 with BJ’s and get free onboard spending of up $300 and a gift card valued at up to $200. Costco offers a cash card of up to $2,000 for booking an Adventures by Disney vacation.

As of now, consumers can only use those cash cards to purchase Costco merchandise, but the company said that ultimately, they will be able to use the incentives to purchase travel.

Such rebates and incentives are an anathema to many in the industry, and for that reason, some suppliers choose not to sell through warehouse stores. For example, that was the reason cited by Sandals earlier this year when it described its decision to no longer sell its resort products through Costco.

The warehouse stores, on the other hand, rationalize these sometimes sizeable incentives by pointing out that they are membership clubs and that their members’ fees are buying these sorts of discounts.

Of course, suppliers can choose to walk out on a questionable distribution channel, as Sandals did, or simply let their distributors do business as they choose. The latter is Disney’s philosophy.

“We do not comment on our clients’ business practices,” said a Disney spokesman. “We allow our distribution partners to set their own pricing models.”

Follow Kate Rice on Twitter @krtravelweekly.


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