Wholesale clubs feel pinch from rising costs

While frugal shoppers flock to wholesale clubs to save money on food and gas, the same clubs face a tough time nudging prices up as fast as inflation."It's become very hard to manage prices," said Herb Zarkin, 69, the chairman and chief executive of BJ's Wholesale Club Inc. "But sooner or later every rational retailer will have to pass these higher costs on to consumers."Food prices are up 5 percent this year over last year and the U.S. Department of Agriculture expects them to jump another 6 percent in 2009. But clubs are having trouble passing more than 2- to 4-percent price increases on to customers.Some call it a food price war between supermarkets, discount giants and the clubs clinging to customers. But the resistance is starting to eat into profits at Wal-Mart's Sam's Club unit, Costco Wholesale Corp. and BJ's. Because of the pressure, BJ's and Costco's stocks took a hit.Costco shares dropped 12 percent after the company issued a decreased profit warning July 23. BJ's turn came when the Natick, Mass., chain of 170 clubs reported flat quarterly earnings and forecast more of the same for the rest of the year. BJ's shares are down despite a 5 percent spike in customer traffic and soaring comparable-store sales of 15.5 percent. More than half the robust sales increase was at the gas pumps. Higher gas prices required the clubs to further shrink low profit margins to be among the cheapest filling stations.In July, Sam's comparable-store sales rose 7.3 percent, but only 3.5 percent if you don't count gas. At Costco, comp sales were up 10 percent, only 6 percent excluding gas. That's still far better than all chain retailers, which had a modest 2.6 percent increase in July, according to the International Council of Shopping Centers.Warehouse clubs live on an 11- to 14-percent markup that pays for expenses, then try to muster profits from $40 to $100 annual membership fees. Supermarkets work on a 20- to 30-percent margin and rely on vendors to pay many expenses, so their prices are typically 30 percent higher."I think the consumer has reacted to higher commodities costs in a much bigger way than we have seen with gas prices," said Richard Galanti, chief financial officer of Costco.(Distributed by Scripps Howard News Service www.scrippsnews.com)