Most people who join a warehouse club like Costco (NASDAQ:COST), Wal-Mart's (NYSE:WMT) Sam's Club, or BJ's do so because they intend to save money.
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Warehouse clubs offer a tantalizing proposition. Pay a yearly membership fee ($55 for Costco, $45 for Sam's, $50 for BJ's) and you get access to a warehouse full of discounted merchandise. All three chains sell everything from groceries and household items to drug store staples, clothes, and a whole lot more. Prices are kept down in part by offering limited selection, bulk sizes, less in-store help, and a no-frills shopping experience.
It's a formula that in theory leads to saving money. In reality it's more complicated than that.
Joining a warehouse club could save you money. Image source: author.
Are warehouse clubs cheaper?
In a broad sense, warehouse clubs mark their items up less than traditional grocery stores or retailers, Michael Clayman, editor/writer at Warehouse Club Focus and www.warehouseclubfocus.com [account required] told The Motley Fool in an email interview.
"Generally, club merchandise gross margins will range from an average of 12% to 14% with Costco and Sam's Club at the low end of the range and BJ's at the higher end of the range," he wrote. That compares to 25%-50% margins for traditional stores.
"Every year, we publish an item basket comparison between the three clubs, a Wal-Mart Supercenter, and a grocery store in the same market," he wrote. "The results have been consistent and show the dramatic savings a consumer receives by shopping at a club compared to the other two."
It's more than just price
In theory, a smart warehouse club shopper should be able to quickly recover their membership fee and begin saving money. The problem is that lower prices are not the only component in a money-saving equation. Paying less per item but throwing away half of what you bought, for example, does not count as saving money.
Billie Blair, an organizational psychologist who serves as CEO of Change Strategists, Inc., told The Motley Fool in an email that despite prices being lower she does not believe that in the long run warehouse clubs save shoppers money.
"Taken as a whole and over a span of years, the answer is that warehouse clubs almost never save money for the individual shopper," she wrote. That, Blair added, is due to "membership fees, wastage from overbuying (produce and such), the necessity to buy in quantity (canned goods that sit on shelves and have to be discarded) etc."
Benjamin Glaser, an editor for DealNews, a shopping comparison website, agrees with the idea that warehouse clubs can be a trap. He told The Motley Fool in an email that chains like Costco, Sam's Club, and BJ's "can save you money, but they can also trick you into spending more."
He noted that low-priced items are actually one of the bigger reasons members end up spending more than they would have had they not joined. "Great prices are why you walk in to buy milk, and walk out with a big-screen TV," he wrote.
"Also, it's important to remember that buying in bulk is generally not a great idea for perishable goods," Glaser added. "The average family of four wastes about $1,800 a year throwing away food, including groceries that spoil before you eat them."
Clayman agreed that consumers can overbuy when it comes to perishable items. He also said that part of how warehouse clubs are set up can also lead to poor choices by club members. "The in-and-out/treasure hunt philosophy coupled with the limited window these types of items are stocked does cause members to buy items on impulse simply because they know it may not be in stock the next time they shop at their particular club," he wrote.
So, do warehouse clubs save members money?
The answer to the headline question is that a warehouse membership should save members money because they generally offer lower prices. But actually saving money requires disciplined shopping. That means only buying what you will use, and what you would have purchased from another store.
Buying an item you don't need because it was marked down from $125 to $50 is not saving $75. It's spending $50. That's a lesson that, if taken to heart, should save all Costco, Sam's, and BJ's members money. That's doesn't seem to be the case for most people, however, so these money-saving memberships probably end up being a drain on people's finances.
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Daniel Kline has no position in any stocks mentioned. He can be tricked into buying stuff. The Motley Fool owns shares of and recommends Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.