Shopping Activity at Warehouse Club Stores and Its Competitive and Network-Density Implications

Production and Operations Management, Forthcoming

46 Pages Posted: 16 Jun 2020

See all articles by Stanley Frederick W. T. Lim

Stanley Frederick W. T. Lim

Michigan State University – The Eli Broad College of Business

Elliot Rabinovich

Arizona State University - W.P. Carey School of Business

Sungho Park

Arizona State University (ASU) - W.P. Carey School of Business

Minha Hwang

McKinsey & Co. Inc.

Date Written: May 13, 2020

Abstract

Warehouse club (WC) retailers have typically expanded to new markets using stand-alone stores, rather than pursuing dense store networks as other (non-WC) retailers have in the past. While this strategy generates operating efficiencies, it also imposes high travel costs on households to shop, which calls into question WC stores’ resilience to spatial competition from stores operating other formats. We examine this phenomenon by using data on households’ shopping activity across markets served by Costco Wholesale stores. Specifically, we evaluate these stores’ resilience to spatial competition by estimating the share of households’ expenditures relative to travel costs to shop at the stores and comparing this estimate with that for non-WC stores. Controlling for households’ travel costs across Costco and non-WC stores, we find that households’ share of expenditures at Costco stores exceeds the share at non-WC stores by 61%. This suggests that Costco stores have an advantage over non-WC stores when serving market areas with sparse store networks. Nevertheless, we also find that this advantage diminishes with the distance between Costco stores and households and that there is a finite distance beyond which this advantage disappears. We show that this distance (approximately 21 miles) is an important reference point for the evaluation of spatial competition between Costco stores and other stores and the examination of demand saturation at Costco stores.

Keywords: retail operations, warehouse club, industry study, quasi-experimental design, econometrics

JEL Classification: L81, C01, D12

Suggested Citation

Lim, Stanley and Rabinovich, Elliot and Park, Sungho and Hwang, Minha, Shopping Activity at Warehouse Club Stores and Its Competitive and Network-Density Implications (May 13, 2020). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3600167

Stanley Lim (Contact Author)

Michigan State University – The Eli Broad College of Business

Business College Complex 632 Bogue St
East Lansing, MI 48824
United States

Elliot Rabinovich

Arizona State University - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Sungho Park

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Marketing Department
PO Box 874106
Tempe, AZ 85287-4106
United States

Minha Hwang

McKinsey & Co. Inc. ( email )

Konigsallee 60C
Chicago, IL Quebec 60603
United States

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