Financial Resource Center

Money Management

Join the Warehouse Club

by Jennifer Garrett / September 26th, 2011

Warehouse retailers know how to woo and win consumers who think they are saving a bundle. Warehouse clubs have become experiences, destinations for afternoon outings as much as outlets for good prices on pickles or paper towels. Built on the promise of cutting out the middleman and passing savings along to the consumer, warehouse clubs have become mecca for cost-conscious shoppers. But are you really saving money? Take Sam's Club. The Walmart-based warehouse club offers the HP OfficeJet Pro 8500A multifunction wireless printer for $174.87. Best Buy and Office Depot both list it online for $299.99. The savings on the printer alone could cover any warehouse club annual basic membership fee ($50 for Costco, $40 for Sam's Club, and $50 for BJ's). However, the other side of that pinched penny—and there is another side—is that you might spend every nickel that you save on false bargains and impulse buys. "Warehouse stores are very smart places to shop, but people have to recognize the psychological landmines," says Golden Gate University's Kit Yarrow, a psychology professor specializing in consumer psychology and behavioral economics in San Francisco.

It was such a deal

First, clubs create an atmosphere that suggests everything is a bargain, says Michael Norton, associate professor at Harvard Business School in Cambridge, Mass. The cavernous warehouse with the unpacked pallets piled high, dearth of employees—save those offering the free samples—and Spartan interiors suggest a lean operation with tight margins and direct-from-the-manufacturer prices. "In general, you would think that a nicer store would make customers happier, [but] if the store is really beautifully designed, people make the inference that [the store] is spending a lot on overhead," Norton says, "and there's an even stronger inference that prices must be low when someplace like Costco is running a bare-bones operation."
Clubs create an atmosphere that suggests everything is a bargain.
Yet that is not always the case. Consider this: Costco lists the Canon EOS 60D DSLR for $1,299.99, while Amazon lists the same camera for $1,199.99. Costco's price includes a "bonus kit" with a gadget bag, mini HDMI cable, and 4GB Class 6 SDHC memory card; Amazon's doesn't. But you could piece together the gadget bag (around $35), cable (less than $10), and memory card (around $7) for less than the $100 price difference. And yet, a locally owned retailer, The Camera Company in Madison, Wis., offers the same camera (without the bonus kit) for $1,199.99. Plus you get to deal with a local business, which might make a difference if you want service before buying (you won't get much, if any, at warehouse clubs or online), or if you run into problems down the road. The lesson? It still pays to comparison shop. But don't trust your memory. Norton says shoppers almost never recall details as accurately as they think they do. Write down model numbers, features, and prices so that when you get to the store you're certain to compare apples to apples.

Track unit prices

For groceries and household products, compute unit sizes for accurate comparisons. Gary Foreman, publisher of consumer newsletter The Dollar Stretcher, Bradenton, Fla., advises shoppers to carry a price book. That's really just a small notebook where you record your most common purchases, the size, and the price so you can calculate the price per unit such as ounce or bar. Keep it in your car or purse, and then take it with you shopping to determine whether Dunkin Donuts French roast really costs less at Sam's Club than at other places where you shop.
Write down model numbers, features, and prices so you're certain to compare apples to apples.
"For most families, there are 12 or 15 items that control your grocery spending," Foreman says, agreeing with Norton that consumers tend to have faulty memories when it comes to pricing. "Track those 12 or 15 items, and when you see a good sale, stock up." The "Costco effect" is another pitfall. "It's where you go in to buy some lasagna and you come out with a flat-screen TV," says Richard George, professor and chair of the food marketing department at St. Joseph University in Philadelphia. All three of the main warehouse clubs tap in to this with the quantities-are-limited treasure-hunt approach that urges consumers to search for and seize fleeting deals. "Scarcity is an enormously powerful principle," Norton says. "It really makes us react very strongly out of fear that we might miss out." Consider Costco, which has 582 warehouses worldwide and is the third largest retailer in the United States. Costco notes in its annual report that the "treasure hunt" is part of its sales strategy. It appears to be working. Net sales in 2010 topped $76 billion. But you don't have to give in to impulse purchases. "The key is discipline," George notes. "Shop from a list."
You simply aren't saving money if you buy things you don't need or won't use.
It's by far the most popular piece of advice, and it keeps you from falling prey to tempting samples, designer jeans, and it-won't-be-here-next-time deals on LCD TVs. Remember, you simply aren't saving money if you buy things you don't need or won't use.

Stick to things you need and use

That, it turns out, is the other key. Warehouse club deals are only good deals if you need and use what you buy. Sure, Sam's Club's 44 ounces of peanut butter-filled pretzels for $6.68 is a good price. But do you really need 44 ounces? Maybe you do if you have a large family or are entertaining. But if you are buying them just to have on hand, don't expect to have them on hand for long. Research suggests that you'll devour all 44 ounces at about the same rate that you would have polished off a more reasonably sized package. "It's a general consumer principle," Yarrow says, "that the more people have, the more they consume." And if you're not going to feel good about consuming all those pretzels, it wasn't a good purchase even if it was a good price. Of course, the giant packages of lettuce probably won't inspire the same kind of bad habits. However, if you end up tossing half of it because it spoils, then it turned out to be a bad choice, too. The bottom line? Shop for produce and other perishables at warehouse clubs only if you have a large family, can split the purchase with someone, could freeze some of it (such as meat, cheese, or bread), or are entertaining, George says. Otherwise, limit your household purchases to cleaning supplies or paper and dry goods with a long shelf life. George notes that those are almost always great bargains, and most of us won't use up more toilet paper or laundry detergent just because we have it sitting around.
Facebook Post