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Sam’s Club CEO: The 63 Stores We Closed Are Fueling E-Commerce Growth

September 24, 2018, 9:42 PM UTC

Earlier this year, Sam’s Club announced it was closing 63 of its U.S. stores in a move that raised questions about the prospects of the warehouse club operator.

The news was a shock. Closing 10% of stores had been more typical of struggling chains like J.C. Penney or Macy’s. Sam’s Club, by contrast, had experienced middling performance for the past several years.

But Sam’s Club, a unit of Walmart Inc (WMT), was not even close to keeping pace with sales growth at competitor Costco Wholesale (COST), whose more affluent clientele and better locations gave it a big edge.

“It was clear that a certain number of the clubs were not going to be successful by focusing in, and some of those clubs were a financial drain,” said CEO John Furner on Monday at Fortune Brainstorm Reinvent conference in Chicago.

So Furner, who became CEO of Sam’s Club in early 2017, decided those locations would be more useful as hubs that could speed up the retailer’s e-commerce delivery.

For years, Sam’s Club mistakenly believed that roughly half its sales came from small businesses and the other half from everyday consumers. But in reality, it turned out that personal purchases accounted to closer to 85% of sales—since some of its business shoppers were actually buying items for home use. And, after a deep dive into its real estate portfolio, Sam’s Club determined there were some big disconnects between its current locations and where its customers live.

As a result, Furner determined that having more of the cavernous clubs serve as distribution facilities was a better use of the space.

The new hubs have enabled Sam’s Club to offer free two-day shipping to its “Plus” premium members, something Furner says is key in driving home the benefit of Sam’s membership. “It enabled some of the investments we’ve been able to make this year,” he said.

In its most recent quarter, Sam’s Club’s comparable sales rose 6.5%, a much higher rate of growth than had become the norm at the retailer in the not too distant past. Business by that measure has now risen for 10 quarters, with the pace accelerating. But given the competition from (AMZN) and Costco, Furner says Sam’s cannot afford to sit on its laurels.

“It always helps to have a bit of paranoia,” he quipped at Brainstorm Reinvent.