Sam's Club is winning over Gen Z shoppers with convenience, and that could spell trouble for Costco

• Sam's Club has grown its Gen Z membership by 68% in the past two years, CEO Chris Nicholas said.
• While the main attraction is low prices, the real difference for the club is its tech, he said.
• That could spell trouble for Costco, which lags far behind when it comes to digital innovation.

Long a mainstay for boomers and Gen X shoppers, warehouse clubs increasingly have a new set of fans: Gen Z.

"That generation believes it's cool to save money and we agree with them," Sam's Club CEO Chris Nicholas told CNBC last week.

Nicholas said the Walmart-owned company has grown its Gen Z membership by 68% in the past two years as younger shoppers discover the value of buying in bulk (and earn enough money to do so).

But while several warehouse competitors like Costco and BJ's also offer low prices, the real difference for Sam's Club is its tech, the CEO said.

In particular, Nicholas highlighted that a third of shoppers use the club's scan-and-go app and the high customer satisfaction ratings from the newfangled AI-powered gateways, which let them just roll out of the store without a person checking their receipt.

"That's not something typical of the club model, but it's something that we offer and it's something that's really resonating with our members," Nicholas told Jefferies analyst Corey Tarlow last week.

It will be quite a while before millennial and Gen Z shoppers supplant older generations when it comes to spending power, but Sam's Club's success with younger members could spell trouble for Costco.

The current king of wholesale famously lags behind Sam's Club when it comes to tech, in part because its unmatched physical retail operation has made digital innovation somewhat superfluous.

But times and trends change, and shoppers seem to be looking for something more than rock-bottom pricing alone.

"We want great items at great value, and we want to give them convenience," he added. "That's kind of like heresy in the club model, but we can do it."

Indeed, part of Costco's success with growing sales is a function of making it mildly inconvenient to shop there — putting discounted flatscreen TVs by the front entrance and the toilet paper and bottled water in the farthest back corner of the building — so that you end up buying a lot more than you planned for.

Costco's e-commerce operation is a whole other story, but suffice it to say that it's not the seamlessly integrated experience that Sam's Club is offering.

Nicholas said half of Sam's Club members use the company's digital channels, and that number is growing as customer satisfaction scores continue to climb: "It drives engagement, it drives renewal rates, it drives people to tell their friends, 'You've gotta come to Sam's Club and you've gotta sign up for a membership.'"