Wholesale club is one of the fastest expanding retailer formats. Given its key features such as limited assortment and no promotion policy, the current paper provides a theory on why the wholesale clubs charge their members fixed annual fees. In a competitive setting with supermarkets, the proposed model demonstrates that the membership fee is the optimal reaction of wholesale clubs to supermarkets" sales promotion. More specifically, the positive amount of annual fee is only justified under the condition that there exists consumer heterogeneity in consumption rate and when the supermarket exercises price promotion on the product that the wholesale club carries. This paper describes the competition in a stylized fashion and derives the optimal membership fee under a scenario where retail promotion is present. This study is valuable in that it offers a different explanation on wholesale club membership fee than conventional wisdoms such as cost sharing and that it provides insights to the managers who consider no-fee format.