Costco: Hot or Not?

Once a quarter, research firm Synovate Aztec presents an in depth Grocery overview – “What’s Hot?” - to all TorchMedia staff.

Last week Shopperholic sat in on the presentation, which included some interesting discussion points concerning the latest global retail player to enter Australia – Costco. The opening of Costco’s first store in Melbourne certainly created a huge amount of hype with thousands of bargain hunters visiting the store on the first morning. Not even the 50 plus checkouts could cope with the demand.

Costco President and CEO, Jim Sinegal, explains the company’s success to date.

“Costco is able to offer lower prices and better value by eliminating virtually all the fills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable”.

Perhaps one of the most interesting facts about Costco is its impressive MAT (moving annual turnover) compared to the number of stores it has. Costco sits at number 9 on the list of Global Retailers with a MAT of $78,750 million gained from only 559 stores. The highest number of stores in the list of top 10 global retailers is Sven & I, Japan with 25,137 stores while the Metro Group in Germany has the second least number of outlets after Costco with 2,334 stores. This statistic shows just how big and successful each individual store has been overseas.

But will the chain be a success in Australia and break the market dominance of Woolworths and Coles?
There will certainly be shoppers attracted to the low price brand and private label SKUs that Costco offer. However, there are clearly some barriers to success if the retail giant want to steal market share away from the likes of Coles and Woolworths.

Finding locations for the stores is a major issue likely to prohibit expansion. The stores need to be close enough to major cities to be accessible to its middle income family target market, but finding sites big enough is causing huge headaches. Unlike shoppers overseas, Australian’s do not traditionally travel far for their grocery shopping. Having stores too far out of traditional suburban suburbs is likely to limit long term success, with shoppers eventually choosing convenience over price.
Suppliers' relationships with Costco will also be an interesting determinant on the prices Costco will be able to offer and the range of branded SKUs available in the long term. The larger specific pack sizes required by Costco may add considerable costs to suppliers business which may prove difficult to absorb.
Finally it should also be interesting to see how Australians adapt to shopping membership fees, which is a foreign concept in Australia.
While Costco’s arrival may add an extra choice for some Australian shoppers, only time will tell whether the company is a real threat to Woolworths and Coles grocery supremacy.