Costco readies first Australian outlets

Costco Wholesale, the largest US warehouse club, expects to lower Australian grocery prices with its first outlet in the country, providing new competition to Woolworths and Coles.

Costco, which will charge as much $60 in annual membership fees to Australian customers, will open its Melbourne outlet Aug. 17 with a 14,000 square meter (151,000 square feet) store, almost three times the size of typical supermarkets.

”We operate with low margins and with our membership fees, we can sustain low margins,” Australian Managing Director Patrick Noone said in an interview. ”Lower prices are important because people shop with us to get value.”

The Melbourne outlet, located in Docklands on the fringe of the central business district, will be followed by a store in Sydney’s western suburbs before Costco looks at more openings in the nation of almost 22 million. The Washington-based retailer enters a market where Woolworths and Wesfarmers’ Coles unit control almost three-quarters of retail grocery sales.

”We’ll have to see a competitive response from Coles and
Woolworths,” said Saxon Nicholls, at Herschel Asset Management in Melbourne. ”The Australian retailers already have substantial scale in the market and it will depend on Costco getting its own scale in Australia.”

Fundamental difference

Costco’s impact on rivals may extend beyond any market share it wins, with the company’s practice of pricing goods as much as 15 per cent below rivals likely to influence perceptions of value, according to analysts at Macquarie Group.

”Membership fees allow Costco to operate at low margins and are a fundamental difference in the business model,” Macquarie said in a July 7 note to clients. ”All other retailers of like products could be forced to price within these bounds depending on consumer response to Costco.”

Noone, an Australian who has worked for Costco for two decades, said the size of the Australian network will depend on the success of the first two outlets, with the company typically targeting a ratio of one store per 500,000 people.

”It all depends on how well we do what we say we are going to in Australia,” Noone said. ”When I was in Canada we started building warehouses to that ratio but when I left our brand name was such that we could build to 200,000 or 300,000 people and have a successful store.”

Vegemite, not peanut butter

The Australian outlets will carry about 3,800 product lines, compared with 27,000 in some Coles outlets, with some variation for local tastes. Instead of bulk packages of peanut butter popular in the US, Costco may stock items such as large sizes of Vegemite.

While both Coles and Woolworths trial hardwood floors, redesigned fresh produce sections and new shelving in their supermarkets, Costco maintains its warehouse design with concrete floors, exposed light fittings and inventory stacked on wooden pallets.

The Australian unit has no plans to sell coffins, as some of its US outlets do, although Noone expects the product range to evolve as Costco gains acceptance from consumers.

”If we can get good volume we will stock it and sell it,” Noone said. ”We look at areas we can show great value and that is why we sell diamonds and liquor and candy and all the other things.”

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