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.”

Giant Eagle’s beer requests worry Western Pennsylvania outlets Buzz up!

Giant Eagle is bringing the battle over supermarket beer sales to the Pittsburgh region, with a plan to sell six-packs from restaurants inside some of its stores.

As food chains nationwide boost brew sales, the O’Hara grocery chain is asking the state Liquor Control Board to transfer a restaurant liquor license to a Giant Eagle Market District store expected to open this fall at the new Settlers Ridge development in Robinson. Giant Eagle is pursuing other licenses, including one for a store in Pine.

Wegmans and other grocers in the state have opened cafe-style areas in some stores that sell six-packs of beer along with other beverages. The small, in-store restaurants allow them to take advantage of recent legal interpretations of Pennsylvania’s restrictive liquor code, which bars most sales from grocery stores.

Now it’s Giant Eagle’s turn.

Spokesman Dick Roberts said Giant Eagle has yet to work out some details, such as what brands of beer it might sell, but one thing’s certain: Pennsylvania’s licensed beer distributors will fight before the Robinson store or others ring up their first sales.

The Malt Beverage Distributors Association is challenging each license transfer to go before the LCB. A board hearing examiner will schedule a public hearing in the Pittsburgh area before a final vote on Giant Eagle’s license for the Robinson supermarket, said LCB spokeswoman Francesca Chapman.

Mary Lou Hogan, executive secretary and counsel for the Philadelphia-based distributors association, said grocery chains are stripping away beer sales from neighborhood businesses that only can sell it by the case or keg, without having to follow the same rules such as limits on hours.

Peggy Alston worries sales will fall at her family’s Pike Beverage Outlet, a distributorship about two miles from Giant Eagle’s Settlers Ridge site.

“I’m not allowed to sell flowers or groceries or baked goods for extra income, but Sheetz and then Wegmans and now Giant Eagle can get licenses to sell beer,” she said. “It’s another slap in the face for small businesses, and for the customers it will mean limited choice and service.”

Another nearby Giant Eagle supermarket sends customers from other states who are used to buying beer in grocery stores to her business, Alston said.

Nationwide beer sales last year weakened in bars, restaurants and other businesses where customers typically drink on-site, while they increased 1.2 percent in grocery and convenience stores, the Beer Institute said.

“Beer and wine sales are critically important to supermarket sales,” said retail analyst Burt P. Flickinger III. While the profit margin on most groceries might be 1 or 2 cents on the dollar, he said, it averages 3 to 4 cents on beer sales.

Pennsylvania’s liquor laws hurt consumers, regional brewers such as Lawrenceville’s Iron City Brewing Co. and grocers, he said.

“When you have one of the most inefficient distribution systems in America, it adds tremendous costs for consumers and it penalizes the sales and operating profits of food retailers who, were they able to sell beer, could compete more effectively with the Wal-Marts and Sam’s and other big players,” he said.

Consumers, too, have differing opinions.

“Buying beer and wine (at the supermarket) is like getting milk and bread,” said Rob Hornison of Hempfield.

Colleen Friedline, 55, of Export opposes loosening liquor restrictions.

“There’s enough temptation for people to go out and get drunk, to ruin their lives and the lives of their families … and kill other people,” she said.

Pennsylvania’s restrictions on beer sales are thought to be the second-tightest in the nation, behind Utah, said Cris Hoel, a Pittsburgh attorney who has represented alcohol trade associations and grocery chains, but isn’t involved in the cases here.

The state’s tough stance on liquor, including its controlled beer-distribution system, dates to the repeal of Prohibition in 1933, when states were told to set their own laws.

Then-Gov. Gifford Pinchot, an ardent alcohol foe, reluctantly accepted its legalization.

“He did his best to make sure the laws were as harshly worded as they could be,” Hoel said. “We’re still living with the remnants of that today.”

Subsequent attempts to loosen controls went nowhere. Gov. Dick Thornburgh ran into opposition from religious and other groups in 1981, when he tried to sell off state liquor stores. Later privatization attempts by Gov. Tom Ridge in 1997 and, most recently, state Sen. Rob Wonderling, R-Montgomery County, failed.

Hoel noted one reason for maintaining the status quo: Pennsylvania’s wine and liquor sales generated $1.76 billion last year, putting $433 million into the state Treasury.

With the licenses it’s seeking, Giant Eagle couldn’t sell alcoholic beverages on shelves, as it does in Ohio. The Pennsylvania stores would partition off areas with at least 400 square feet that seat 30 or more people, serve food prepared on site and ring up their own sales.

Customers could buy the equivalent of up to two six-packs to carry out or order a beer or glass of wine to drink at the restaurant.

Wegmans was the first supermarket chain to open restaurants and sell beer in Eastern Pennsylvania, and Commonwealth Court in February upheld the licenses. The beer distributors association is waiting for the state Supreme Court to decide whether it will consider a further appeal.

Wegmans has obtained or is applying for licenses for 14 stores, according to the Liquor Control Board’s Web site. In addition to Giant Eagle’s applications, Weis Markets and Whole Foods Markets are moving toward beer sales in Pennsylvania.

The license for Giant Eagle’s Robinson store is the first to go before the LCB for approval. Supervisors in Pine, where a large, new-concept Giant Eagle opened in February, have scheduled a May 4 public hearing on a license transfer.

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