Costco is Coming. Woolies Watch Out! | BTalk Australia

(12min 24) In North America Costco has cornered the market for membership shopping. The company has been experiencing rapid growth and now includes Australia in its international expansion plans.

Phil Dobbie talks to Patrick Noone, Costco’s Australia MD, about the launch of a Melbourne store in the middle of this year. How will it differ from the North American stores? How will the dominant retailers react?

Will it succeed? Add your thoughts in the Talkback section at the end of this post.

See also:
“Woollies Has Us by the Proverbials” Says Joyce | BTalk Australia
Getting a Share of Your Stomach | BTalk Australia
Costco Wholesale Corp. company page on BNET

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• Today’s Transcript

Dobbie: Hello I’m Phil Dobbie and welcome to BTalk Australia. Today, Costco is coming to Australia.

Noone: Well thanks Phil. Costco’s a large warehouse membership club. We ask people to pay a membership fee to shop with us and in return we sell goods and services, quality brand name merchandise, at a discount. So we feel pretty much that over one or two shopping trips you’ll get that membership dollars back in your first few weeks you shop there. And consequently about 85 percent or I think this year it was 87 percent of our members renew that membership every year.

Dobbie: Right and I guess once you’ve paid that membership you know you’ve got some loyalty at least for the lifetime of that membership, don’t you?

Noone: That’s right. It’s a pretty high bar for retailers to ask people to pay before they even shop at our warehouse but on average like I said the vast majority of our members get their value for the membership and it raises a high standard for us as operators to make sure that everything we sell is of a great quality and also a great price and a great value statement.

Dobbie: And what’s the structure of this venture in Australia? Is it wholly owned by Costco in the states?

Noone: That’s right. It’s a wholly owned subsidiary of Costco wholesale out of the United States and its Costco wholesale Australia.

Dobbie: Right, OK, now this is part of a worldwide expansion. Of course, Costco’s now in the UK, it’s in Japan, Korea, Taiwan, do you see any challenges being presented specifically by Australia? Are there any things that are waving flags of potential risks in this part of the world?

Noone: Australia is a very similar country, in terms of demographics and in terms of shopping habits, as a north American continent and we’ve taken the Costco experiment if you like from San Diego back in the late 70’s and through Canada, Mexico and the oriental countries and the UK. And for the most part people around the world have liked to save money and they like the value statement that we bring. So the challenges here are more specific to the country in terms of logistics perhaps in terms of hiring a new buying office, in terms of hiring and training our employees here. But no I think that we bring a great formula and we won’t be changing that very much for this market.

Dobbie: I guess when you go into a new market you do have hit the issue that you’ve got to have some brand recognition before you start telling people how much it’s going to cost to join. I should imagine there’s a bit of a learning curve the customers have got to go through before you launch.

Noone: Australian’s are great travellers and a lot of Australians travel to the United States and to the countries we operate and for the most part when you go to a party five out of 10 people will tell you they’ve heard of us or been to a Costco. So there’s already some expectation out there in the marketplace to what we can bring to the market. One of the great examples was I was flying down here to start the company up and my luggage had a Costco tag on it and on the airplane from Qantas a couple of the stewards and stewardesses came to me and said, do you work for Costco? We can’t wait until you open in Australia. So there’s already a degree of brand awareness out there and I think we’ve made a pretty good reputation for ourselves in every country we operate in.

Dobbie: So you don’t see the need for any major advertising campaign before the launch?

Noone: I don’t think so. I think the value statement will be what will be the advertising campaign that we’ll use.

Dobbie: Right, now the groups got sales, as I said, exceeding 70 billion dollars. The gross margin’s pretty low though, isn’t it? I guess because you are competing on price and net income obviously considerably lower than that, I think about less than two percent of sales. So does that make any launch, I guess, becomes a risky venture, doesn’t it?

Noone: Well there’s risk in everything but you know what? The value statement that we bring to the table helps us drive volume and volume makes our business grow. So that’s what we’re focused on is that value statement and driving sales and driving the sales volume.

Dobbie: Is the product range going to differ very much in Australia from North America? I note that petrol forms, for example, a huge chunk of the revenue in the US, as it does for the supermarkets here. Are you expecting to get into that space here as well?

Noone: Our product range will be pretty similar to what we sell around the world which is almost identical to the US in many respects. There’ll be some businesses we don’t get into. The American’s run with a large gasoline component and we haven’t had the land component here to run that in Australia but most businesses will be the same. The brands may be different but in general a very similar line-up.

Dobbie: Now we have very strong competition between Woolworths and Coles who completely dominate the retail market in Australia. Is that a concern and looking back in the US what was the reaction from traditional retailers in the US as Costco continued to gain strength?

Noone: That’s a great question. I think what we’ve learned around the world is that we come to a market and we run our business the way we run our business and as long as we offer the value statement to our customers we exist happily in every market with other retailers and we’re just another component of the retail scene. And we add another layer of competition to the market if you like and also the choice of the consumer. So yes, there’s some great competitors here and yes I think we can work with that and work beside them and offer the consumers a great value.

Dobbie: Those competitors are not really going to want to give away market share too quickly so we can expect the competition from those guys, if you continue to grow and be a success, is going to be quite intense.

Noone: You know the US is probably the most dynamic and competitive retail market in the world and we’ve done very well there so I think that we’re going to be heads down and tails up and run our business here in Australia the way we do it and see what happens and I’m sure that we can offer a great value statement.

Dobbie: You’re going to give them a run for their money in other words.

Noone: I think we’ll do well ourselves and I think that if you want to shop at Costco you can come and shop at Costco, but most of our items are larger sizes, larger packages and if you want to buy smaller or if you want to go buy a loaf of bread instead of perhaps two or three then you’ll go to Woolworths and Coles and those other retailers anyway. So we do exist side by side for sure.

Dobbie: Given the economy, perhaps the Australian economy is doing better than the US economy at the moment but is it really a good year to be launching a venture like this or do you think by nature the discounting element of the business is relatively recession proof.

Noone: Yeah I don’t know whether there’s a great time or a good time. I think that our value statement, saving money on brand name products coming to the market, it’s probably as good a time now. Certainly we wish there was more money out there and retail growth was stronger but I have complete confidence we’ll do very well in this market.

Dobbie: The whole membership idea is interesting. I think out of the 70 billion or so last year that was total revenue for the business, about a billion dollars comes from memberships which would be a sizeable chunk I guess of the profit for the business so that’s a key component, isn’t it really that if you get people in and build their loyalty. And then the margin on each incremental sale is less important.

Noone: That’s pretty well correct there, Phil. The membership dollars tells us not only do we get income from those people coming to shop with us, but it tells us about their loyalty and about the value statement that we’re offering. In the United States there’s a $50 membership fee for one year for two people at the same address and it won’t be that much different here although perhaps marginally higher because GST is built in. But it will be the formula that we use here as well in Australia.

Dobbie: Right OK so I mean a year ago it would have been an exceedingly good value or even less than a year ago when we had a good exchange rate, it would have been exceedingly good value.

Noone: That’s right if you compare it to markets absolutely. But I don’t think we’ll change the idea on the price in this point in time in Australian dollars.

Dobbie: That must be creating a problem for you actually just thinking about the exchange rate so you must have really worked your model for the Australian market several times over, over the last 12 months.

Noone: Yes it’s challenging and keeps me busy on my computer with my Excel spreadsheets for sure.

Dobbie: So you keep the formulas, just change the figures.

Noone: That’s right.

Dobbie: Now we’re relatively parochial here in Australia or at least we are until it starts to cost us money. I wonder if there’s any emphasis on Australian goods or whether you’re using pretty much the same global suppliers.

Noone: That’s a good question too. We’re looking at the best items for the market and obviously there’s a lot of local product here that really interests us. There’s a lot of small businesses out there as well that make a good product or a fantastic product that we can bring into a Costco scenario. Sometimes, in this case, being only one location to start with, perhaps two in a year or two is going to be beneficial for us to attract the small manufacturers coming into the marketplace. Yes, Australian products will stand by their own and we’ll sell them if they meet our quality standards and if the value statement can be applied to it for sure.

Dobbie: Now it strikes me as well that there’s a huge opportunity here. I noticed in the US the online component is pretty strong. Woolies and Coles haven’t really caught on online in this market. Part of the problem I think is because they charge you higher prices to buy online then they do in store. So is that something you’re investigating as well, extending online?

Noone: Not at this time. There’s a lot of infrastructure that has to go in place with that, perhaps in years to come when we have our larger market presence and have a larger support network here in our office, but right now we’re just going for store operations.

Dobbie: Now presumably this plans to have many more of those stores. You’re starting with the warehouse in Melbourne. How long do you give it before you claim success or otherwise and start to look at other plans for this market?

Noone: We’re a pretty conservative company. This is a new formula for retailing if you like. It is a new way of shopping. So I think that we’ll open our front doors and then we’ll see how we go from there. I don’t think there is a timeline out there. I think we just want to make sure that our formula works here, that we can get the infrastructure in place to continue to provide value and grow that membership base. Melbourne’s first, Sydney soon after perhaps in a year and then we’ll go from there.

Dobbie: Great. And what about you Patrick? You’ve worked with Costco for a number of years or is this a new gig for you?

Noone: No, I’m a 19-year veteran. I’m actually born and raised in Melbourne and I married a Canadian back in the early 80’s and we moved to Canada and I’ve worked with Price Club originally and then we merged companies into Costco and from Vancouver I worked from there and I was a VP for the Western Canadian region and then this came open and I was more than happy to accept to come back to Australia. I’m a boomerang I suppose you could say.

Dobbie: That’s right, you come back eventually.

Noone: That’s right.

Dobbie: Thank you so much for your time Patrick and best of luck with the new venture. By the way, have we got a date for when it launches?

Noone: Just after the middle of the year at this point depending on construction, weather and all kinds of things so we’ll be announcing a date a little later on.

Dobbie: OK good luck with it.

Noone: Thank you Phil.

Dobbie: We watch with interest to see how it goes.