COMPANY PROFILE: Costco
In 2016, US membership warehouse discount retailer, Costco, is marking the 40th anniversary of its formation. The Washington state-based retailer opened the doors to its first Australian store at Docklands in Melbourne on August 17, 2009. Opening its second store less than two years later on July 21, 2011 in Auburn in western Sydney, Costco has now grown to eight Australian stores, in Victoria (three), NSW (two), and one each in Queensland, South Australia and the ACT.
Justin Grey: How have you seen Costco evolve over the 26 years you’ve now been with the company?
Patrick Noone: When we first launched Costco at the Press Club in Vancouver, we didn’t have an ancillary businesses – optical and hearing aids. We didn’t have fresh food at that time either – a couple pallets of potatoes, is is all we sold. Tires were hand stacked in the warehouse, we had three or four rows of tires, probably 1100 and 1200 tires on the floor. If you wanted to buy them you had to take them out on a cart and wheel them around to the back of the warehouse to have them installed.
Everything’s changed basically; we’re much more service orientated. We find that model works better in all areas of merchandise that we want to have a go at. Since we opened in Australia we’ve launched hearing aids, optical, tire shops, and we do well with all that. So as long the model stays very clear – a membership warehouse club with a 3500 SKU count and great value – I think it’s going to work.
JG: How has Australian expansion been going? You’ve had some issues around securing land, but six years in is it where you expected to be in terms of market share and store count?
PN: Pretty much store count is where we wanted to be at. We’d like to have one or two more obviously. We’d like to open quicker, but we’ve got in the pipeline one building per year for the next three years. And we’re hoping to improve on that. We’re going to open a new depot soon in the Western Sydney area, which will service the rest of the country. We’re in pretty good shape. The planning is always a long-term thing – you’ve got to give yourself three years for a new site in Australia.
JG: What is the projected number of Costco stores you think the Australian market can accommodate?
PN: A lot. I don’t know where it’s going to end up. But certainly in next couple of years we’ll have a couple per year. That would be the ideal situation. So eight to 12, to 13 or 14 in the next five years.
JG: Is there a certain catchment that you need to justify a new store? Something like Ikea’s catchment needs of one million people within 20 minutes drive?
PN: Yes. It’s about the same with us. Because we have so few Costco’s right now, the catchments are very, very large. So for example, western and south Brisbane, there is almost a million and a half to two million people so I think that’ll become more important as we continue to cannibalise the bigger cities in Australia.
JG: What can you share about the challenges you’ve had in finding the right real estate for new Costco stores in Australia?
PN: For us, we look at good size with good access – good freeway access is always important for us, or good main roads access. We’d like to be in the centre of activity if we can. If we can’t, we’d like to be on the outside of that with the same road access. And then demographically we’d like to be amongst that population base that we use. So when you look at those criteria, it’s not that hard after that – you can generally find quite a few sites, but then it’s getting the right price for the site, and then you work on that.
JG: There is clearly an undersupply of large format retail real estate in Australia – and NSW in particular also suffers from zoning issues that further impact supply. Are those issues impacting on your ability to expand Costco?
PN: Yes. Every site we’ve had has had to be rezoned. That takes time, so that’s our biggest problem in finding sites. There’s lots of land in Australia –there’s only 25 million of us – but it’s finding the right land in the right spot and gaining the right zoning. So as we work through every site, council’s generally have been very supportive. And so have state governments – they see us as bringing value to the market, they see us bring competition. So it’s not a lack of support, it’s just normally the process just takes longer. That’s all.
PN: It depends on the population and what we can draw from that. We’ve been here a few years now but we’re still relatively in our infancy. We obviously are targeting the largest cities where there are bigger population base to get the biggest bang for our buck at this point. But as we grow through the next few years, you don’t know what’s going to happen. Some of the smaller midsize towns in Australia have grown quite quickly. I won’t name towns, but some of the smaller medium size cities will definitely be attractive in a few years time. Newcastle, Townsville perhaps. But that’s not a prediction.
JG: Are smaller format stores an option for these regional areas?
PN: No. I think Costco is going to stay with our formats that we have now. It gives us efficiencies of scale, we can carry our 3500 items on full pallets. To carry less would be inefficient for us to do that. So I think it’s one big Costco, or none at all.
JG: The limited SKU strategy is a big part of the success of a business like Costco, isn’t it?
PN: Yes. We like to keep a narrow SKU count so we can drive a lot of value into that pallet. It’s efficient to merchandise. It’s efficient logistically. And also, when we have that relationship with our vendors – which we love to have really loyal and good solid relationships with our vendors – we can work together in finding ways to drive even more efficiencies. Things like taking round canisters into square canisters so you can put more into a pallet, drives more efficiencies and economies of scale.
JG: The positive relationships that Costco has with its suppliers is in stark contrast to that of Coles and Woolworths. What is the key to those successful supplier relationships?
PN: We like to stay close to our vendors. Again, having that narrow item count means that you have to stay very, very sharp and have a good communication in the open so you can continue to drive more sales on the item. We like to continue to find ways to efficiently move the freight and obviously the member will benefit from that. So if we can save money on buying a full truckload of a pallet of an item, then we’ll try and pass that savings onto the member, increase the value and drive the sales. So having that collaborative relationship with the vendors is very important for us. And it’s part of our culture to always take care of our vendors.
JG: And that extends to how Costco Australia is helping some of its suppliers grow their export business too, by facilitating growth through Costco in Asia, for example…
PN: It’s good for everyone, because if we have an Australian vendor who makes a great quality item and he can sell to another country outside of Costco Australia. That means that he’s got more efficiencies of scale. He can increase his workforce, which is good. He can increase his volume enough and increase in volume means more efficiency for him to make that good. So ultimately we’ll benefit, and our Australian consumers will benefit for him too, as will Australian workers. It’s not for every home that we make here in Australia, but it’s definitely for some of them. It’s good for Asia and its good for Costco.
JG: Costco is arguably one of the best discount retails in the world, and while the SKU count is limited, it’s fascinating in its variety. How do you get to a point where you decide you can sell a $40,000 Cartier watch alongside hearing aids and coffins and car tyres – and take market share from those already selling such items?
PN: That’s the beauty of coming here, isn’t it? It’s that wow, that excitement and the treasure hunter atmosphere that we have. But basically what we see is that you have to know your member. Our members generally have a bit of extra cash to spend, they’re generally higher income, and more importantly our members have grown up with regular shopping centres or regular retailers here in Australia. So coming to us is irregular and they expect to see something different here. That Cartier watch, we’ve sold a few of them and we’ve sold a few coffins, we’ve sold a lot of high end champagne. But that’s our member – they you want to come and buy that kind of merchandise. And as long as we keep surprising and delighting them every time they’re here they’ll come back.
JG: You’re obviously not taking market share from retailers in any one sector – grocery, discount department stores, electronics and white goods and so on – you’re taking market share from everybody…
PN: We’ve seen some studies done on the impact of Costco over a wide area of retail and we hit about one per cent of the retail spend in the given area that we come into. So we don’t hit any one retailer very heavy, but we spread it out over everyone because we are selling that variety of merchandise. As a trade supplier as well when we come into an area, we often end up selling a lot of merchandise to other retailers to resell onwards, so we actually lower their cost of goods. We don’t have a huge impact, but we have a big competitive impact.
JG: The Costco membership program has been called the most successful retail customer loyalty program of all – and there’s obviously some truth in that because you have to pay that $60 annually to shop at Costco. It turns the whole business model on its side, doesn’t it?
PN: Yes. It means that you have to stand behind that membership too and you have to able to provide better value. So it puts a very, very high onus on the warehouses have great service, clean facilities and an enjoyable, delightful experience. And it puts a huge onus on our buying group to buy the right product at the right price at the right time, so the member is delighted by the product choice as well. So it puts a higher bar for our job, which we do and I think the members enjoy it as well part because it becomes their club.
JG: The supermarket chains have been criticised for not formulating a deterrent strategy for when Aldi entered the local market. Do you feel established retail brands have likewise underestimated Costco’s ability to take market share?
PN: Look, we are going to take market share – every new operator that comes to town does that. I can’t really answer for what they’re up to. I’m content at this point in time to some extent that we are offering good value to the marketplace, and that’s what we continue to focus on ourselves. Competition…Olympic swimmers swim faster because of competition, and we’ve got to make sure we’re returning with gold every time we’re out here.
JG: What keeps you up at night the most as a retail executive?
PN: Value – making sure we have the right value. We want to make sure we delight our members. Good training of our employees is paramount. Other things like deflation is an issue right now with food and gas-petrol pricing. But what keeps me up is really making sure that everyone’s doing the right thing all the time. And I think we generally do, but you always have to audit and make sure and continue train and coach your employees. [Costco co-founder and former CEO] Jim Sinegal once said that 90 per cent of your time should be coaching and training. So that’s what I try to do.
JG: Costco doesn’t currently have an e-commerce channel in Australia. Is that something that’s on the cards?
PN: We haven’t got any concrete plans, but we sure would like to do that in the next little while. It’s a different business model to what bricks and mortar like we do. Even in our dot.com business in the US and Canada, they don’t really compete with the fresh part of it. So it’ll be a higher cost for sure for consumers. There’s always people out there who will take advantage of that. And that’s up to them to do that. But I think for us, it’s always having the best price and in the warehouse environment. That’s what we’ve focused on.