There are just two things standing in the way of a potential revolution in Australia’s retail sector: Melbourne’s notoriously fickle weather, and a roof.
For Costco Australia managing director Patrick Noone, whether the warehouse shopping giant opens its Melbourne store in July or sometime after that depends on whether workman can get the roof on Costco’s 13,000 square metre store in Melbourne’s Docklands precinct this week.
“The sooner we get there the better,” Noone says. “What we’re working on now is the roof. Once the roof is on that really speeds up the entire interior fit-out process.”
A few weeks delay probably doesn’t matter in the grand scheme of things, but there is little doubt that Australia’s retailers, grocery suppliers and retail analysts are dying to see how Costco will actually perform in the Australian market.
While questions remain over how many Australians will be willing to pay the annual membership fee Costco charges its shoppers ($60 for individuals and $55 for businesses), analysts say it won’t be long before Costco Australia will make a big impact for suppliers and its retail competitors.
Patrick Noone certainly knows customers are raring to get inside his Melbourne store. Costco Australia quietly started selling memberships about three weeks ago from its office in Docklands, and it is also sending sales representatives around Melbourne to talk to small business customers.
Noone won’t reveal numbers, but says he has been “pleasantly surprised” by the interest from Melburnians.
“It’s tough right now. You’re trying to sell memberships, but you don’t have a membership warehouse to show people. But I have been pleasantly surprised. We have a great reputation overseas and I think that’s really helping.”
The shoppers aren’t the only ones eagerly awaiting the opening of the first Costco Australia store. Retail commentators and analysts are dying to see how the store performs and whether Australians will really be prepared to pay $60 a year just to walk into a shop.
The Costco model is simple – bigger is better. The typical store is around 11,000 square metres (the Melbourne store will be around 13,000 square metres) and each store carries around 4000 products. Costco Melbourne will have its own bakery, its own butcher section and everything else from clothing and jewellery to electrical goods and furniture.
Just like the warehouse, the product sizes are also big. Instead of buying one litre of apple juice, a shopper might have to buy a bulk pack of three two-litre bottles. Rather than buying two lamb chops, you’ll need to buy a whole tray.
Phil Bonanno, the director of retail strategy at The Leading Edge and an American expat, says customers are usually split 50/50 between small businesses and households, although the Australian store may rely more heavily on SME customers in its early days.
“On the very functional level they do a very good job of bringing really good value on household items that you just have to buy, like toilet paper and household cleaning goods. But the second attraction is that people will often find brands and products that are very high quality for a very low price, usually for a very short time.”
Kevin Moore, chief executive of retail strategy firm Crossmark, says that unlike other discount-style retailers, its customer base is much more diverse. “Costco deal with everybody, from multi-millionaires to forklift drivers.”
Moore describes Costco as “probably the most profitable retailer in the world”. The financial model is underpinned by the membership fee. “They derive more than three quarters of their profit from membership fees,” Bonanno says.
In order to keep prices a low as possible, expenses are kept to a minimum. Advertising is non-existent. The warehouse environment means a no-frills approach to shop fittings. Staff levels are lower than Australian supermarket shoppers are used to.
“So all they are really looking to do is cover costs,” Bonanno says. “But if I am Costco I’ll wake up in the morning and I’ve got a 25% cost advantage against the lowest competitor in the market. That’s pretty powerful.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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