Expanding low-cost retailer Costco aims for $1bn sales

NOVEMBER 24, 2014
THE AUSTRALIAN

Costco’s Patrick Noone at the company’s Lidcombe store, Sydney, which is ‘like a combination of a high-end department store and a Bunnings warehouse’ Picture: John Feder Source: News Corp Australia
US warehouse retailer Costco is expecting Australian sales to expand by more than 50 per cent to $1 billion next year, as it continues to open local sites and Australians take to its low-cost, bulk-buying approach.
“We see the business growing every day,” says Patrick Noone, the chief executive of Australian operations from the company’s headquarters in Auburn, in western Sydney.
“We turned over $660 million last fiscal year and we hope to top $1bn this fiscal year,” says the Australian born Noone, who worked for Costco in Canada before moving to Sydney to head up the local operation several years ago.
Noone was speaking as the company, which turns over $64bn annually worldwide, opened its seventh warehouse in Australia last week, a store in Adelaide.
This follows its entry into Brisbane earlier this year.
The Adelaide store includes a petrol outlet, making it the third Costco to do so including Brisbane and Liverpool in Sydney’s west.
Costco opened its first warehouse in Australia in 2009, in Melbourne’s Docklands area. It now has two warehouses in Sydney (Auburn and Liverpool), two in Melbourne (Docklands and Ringwood), and one in Canberra.
Under the Costco model, customers sign up for a $60-a-year membership. The company promises to save them far more than that with its cheaper prices.
Originally established in California as a buying outlet servicing small businesses, the company ­offers a limited range of goods at low prices, and is also open to retail shoppers.
Its model favours bulk buying, such as packs of 60 toilet rolls, but Noone says customers can still buy individual items such as food, handbags, clothing, televisions, bottles of wine and jewellery.
“We only have a select group of items,” he says.
“We only carry about 3600 items compared to a supermarket or department store which would carry 30,000-40,000 items. We try to upsize as much as we can. Our business model is really a cash-and-carry trade supplier. That’s the way we started in the late 70s,” Noone adds.
“But we have morphed into a retail and trade business. We still do an awful lot of trade business with restaurants and offices and small businesses, but we now have a big retail component as well.
“Our margins are typically around 10-11 per cent on most things we sell. A typical retailer’s margin would be between 25 per cent and 40 per cent.”
Noone will not say how many members Costco, which has more than 60 million members worldwide, has signed up in Australia.
“We have hundreds of thousands of members in Australia. We don’t give out exact numbers. It’s the only trade secret we have.”
Noone argues Costco is very different to low-cost supermarket Aldi, which mainly focuses on food and groceries.
He says Costco’s opening in Australia coincided with the expansion of Aldi here, leading to some confusion among shoppers.
“The perception that we are like an Aldi store is incorrect,” he says. “We are more like a combination of a high-end department store and a Bunnings warehouse.
“We have some great brands but with great prices on them. Aldi stores are tiny.
“They are around 1000-2000 (square) metre stores in a larger building. We are a 14,500sq m building. Everything is palletised, so it is a totally different business model.”
Costco offers luxury items such as Tag Heuer watches and Versace handbags, as well as high-end diamond jewellery.
“You can come and shop at Costco and buy a diamond ring for $10,000 or buy a couple of hundred dollars worth of groceries.” Noone says.
The Australian stores also sell hearing aids and optical products.
“We offer extreme value,” he says. “We sell hearing aids for $2000 which cost between $3000 and $5000 anywhere else.”
He says some of Costco’s prepared food, such as party platters and large plates of peeled pawns, are popular with office groupings for pre-Christmas parties. The company also did a strong trade in party platters during the grand final football season this year.
Noone visits Costco’s headquarters in Seattle once a month and does a lot of joint buying with the Costco group internationally.
But he says the company has also sourced many food products locally in Australia, including Wagyu beef from Queensland and abalone from South Australia, now also bought by Costco ­operations internationally.
“We are open to buying all of our fresh food locally,” he says.
“Costco is the largest buyer of Australian lamb in the world. The Wagyu beef products we have developed here in Australia, which come from Queensland, are being sold in Costcos in Canada and San Francisco. The abalone we get from Kangaroo Island is also being sold in the Costcos in San Francisco and Asia.”
Noone says Costco doesn’t advertise, relying on word of mouth for its marketing.
“When I sell you a diamond ring and you show it at the barbecue and people ask you where you got it from, that’s what really drives out business,” he says.
Noone says Australian consumers are similar to most of Costco’s consumers around the world. The company would like to offer pharmacy products here but is prevented by law. It is also ­restricted from selling liquor by law in South Australia and Queensland.
“The big secret is that we are all the same,” he says.
“Australians are no different to North Americans, who are no different to the Japanese, who are no different to the Brits.
“We sell Vegemite here which we don’t sell anywhere else in the world. But when it comes down to it, consumers are all looking for a great deal.”
Noone grew up in Cranbourne, Melbourne and began working at Woolworths after leaving school. He managed stores in Melbourne and Shepparton before moving to Canada after he married his Canadian-born wife.
He joined Costco predecessor Price Club in Canada in 1990 and has been with the group ever since. He moved to Sydney in 2006 to search for suitable sites in Australia for the company.
Noone says pre-Christmas sales have been going well for the group.
“So far, Christmas has been very strong for us. We are seeing significant sales of toys and Christmas trimmings,” he says.
“We are seeing significant apparel sales and, right now, electronics is very strong. Fresh food also looks like it is going to be really strong this year.”
He says Costco does not have an online store in Australia but it could be introduced here in future. In the US, Costco uses its online store to sell very large items, such as a children’s play gym for a retail outlet. It also offers customers a low-cost, online travel service featuring travel packages.
In the shorter term, the plan is to expand by opening new warehouses around the country, including Western Australia.
“You don’t get to do $1bn worth of business unless you have something that is a worthwhile ­offering,” Noone says.