Start-up retailers urged not to fret over Costco expansion

American retail giant Costco opens its third Australian store today but industry experts say small retailers shouldn’t worry, claiming some will actually benefit from the expansion.

Costco operates an international chain of membership warehouses, carrying brand-name merchandise at substantially lower prices than its competitors.

The US chain, which opened its first Australian store in Melbourne last year, will open a Sydney store today and a Canberra store tomorrow, putting it in direct competition with supermarket giants Coles and Woolworths.

The chain is expected to open up to six stores over the next three years, but retail expert Brian Walker says he could see them opening up to 50 new sites over this period.

“Once they build their base and understand the market here, absolutely. The see Australia as a good market and they’re a well researched, resource-rich company,” Walker says.

According to Costco Australia managing director Patrick Noone, the retailer can afford to offer low prices on everything from food to clothing to electronic appliances.

“We’re a warehouse business so everything we buy comes on pallets, which we put straight on to the floor,” Noone says.

“We can put items like one kilogram of Vegemite on the floor instead of stacking it by hand on shelves. It’s more productive and the packaging in bulk brings down prices.”

Noone says Costco intends to support the local industry by allowing small businesses to on-sell products; a welcome development for suppliers, many of whom are at the mercy of the major supermarkets.

“We always deal with small and medium companies. But not only do we buy locally and sell locally, we sell overseas too,” Noone says.

Walker says suppliers will benefit from Costco’s presence in the market, providing they have a good offering and something unique. He doesn’t believe Costco will post a direct threat to small, independent retailers.

“Sure they’ll compete in the sense of the discretionary dollar but that’s a fact of life in retail. Small independents are already having to compete in a way they haven’t in the past,” he says.

Walker says in addition to being competitive on price, small retailers need to ensure they have the right product range, a good database, and create some sort of value-add proposition.

“Ensure you can offer what Costco can’t offer. If you’re really worried about the competition, go and visit them as a customer to determine what they’re good at and what they’re bad at,” he says.

“Costco is not a high service model; it’s very much a figure-it-out-for-yourself model. They don’t want the overheads associated with service. It’s not their model, but it can certainly be the model of others.”