Costco gets $140 million from parent to fuel expansion

American bulky goods retailer Costco has been given an extra $140 million by its American parent to continue its expansion across Australia, with more stores planned for both Melbourne and Sydney along with its first Queensland store.

The move comes as the company has already opened one store each in Melbourne, Sydney and Canberra, while it is believed the company is already eyeing potential properties in both Melbourne and Sydney.

However, it may be some time before the company becomes profitable and can compete with major players in the supermarket space, one analyst argues. 

Costco Australia managing director Patrick Noone was contacted by SmartCompany this morning, but he was not available to speak prior to publication.

However, he confirmed to Fairfax the company had been given $90 million in 2011 from its US parent for more start-up costs, which was quickly topped up with a further $10 million. Now, it has been given an extra $40 million to fuel its expansion.

“We would like to do two [stores] in calendar 2013. Iideally we could do three but are likely to do two for sure. We have a couple of sites we are working on – one in Sydney [and] we do like the market in Queensland and would like to have a site up there in Brisbane next year.”

“We are also now looking at a second store in Melbourne,” Noone said. “And Adelaide is also an interesting area for us.”

That area in Melbourne is rumoured to be in the city’s eastern suburbs, near Ringwood, although Noone has not confirmed that is the case. Last year the Maroondah Council indicated the company was exploring the area.

Part of the problem with securing new areas is Costco requires larger-than-usual pieces of land. Acquiring such large areas near residential developments is difficult and often requires lengthy consultation periods with input from nearby residents.

Fairfax has also claimed Costco had revenue of $245 million in the 12 months to August 2011 – a result that shows the American-style bulky goods approach has been a hit with Australian consumers. However, it also claims the stores are not yet profitable.

And such a venture may take time. City Index chief market analyst Peter Esho told SmartCompany this morning that, just as Aldi chipped away at supermarket prices, it wasn’t profitable for quite some time.

“You need scale, massive scale to compete against players like Coles and Woolworths, and they’ve been spending a lot of time and effort to make the whole venture profitable.”

“Right now, they probably don’t have that scale. It took Aldi a very long time to build a footprint and make themselves into a profitable businesss.”

Esho says it’s not necessarily the supermarkets that only need to be worried about Costco’s expansion, but department stores as well.

“The most immediate competitor is Campbell’s Wholesale, which was owned by Metcash, and they took the preemptive step of rejigging the business before Costco came on board.”

“But this will creep into other bits and pieces of the market. The supermarket space, the discount department store space. KMart and Big W are in that category and it’ll hite veryone, albeit in a fragemented way.”

Noone also said that while the American parent had raised membership prices, the Australian division has no plans to do the same.