costcoThere’s a war brewing in Sydney over one of life’s staples – food. Consumers might be the ultimate winners, but the supermarket chains involved are bound to get a few bumps and bruises along the way.

This month US discount retailer Costco opens the doors of its second store Australia. The big-box style of food retailing begins trading in Auburn, in the heart of Sydney’s Western suburbs.

In terms of geography, Costco has hit the sweet spot, says marketing professor Paul Patterson from the Australian School of Business. “In Sydney the obvious location was always going to be the Western suburbs, and I suspect there’s a demographic in Auburn that is really looking for value for money in their supermarket spend.”

Patterson says Costco, with its focus of selling goods off shipping pallets out of huge galvanised barns with minimum levels of customer service, certainly is a very different value proposition from what supermarkets currently offer in Australia. But “shoppers today are very price-sensitive”.

Sure Woolworths and Coles might be full-service, however, the arrival of Costco could entice consumers to switch to monthly shopping, buying in bulk to save money. “This will make the existing players up their game,” says Patterson.

Costco – already well established around the globe with 550 stores – differentiates itself on price. “When you sell from a pallet in a large barn-like environment (much like hardware store Bunnings), there’s a perception that the prices are lower, and I’m sure they are, because Costco has a very different business model with lower overhead costs,” says Patterson.

Costco cuts its overheads by reducing above-the-line advertising and providing bare-bones service. The US retailer also saves on not having to depreciate fancy stores. And they have lower fixed costs.

However, there’s also a touch of illusion on pricing, suspects Patterson. “The very nature of the way they’ve set up, I think would give the perception that the prices are lower than they may actually be,” he says.

Woolworths and Coles won’t not stand by though and let this giant upstart erode their dominance of what is dished up on Australian tables. But to stop Costco from gnawing at their market share, the duo may well need to fight the newcomer on shelf price.

Wars over bread and milk may not be the only price cuts consumers get to see. Costco may well prompt Australia’s existing supermarkets to take a “further look at their own prices”, says Patterson.

Rather than a battle to the bottom, though, the market leaders could also decide to expand their loyalty programs and joint badging of credit cards, and fast-track their plans for one-stop shopping with newsagents, pharmacies and liquor all under the one roof.

The new Auburn Costco will have about 14,000 square metres of shopping area and 800 car parks. Distribution infrastructure was already established for the chain’s beachhead, its Melbourne Docklands operation, which opened in August 2009 and has between 75,000 and 100,000 members.

A similar store is opening in Canberra, and the US retailing giant plans to develop up to a further four Australian stores in the next three years.
The arrival of Costco follows that of German supermarket chain Aldi, which entered Australia’s eastern states 10 years ago.

Costco operates on a membership model, charging consumers $60 a year. “I think human nature will dictate that shoppers will want to recoup that $60,” says Patterson. “Consumers are going to be more likely to go back there to do repeat business, because they’ve invested $60 upfront in a membership.”