Costco Takes It Slow

MARK HAMSTRA

ISSAQUAH, Wash. — Costco Wholesale Corp. here is taking its international expansion slowly.

The membership-club operator ranks 8th on SN's list of global food retailers (see Page 14). Of its 146 locations outside the United States (including 31 operated through a joint venture in Mexico), 76 are in Canada, 20 in the U.K., eight in Japan, six in South Korea and five in Taiwan. The company plans to open its first store in Australia later this year.

“The key focus for them is on finding locations internationally that have enough of a middle- to upper-middle-class population in a market who can buy into the whole idea of paying in advance for discounts,” explained Leon Nicholas, director of retail insight, mass and club channels, Management Ventures, Cambridge, Mass. “There has to be some level of financial sophistication. Otherwise it just doesn't fly.”

Another challenge the company faces in rolling out its warehouse model is the no-frills presentation, which is a foreign concept in some countries, he explained.

“The U.S. consumer is used to that,” Nicholas explained. “They understand the relationship between the store format and the membership and the low prices. But for someone who is used to going into a nice bodega, when they walk into a warehouse club and see the pallets, they say, ‘Wait a minute, this isn't a very nice store.'

“So there needs to be a process of education that has to occur in some of those marketplaces.”

The company has enjoyed some success in Canada, he said, and it is hoping to take what it has learned from that market and apply it in Australia, which is similar in some ways, he noted. Costco is planning to open its first Australian warehouse club in Melbourne this summer.

One advantage Costco has in its effort to expand globally is its extensive network of international suppliers, said Dina Roldan, a senior consultant at Retail Forward, Columbus, Ohio.

“They have become very adept at sourcing from different countries,” she told SN, noting that the company currently obtains product from about 40 nations. “They are good at getting in and getting to know the landscape, but they are very conservative.”

Last year, Costco said it wanted to double the size of its international retail operations over the next 10-15 years, “but that is a pretty long horizon,” Roldan noted, especially compared with the growth plans of some of the other major multinational food retailers.

One option might be for the company to develop a small format — a tactic increasingly employed by many of the European giants — in order to facilitate new-market development, she suggested.