A BEACHHEAD FOR CLUBS

JAMES FALLON

LONDON (FNS) -- Price/Costco -- the American membership-club operator formed last fall with the merger of Price Co. and Costco Wholesale Corp. -- has skyrocketed to a $15 billion behemoth in the United States through the success of its warehouse clubs.

Now it's rolling the concept into the untested waters of Europe.

The first Costco warehouse outside North America opened in Thurrock, England, just northeast of here, late last year.

Another will open in Bushey, England, this spring about the same time Nurdin & Peacock, a British cash-and-carry chain, opens its first Cargo Club store in Wednesbury.

Analysts say there could be six warehouse clubs in England by the end of 1994, and New York-based Goldman, Sachs & Co. predicts there could be up to 90 clubs in the United Kingdom within the next decade, with total sales of $12.15 billion (8.1 billion pounds), accounting for 5.5% of the retail market.

The stakes are high for both Price/Costco and more conventional retailers and wholesalers in Europe.

Flattening sales in the U.S. club sector means overseas expansion is vital if Price/ Costco is to maintain its phenomenal growth.

In Europe, the arrival of the low-priced clubs has everyone from major food retailers to consumer electronics chains to cash-and-carries worried about their impact.

In the United Kingdom, the first battleground, there traditionally has been little significant price competition because the market is dominated by large retail chains earning high margins.

Food retail margins, for example, average 6% to 8%. But the arrival of the warehouse clubs already has raised consumer awareness of price, and retailers' high-margin days are coming to an end, analysts say.

The United Kingdom's leading food retailers already have reacted to the opening of the Costco unit in Thurrock by adding bulk-pack aisles to their nearby stores.

In addition, they have introduced customer-loyalty cards that offer discounts for purchases over a certain amount.

"It's not far-fetched to say there is a bit of a revolution going on in British retailing now," said Richard Hyman, chairman of U.K. retail consulting company Verdict Research. "So many things are changing and so rapidly it's hard to predict where it will end."

Paul Moulton, managing director of Costco Europe (U.K.), told SN global that membership tripled in the first few weeks following the opening here late last year.

And membership is key to the club style of doing business: Strictly speaking, clubs aren't open to the public. Instead, potential shoppers have to post some minimal qualification -- such as being employed by a major business in the region -- and must pay a fee to buy at the club. Operators of small businesses are also eligible to buy products that may be used for resale.

At the Price/Costco here, about 85% of the initial members were from businesses, the remainder from general consumers. To join, business, or trade, members pay an annual fee of $22.50 (15 pounds) plus a value-added tax to join, for a total of $26.43.

General consumers can establish their eligibility for Price/Costco by being employed in any of 18 job categories, including the military, banking, law, accounting, local government, education, journalism, the civil service, the health profession and surveying. These members pay $30 a year plus VAT for a total of $35.25.

The arrival of the warehouse clubs already has raised consumer awareness of price, and retailers' high-margin days are coming to an end, analysts say. The United Kingdom's three leading food retailers, Safeway, Sainsbury and Tesco, already have reacted to the opening of the Costco in Thurrock by adding bulk-pack aisles to their nearby stores.

In addition, they have introduced customer-loyalty cards that offer discounts for purchases over a certain amount.

As for overall strategy at Price/Costco, Moulton said the club is seen primarily as a wholesaler in the United Kingdom, with its main competition coming from U.K. cash-and-carries such as Makro, Nurdin & Peacock and Booker, which are open to both businesses and consumers.

The British cash-and-carry market currently is worth about $13.5 billion a year. Price/Costco is not actively seeking business from general consumers in the United Kingdom, Moulton said. Consumers typically represent about 65% of membership at the average Costco in the United States.

But he declined to predict whether the 85% trade level so far achieved at the Thurrock Costco will be maintained in the long term.

"We are not trying to achieve something different from what we do in the U.S.," Moulton said. "I would be thrilled to have Costco's U.S. membership levels at the end of the day here.

"Our plan was to pick up a U.S. Costco and drop it into the U.K.," he continued. "If anything was wrong, then we would adjust it from that base. But we would prove ourselves wrong first because we wanted to start off with what we knew."

The membership area is in the immediate front of the Thurrock store. On entering the club itself, jewelry, consumer electronics and major appliances are the first products displayed.

The right-hand side of the store contains such product categories as hardware, car care, small appliances, furniture, stationery and office supplies, housewares and gardening equipment. The left side carries canned goods, paper products, cereals and toiletries.

In the front of the store paralleling the checkouts is the wine and alcoholic beverage area, behind which is confectionery; books, videos and compact discs; men's and women's apparel and sports shoes; linens, and toys. In the back of the store are the departments for fresh fruit, vegetables and meat; the bakery, and the frozen and chilled departments. There also is a tire and exhaust-fitting center on the left-hand side of the store.

Inside the entrance to the store area itself is a small print shop offering printing of invoices and business stationery and a 24-hour photo processing department.

The store carries about 3,500 stockkeeping units. The product mix of the Thurrock store is similar to Costco stores in the United States, with about 40% food and 60% nonfood. Moulton said the nonfood element of the store was slightly higher in the early days because it opened in the pre-Christmas trading period.

No major changes are planned in the merchandise mix at this stage, however.

Profit margins are similar to those at Costco in the United States, at about 2.5% to 3.5%, Hyman of Verdict said.

Brands represented throughout the club include Sony, Panasonic, Hoover and ACT in the consumer electronics and major appliance areas; Levi Strauss, Nike, Reebok, Calvin Klein, Yves St. Laurent and Burberrys in the apparel and sports footwear section, and Findus, Birds Eye, Sara Lee, Nestle, Coke, Pepsi, Kleenex, Kellogg's and Sharwoods in the frozen and packaged grocery section.

Moulton said strong product categories in the weeks following the opening included consumer electronics, tires, baked goods and fresh produce.

"The fresh produce side was a bit of surprise because that normally takes a bit of time to build up trust for in the U.S.," Moulton said.

An Goldman Sachs analysis of the Thurrock site found Costco's prices are about 16% cheaper in food than a nearby Safeway and 25% cheaper on nonfood.

Against its main competition -- the U.K. cash-and-carries -- Costco is 6% cheaper on food and 14% on nonfood. But Goldman Sachs expressed some disappointment at certain elements of the club. For example, there aren't the value-added service departments common to U.S. clubs such as pharmacies, optical shops, takeout food or travel centers. Goldman Sachs also points out the apparel offering is even more limited than at U.S. clubs, as are the CDs, toys and jewelry. A possible reason for the limited selection in some product lines may be the admitted trouble Costco has had with suppliers in the United Kingdom.

Moulton has said some of the larger companies have declined to supply the club for fear of upsetting their traditional retail customers. Clearly Costco's retail competitors are pressuring their suppliers over potential links with the club operator.

Dixons, the United Kingdom's largest consumer electronics retailer, has warned companies that it expects to receive the same margins as Costco, for example.

But analysts contend that Price/Costco also may be using its buying strength in the United States to pressure suppliers in the United Kingdom, even threatening to ship their products over from the United States if necessary.

Moulton is said to have told Heinz, for example, that he was going to get its products one way or another, so Heinz still would get complaints from its retail customers even if the company didn't supply Costco directly.

Moulton declines to discuss specifics of his supplier relationships, but several companies contacted by CN -- including Kellogg, Levi Strauss and Sony -- claimed they were not supplying Costco directly.

Spokesmen at the companies declined to speculate how Costco is getting their merchandise.

It is illegal in the United Kingdom to refuse to supply a store with merchandise, however, and the companies said they simply have criteria all their retailers must meet before they can carry their products.

Regardless of problems with suppliers, Price/Costco already is gearing up for the opening of its second club in the United Kingdom. The 142,000-square-foot Bushey outlet also will be called Costco, Moulton said, adding there are no plans to use the Price Club name in the United Kingdom.

The Price Club name may be used whenever Price/Costco expands into Continental Europe, Moulton said. He declined to say which other European countries Price/Costco is presently targeting. When Costco's U.K. subsidiary was formed last year, it was thought to have its sights set on the United Kingdom and France. In addition, an agreement signed one year ago between Price Club Canada and Centros Commerciales Ceco to open warehouses in Spain and Portugal remains in place.

The Costcos in the United Kingdom are being developed by a new company that is 60% owned by Price/Costco, 20% by U.K. retailer Littlewoods and 20% by Carrefour of France.

Littlewoods had a joint venture with Price Club to open clubs in the United Kingdom prior to the merger of Costco and Price Club in the United States. Moulton said Carrefour and Littlewoods bring international sourcing skills and knowledge of the European market to the new venture as well as additional financing.

Price/Costco's positioning of itself as a wholesaler in Europe contrasts with the tactics of the second warehouse club operator to open in the United Kingdom, Nurdin & Peacock's Cargo Club. Analysts said Nurdin & Peacock, which has 46 cash-and-carries with sales of $2.25 billion (1.5 billion pounds) a year, is afraid Cargo Club could cause it to lose its traditional business customers, so it is tilting the club venture more toward the general consumer.