As Costco unveiled its fourth-quarter results (the company made $US2.04 billion in the 12 months to September 1, up 19% on last year but down slightly on analysts’ expectations), the company’s chief financial officer had something to say about his Australian customers.
The company’s international operations are where the bulk of its growth is coming from, and the best performer was Australia.
”I think when we opened in Australia we got off to an incredible start, our highest per share volumes ever in a country,” Costco CFO Richard Galanti told analysts.
Unlike locally-grown supermarket giants Coles and Woolworths, and foreign-owned competitor Aldi, the bulk of Costco’s profits come from its membership fees. To shop at Costco, Australian consumers must pay $60 annually (or $55 if they are a business).
With three stores – one in Melbourne, one in Sydney and another in Canberra – the company is estimated to have 100,000 members at its Melbourne and Sydney stores. Two more stores are expected to open within the next 12 months.
In August, Citi analyst Craig Woolford told a public symposium that Costco and Aldi are key threats to the dominance of Coles and Woolworths.
“I call them unstoppable,” he said.
This was because of their vastly lower costs of operating, which allowed them to offer lower prices. According to company reports and Citi’s own research, the cost of doing business, as a percentage of margins, was 19.8% for Woolworths, and 20.9% for Coles. However, it was only 10% of margins for Aldi and only 10.1% for Costco.
However, Peter Esho, chief market analyst at Invast, told SmartCompany this morning that it was difficult to gauge Costco’s success because of its vastly different business model.
“Their concept is new in Australia, and I think the novelty around that business model is what appeals, rather than their actual prices.”
The real upstart in the grocery space is Aldi, Esho added, saying the German discount supermarket chain is “shaking up the domestic supermarket space”.
“I think Costco will continue to grow, but it’s coming off a very low base. It probably won’t be a significant player in the Australian market in terms of volumes.”
The growth of both foreign-owned supermarkets is likely to mean margins in the grocery industry continue to be under pressure, Esho says.
“The biggest losers out of this will likely be Metcash and IGA.”
Another loser could be local suppliers. In June this year, competition lawyer and former ACCC researcher Alexandra Merrett, along with economist and Melbourne University lecturer Rhonda Smith, documented the number of times supermarket catalogues advertised branded products, as opposed to their own private label brands.
Aldi was unlikely to ever advertise branded products, instead heavily focusing on its own private labels.
Private label brands offer supermarkets higher margins, and sell more cheaply than branded products, forcing suppliers of such products to compete more vigorously on price.