People get Costco, but does the Minister?
Do consumers want cheaper prices and greater product choices? Of course they do and that’s why it is essential that more Costco supermarkets open up around Australia.
Costco is a US company that operates retail warehouses where people can become members for a yearly fee which then entitles them to shop at a massive warehouse offering products at substantial discounts to competitors.
By way of background, Costco has about 563 warehouses worldwide with around 410 operated in the US, and the remainder operated in Canada, Mexico, the UK, Taiwan, Korea, Japan and Australia. We currently only have one Costco in Melbourne’s Docklands which opened on 17 August 2009.
The Costco model is very simple. It builds a “big box” warehouse of around 14,000 square metres and stocks around 4,000 products presented in bulk for members to select. Individuals pay an annual fee of $60, while business members can buy an annual membership for $55. The product categories on offer are very broad and include groceries, confectionary, electronic appliances, automotive supplies, toys, hardware, sporting goods, jewellery, watches, cameras, books, apparel, health and beauty, furniture, and office supplies and equipment.
Costco stocks known brands as well as generic products and offers its products at prices estimated to be up to 15% cheaper than competitors. Members typically buy in bulk and may only visit once every 2-3 weeks. Clearly, Costco works on the premise that the substantial savings members can achieve from buying at lower prices and in bulk justifies the yearly membership.
The Costco model appeals to consumers through a one stop retail warehouse concept where they may buy items less often, but in bulk and at lower prices. It’s a novel approach which combines the typical supermarket with a traditional department store.
Clearly, it’s a different model to Coles, Woolworths and ALDI. A typical Coles and Woolworths supermarket is between 2,000 and 3,000 square metres and stocks up to 20,000 or more products. An ALDI supermarket is typically up 1,500 square metres and offers only hundreds of mostly “private label” (ie generic) products. Apart from the massive size of Costco warehouses, Costco also sets itself apart by requiring the payment of membership fees.
While not traditionally part of the supermarket landscape in Australia, membership fees not only generate an upfront cash flow for Costco, but they offer an important psychological and financial incentive for customers to revisit the Costco warehouse. Much like petrol shopper dockets from Coles and Woolworths are designed to get customers back, membership fees can be used as an obvious way to “tie” customers to the Costco. Frequent flyer and other loyalty programs try to do the same thing. With Costco, the membership fee also seeks to give “members” (ie customers) a sense of exclusivity.
How will Australians respond to the payment of membership fees for a grocery/retailing experience? Only time will tell, but with reportedly over 50,000 members already paid up, the Melbourne Docklands Costco warehouse is certainly off to a good start given that it only opened in August last year. Will members renew their yearly membership? Again only time will tell, but interestingly, Costco states that they have a renewal rate of 87% in the US and Canada.
Now, will we see more Costco warehouses around Australia? Well, hopefully yes. But it may not be that simple as the big boys, namely the established shopping centre landlords and their industry association – the Shopping Centre Council of Australia are taking issue with the proposed Costco in the Sydney suburb of Auburn.
In fact, the Shopping Centre Council and its members – the big shopping centre landlords such as Westfield are opposing the Auburn development. While there are legal arguments that the Costco proposal may not completely fit within existing State planning and zoning requirements, the real concern is that the shopping centre landlords are simply trying to prevent or slow down the entry of a new competitor into the market.
For those not familiar with Sydney, Westfield, for example, has two large shopping centres in nearby Burwood and Parramatta. It doesn’t take a genius or even an economics degree to think that Westfield may possibly want to protect its nearby shopping centres from competition.
Needless to say, there is a danger that the various planning and zoning objections being made against Costco’s Auburn proposal may be an anti-competitive way to deny Sydney consumers much needed access to a new supermarket competitor. Melbourne consumers have responded very favourably to Costco opening up in Docklands and Sydney consumers should be given the chance to shop at a Costco sooner rather than later.
Planning and zoning objections no matter how valid under State laws, need to be carefully considered within the context of our federal competition laws. Clearly, there are serious questions to be asked about whether planning and zoning objections can or should be a breach of our competition laws. After all, planning and zoning objections can used in a potentially anti-competitive manner and for that reason alone should, whenever lodged by competitors, be closely reviewed by the competition regulator for possible breaches of our competition laws.
So who is standing up for those consumers in Sydney who would like to shop at a Costco? Will Federal Competition Minister Craig Emerson approach Westfield and other shopping centre landlords to withdraw their objections? Will the ACCC ask those curly questions of the shopping centres landlords and the Shopping Centre Council about why they are opposing the Costco development, especially given that there is an obvious place for the new competition that Costco would bring to the Sydney?
So, please Minister Emerson, can you make sure consumers quickly get more Costco supermarkets and that the cosy club of big existing shopping landlords doesn’t call the shots as far as getting the Sydney Costco opened as soon as possible.
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