By Megan Phillips*
Multiple delays and a NZ$60 entry cost have done little to quench enthusiasm for New Zealand’s first Costco, with New Zealanders lining up for more than 90 minutes recently for a chance to buy a membership to the store.
A members-only warehouse retailer, the store will sell a wide range of products including food and grocery items, clothing, electronics, furniture and more. Commentators and people familiar with the brand have claimed the store will disrupt the duopoly that currently dominates New Zealand’s grocery sector.
But to enter the warehouse you must pay a membership fee, set at $60 a year or $55 if you own a business.
Just going by what is currently open – the petrol station – shoppers would need to spend $1,494 on petrol to gain enough savings to make up for the membership. A saving of 10 cents per litre on a 60 litre tank will require ten fills. That said, in the US, replacing one tyre would allow you to break even.
Considering the upfront cost for shoppers, will Costco actually be worth it?
Are prices really cheaper?
Research shows that club store prices can be 22.5% lower than traditional supermarkets.
Already, Costco’s store-adjacent petrol station in Auckland, which opened in April, has had a significant impact on fuel prices in the neighbouring community.
As the world’s third largest retailer, Costco has significant buying power to support its everyday low pricing strategy.
Costco buys in bulk, allowing the store to achieve economies of scale creating savings which can then be passed on to members. The company limits the mark-up on merchandise to between 14 and 15% above costs. In comparison, department stores typically mark up their products by 30% or above.
Costco also has a no-frills self-service store environment and an extremely low marketing budget – which save around 2% a year in costs.
But shoppers will need to get used to a smaller range of each product. Instead of eight brands of toothpaste offered by Countdown online, for example, you might only find four in Costco. Fewer brands in a category allows Costco to buy more of a single product and push for discounts from suppliers.
Costco will push a behaviour change
Costco differs from traditional supermarkets in that it is a warehouse-style shopping experience where you shop from pallets and buy in bulk. Package sizes are often three times larger compared with traditional supermarkets. So, instead of a 405 gram jar of mayonnaise, Costco sells a 1.8 kilogram jar.
Kiwis typically visit the supermarket one to three times per week. Costco members shop on average every two to three weeks to stock up on bulk items.
Shopping in bulk might not fit with our current shopping culture. The Costco way of shopping will require behaviour changes to make sense.
The company also pushes the use of grocery coupons, common in the United States but less so in New Zealand.
People go crazy for Costco
Overseas, Costco is a destination store and research suggests that travel distances can be almost 12 times longer compared with traditional supermarkets.
Once at the store, people usually spend considerable amounts of time to do their shopping. There are no in-store signs or directories and shopping can feel like a scavenger hunt.
That said, Costco has a massive following. One fanatic even tattooed the Costco’s private label brand (Kirkland Signature) on himself, and other loyal shoppers have proposed or even tied the knot in the warehouse.
The adoration seems to be building in New Zealand with 70,000 followers on a local fan page.
How to save
To get the most out of the membership, shoppers are likely to visit the store more frequently and more visits can mean more money spent. If you decide the opportunity for bulk buying is worth the joining fee, here are some tips for resisting the urge to splurge.
1. Buy only what you need
The chance to buy in bulk is a novelty for many Kiwis, so try to temper the temptation by making a list and sticking to it. Remember, whatever you buy you have to store somewhere and will need to use before it expires.
Kiwi fridges and pantries tend to be small compared to US storage space. The standard New Zealand fridge, for example, is 60 centimetres wide, while the average fridge in the US is 90cm wide.
The long travel distance for some is a sunk cost, so shoppers will buy more than they need to ensure the visit is worthwhile.
2. ‘Limited time only!’ offers aim to empty your wallet
The highly edited assortment that is only offered for a limited period creates a sense of urgency – buy now or it will be gone tomorrow.
Of the 4,000 products available at a typical Costco warehouse, 25% are considered treasure hunt products. These are seasonal or speciality items that are constantly changing.
An interesting part of this strategy is the sense of scarcity it creates. Shoppers are more likely to buy if they realise goods are not going to be on offer the following week. This can be exciting and enhances the treasure hunt feeling, but it can also lead to increased spending.
3. Beware of impulse buying
Although prices are very low, a study found that people who shop at Costco-like stores don’t necessarily reduce their total spending. The savings from planned purchases usually free up budget to be spent on impulse items.
Licensing theory suggests that once shoppers have made progress toward their goal (maybe finding what they need), they then give themselves permission to indulge in a treat.
4. Take the savings and stick to what you will actually use
The larger product sizes can lead to greater purchase quantities. Larger families and heavy buyers are more susceptible to this. Buying more than you need can accelerate consumption. It might also lead to food waste if you don’t consume it all before it expires, especially fresh food items such as a massive bag of salad.
* Megan Phillips is Senior Lecturer (Assistant Professor) in Retailing at the Auckland University of Technology
This article is republished from The Conversation under a Creative Commons license. Read the original article.
27 Comments
Not New Zealanders as a whole, NZer's living near a main centre , and with the means to travel further to get their savings. Not that great for the planet either.
We should be planning for the opposite , affordable food at the local dairy , within cycling or walking distance.
That distance question is though a bit of a challenge. Understand the Christchurch outlet is to be at Rolleston. Ok the motorway takes time off that journey but it still takes time getting through the actual suburbs and fuel to do that. With all the space not yet utilised after the EQs could have built much closer to the central city. Still guess they were quite rightly worried that such a venue would soon be surrounded by and limited to bicycle access only, so probably prudent in the circumstances.
We used costco when I lived in the states. I guess probably we will eventually here too, if the costco NZ manages to reproduce the experience reasonably well. Going out west from the shore isn't nothing, though.
I imagine one of the biggest benefits will be if costco's presence means that existing retailers have to sharpen their pencils a bit.
I work for a supplier to Costco and can confirm they are going to be significantly cheaper than current grocery prices in NZ.
They work on a flat 14% margin vs a foodstuffs store at around 30% and countdown anywhere over 40%
Average spend per shop is 600-800$ in AUS.
In meeting with Costco senior leaders in May, they said sign ups for NZ were well well well above their expectations. Likely the first two months are going to be crazy in store.
I wont visit until they've been open a few months and they die down a bit.
Shopping on average is a quarterly visit - so way less driving than weekly shop to your local supermarket.
Any questions, happy to answer.
The vast majority of their products is permanently stocked, as they have long term supplier contracts which usually soak up a large portion of a supplier's output due to the global nature of the contract. Eg. They only buy 200 wine labels, but those wines are available globally (including Cloudy Bay and Penfolds). Winning a Costco supply contract is highly sought after. They also produce their own homebrand products, like toilet paper and dog food, which is always available. Then they have their special products, which they dont advertise so you have to go in store and "treasure hunt" for. Its always a surprise to see whats there, and its the reason why you always walk out spending hundreds of dollars more than what you planned to. CostCo is not really where poor people shop to save money, its for wealthy people who like to bag a drop dead bargain and who have the available funds to purchase it.
When Costco opened in Japan, it was predicted that they would fail fast. Carrefour failed and Walmart didn't really bother. At least 60% of product lines in Costco Japan were domestic. The business has boomed and there are now 30 outlets across Japan. But once again, it all comes back to foot traffic and economies of scale. It doesn't have this in NZ.
Foot traffic? Aint nobody getting in and out of Costco on foot. You need a car with decent boot space to take the shopping haul home in. Have you seen the size of the Costco trolleys? And still you will see people at the checkout with multiple full trolleys. Its not a store where you just pop in to buy a bottle of milk and a loaf of bread on your way to the train station.
That's what I mean. Costco has done extremely well in Japan where it was expected to fail. The reason why it has succeeded is based around the shopper mission. Most of tis locations are not conveniently located but still accessible and near high popn areas.
Costco Japan has a high incidence of trade customers as well. The following is an interesting research piece on the success of Costco in Japan. Interesting quote:
In contrast, food retailing in Japan is much more developed and much more resistant to foreign competition. Carrefour, Costco, Wal-Mart and Tesco all attempted to introduce changes to the Japanese food market. Carrefour brought its hypermarket format to Japan in 2000, but from the Japanese consumers’ viewpoint, it was not much different from the Japanese general merchandise stores. In fact, domestic food retailers were so advanced that they made it difficult for Carrefour to penetrate the Japanese food market. It is no exaggeration to say that domestic retailers have been dominating the Japanese food market. Not being able to achieve expected results, Carrefour had to exit Japan in 2005.
Criticism here is strange. Guess you don't know what you don't know...
Used Costco for years, its a game changer for NZ and cost of living. Biggest issue is the package sizes are large, and add up quickly. Good for families but difficult to manage for couples, I'd expect to see buying clubs start popping up for group shopping and sharing.
No doubt, Costco will have 3 stores around Auckland and stores in Welly/Chch in a few years. While located in Cities, its common for quarterly shops for those in more rural settings who have space to store food.
The Costco I know (from 20-odd years ago in the UK) also sold whiteware, TVs, hi-fis, cameras, phones, books, CDs, tools, etc. It was like IKEA - always very busy, with long queues at the checkouts, and everyone leaving with their over-sized trolleys full. And like IKEA, a lot of people stopping to eat at the cheap in-house cafe. Their returns policy was pretty much no questions asked; have an exchange or your money back. Even for the UK, which is a much easier place to return things than NZ, it was very low-stress. It competed very well on food in the UK, which of course has a very competitive food retail environment, though that was before Aldi and Lidl. I can't see how they can fail against the competition in NZ (same as IKEA).
Its the same in Australia. I saved my membership fee alone on a purchase of a Dyson stick vacuum cleaner. I almost walked out with an 80" Samsung TV once (still one of my biggest regrets is not buying it lol). I bought my NZ$265 moisturiser there in 2 for the price of 1 packs. And the best department of all is the alcohol dept - massive savings on top quality wine and spirits. CostCo is the worlds largest wine buyer, and if you havent been able to get your hands on Cloudy Bay wine for years, you soon will be able to. If you own a large breed dog, you will find their huge bags of dog biscuits will be a super saver, along with big savings on pet products like flea treatments. I only miss 2 things about Australia - one is CostCo and the other is IKEA. Hopefully both will be in Christchurch one day.
I've been in Japan many times. If you have a separate freezer it's great for stocking up on a winters worth of meat and frozen stuff for cheap. The trick is to avoid nonsense like giant bags of chips, cases of soft drink, or stuff you use very slowly. I remember buying a 500g pack of peppercorns because it was 20% what I paid in the supermarket but it was only a fraction gone a few years later.
I live within a few minutes drive to the Westgate Costco and this is how I see it working for me. Their fuel price is consistently about 15c cheaper than my traditional petrol station. Extrapolated over my average annual fuel consumption I would save enough to pay for a Costco card. My small household does not require bulk buying. However, 'big ticket' items is where I see it paying off. Remember: membership is for one year only. So if I see a year ahead of big purchases (eg. moving house), my card is paid for by petrol purchases. Then I get to enjoy all the savings from the sofa, fridge, whatever, and then I just let my membership lapse at the end of the year. Job done!
I was a single person household and still bought a lot of stuff there. Just didnt buy perishables like fruit and vege. But meat and seafood was great, just repacked in (CostCo purchased) freezer bags and frozen. Bought flea treatments for the furkids, moisturiser, laundry products (which lasted for years), wine and vodka (not sold in bulk lol), and my favourite, buckets of M&Ms :-) Its also good for catering for parties, and buying presents like books and kids toys.
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