There was much excitement in the lead-up to American retail giant Costco’s first New Zealand store opening.
How cheap would the food be? What will butter cost? And what about beef mince, or fruit, or that hideously expensive basic, cheese?
Auckland-based consumers within driving range of the west Auckland store were salivating at the hope Costco would be taking it to the big two supermarket duopoly, Woolworths and Foodstuffs, and those alleged excess profits.
There were even rumoured supermarket spies scoping out Costco’s shelves on its first day, walking every aisle of the store and recording what the US firm was selling, and for how much.
What may have surprised some of Costco’s competitors is that some of the best deals in Costco’s first weeks in Aotearoa were items you would more likely see at Mitre10 or Bunnings, or even Farmers, rather than Pak ‘n Save or Countdown.
Take this example from a happy shopper.
Costco Auckland was selling a Masterbuilt Gravity Series 800 griddle, grill and smoker for $1299. Now, this product is not my cup of tea as a mostly-vegetarian, but this was a deal, with the same product being sold for about $2400 at competing NZ retail stores.
One savvy shopper took advantage of Costco’s big grill discount, posting a photo of their new toy on social platform Reddit.
"Expected to just walk in and get some bulk toilet paper walked out with a smoker for $1299. Retails at mitre 10 and other bbq stores for $2399," they said, underneath a photo of their car boot with a brand spanking new smoker residing inside.
But it wasn’t long before the Costco shopper was one-upped by an even more enterprising soul.
“After I saw another post by another user on here today,” they wrote on Reddit, “who stated Costco had the master built 800 series for $1299 when they usually cost around $2399-$2499 depending where you go. I went straight to mitre 10 and they bet it [sic] by 15% as per their price promise. Got it for $1004. Pretty happy.”
And the same grill is also being offered by online importer Container Door as a parallel import deal for $1999. In this case you have to agree to buy it in advance, and Container Door will import it for you.
But you won’t see a $2000-grill and smoker for sale at New World, and not in Countdown, and certainly not in a Pak 'n Save.
Because Costco isn’t a supermarket. And in fact, it’s not even a retail store like Mitre 10 in the traditional sense.
Costco has more in common with Foodstuffs-owned wholesaler Gilmours than New World. An even more similar business model might be New Zealand wholesale buying club Cherry Tree, but with obvious differences such as the lack of retail stores.
Cherry Tree has three levels of memberships, silver, gold and platinum.
Silver doesn’t cost anything to sign up, and members are offered discounts of up to 25% off recommended retail price on products offered by agreement with Cherry Tree suppliers.
Gold comes with a $995 one-off joining fee and then an annual membership fee of $250. In return, Cherry Tree members get up to 60% off recommended retail price on more than 550,000 products from 2,400 brands.
To get the discounts, you have to be a member.
At Costco, to get its discounts you also must also be a member. You can’t just shop in a Costco store on a whim; the lines of people out the front are testament to the no member ID, no entry rule for Costco’s new store.
Costco has two memberships, gold star for individual membership with an annual fee of $60 and business membership for small business owners and enterprises for $50 a year.
And this is what makes Costco so different. It charges you before you even set foot inside its warehouse. You pay up because you expect to pay less.
“It’s a unique model,” retail expert and managing director of Coriolis, Tim Morris says.
“It's kind of part-wholesale. People are currently talking about it as if it competes with grocery. Everyone's focused on the duopoly and that it’s a new competitor. Oh, so exciting. That's not really who they compete with.”
Morris says Costco has flourished with a model that hasn’t worked for many others. Many have tried the club and membership model, and many have died.
But if we are looking to Costco to kill the duopoly, think again.
Morris says Costco doesn’t kill competitors, it just “takes a little bit from everyone”.
“In practice, like the US, people will go to Costco and then they'll realise they don't have everything they need. And while they're there, they'll go to Mitre 10. Or they'll go to Bunnings … It competes with Warehouse Stationery, it competes with Harvey Norman's, it competes with Bunnings.”
And it is aggressively competing for business customers. Morris says at least 60-70% of what Costco sells is to other businesses.
Its membership model means Costco has a nice padding of revenue always coming in that isn’t reliant on sales. For its most recent financial quarter, Costco reported US and Canada renewal rates for memberships of 92.6%. It has more than 100 million members, and Costco Australia and New Zealand managing director Patrick Noone said its NZ membership sign-up numbers were a record.
It is clearly a winner with consumers. Costco’s latest results show it pulled in US$4.2 billion from membership fees for the 52-week period ending August 28, an increase from the same period in the previous year, when it collected US$3.8b in membership fees. These fees are a significant contributor to Costco's profit.
Much like how Costco will take a little bit from lots of competitors, in taking a little bit (membership) from its customers up front allows it to ruthlessly focus on value and those hot, big-ticket deals, like the expensive griller and smoker, that make a membership worthwhile.
16 Comments
The new entrant here is simply bringing pricing practices and competition closer to levels akin to a Western economy.
The fact that a reporter here or elsewhere can't write a piece without making it sound like an ad shows how much we're being fleeced by the supermarket duopoly.
Forget news articles, I saw a post on LinkedIn from the head of NZ Grocery Council on Costco and that too sounded like a paid advert.
I wonder how many of the opening prices were Costco specials and that after a few months prices will rise but be only marginally more expensive than the others. Time will tell. Immediate family will obtain one membership, purchase grocery items and split the purchases.
CostCo isn't designed to replace high frequency grocery shopping (weekly or more frequent) for perishable items - fruit and vege, milk, non-frozen meat etc.
At best there will be one or two CostCo's per city and only a few in NZ. For instance, one in Greater Christchurch (Rolleston).
Shoppers will make one big trip at infrequent intervals (say once a month) to stock up on their bulk grocery shopping needs and possibly to buy large ticket items.
As such, CostCo will provide a partial but incomplete competition for the supermarket duopoly.
P.S there will be some wholesale bulk shopping at CostCo by smaller retail businesses too.
Costco or any big enterprise isn't the solution to our duopoly. What we need is more small businesses that spread ownership and profits throughout NZ population and not offshore.
To work at these places at close to minimum wage is soul destroying for the employee. Lets face it, would you want you kid to aspire to work the floor in a Costco someday? Suggest you may want her to work in the family business perhaps - if you had one.
We need to be better at supporting local small businesses. Multinationals are a symptom of over extended globalisation which has run its course.
Multinationals are inevitable in a small country like NZ. Heaven forbid what our standard of living would be if we had to buy everything locally. The internet exists and we can see what similar items cost in other parts of the world vs. what they cost in NZ. That would be orders of magnitude worse if we could only source retail product from within.
Costco Japan used their outlets to introduce unique products to the Japan market -- American white wear, audio systems, laptops for the U.S. market, branded trade tools, compressors, among many other things. These goods were not there for high-volume sales, but it made the visit quite memorable and also targeted shopper segments such as tradespeople. I later discovered that Costco Japan does well in the food service channel.
In the 00s, I was based sometime in Osaka and read about the leading audio system dedicated to the iPod / iPhone on C-NET. An amazing piece of kit focused on coaxing sound quaiity and power from your device. Of course, such systems find it hard to enter the Japan market. I went to Costco one day and they had it for sale. The audio system has been back to NZ and then back to Asia with me.
We used to grocery shop at Pak N Save, local butcher and local fruit shop. Now we added Costco, which means a slice of our spending will go there now every month. The size of the pie is the same, but now we have four slices of smaller pie instead of three.
I can already see Pak N Save competing on price with Costco in the area, pretty obvious that this increased competition benefits the average New Zealander.
Not sure I'd believe the mitre 10 price match post.For one they had to take evidence of the price to mitre 10 . How, there's no website pricing or catalogue? but the main problem is the price match excludes on account ( cash or credit ) pricing . having to be a member of Costco would mean you are on account , even if paying cash. .
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