Costco is shaking up wholesale and retail industries, IBIS viewpoint

Posted by IBIS World on 19th October 2016

Viewpoint piece by IBISWorld. IBISWorld is an Australian research company which provides market research reports.

Costco Wholesale Australia Pty Ltd, a subsidiary of the US-based chain Costco Wholesale Corporation, entered the Australian market in 2009 through a single store in Melbourne. Since then, the company has grown its presence across several retailing and wholesaling industries, and has put pressure on established supermarkets and grocery stores, grocery wholesalers and consumer goods retailers.

Costco is continuing to rapidly expand, and now operates eight stores across Victoria, New South Wales, the Australian Capital Territory, South Australia and Queensland, with plans to open another two new stores in Sydney and Melbourne. Costco sells memberships for approximately $60 per year, and members who pay this fee can then purchase the company’s low-price products in a wholesale format. New store openings saw Costco record revenue of $1.3 billion in its 2014-15 financial year (year ending August), after 50.5% growth on the previous year.

Among supermarkets and grocery stores, an industry expected to be worth $105.1 billion in 2016-17, Costco currently accounts for an estimated 1.7% of industry revenue. Despite this small proportion, the company has been rapidly expanding through new store openings and the appeal of its cheap prices. Costco has put pressure on Coles and Woolworths, the industry’s two largest players, which are already struggling with Aldi’s growing presence. Costco’s influence is expected to increase over the next few years, particularly if the company follows through with its reported intention to purchase the sites of Woolworths’ Masters big-box hardware stores, which are due to close in December 2016.

The general line grocery wholesaling industry has faced difficult operating conditions over the past five years. Increasing instances of wholesale bypass and heavy supermarket discounting have constrained growth for wholesalers. As a result, industry revenue is expected to be limited, increasing at an annualised 1.8% over the five years through 2016-17, to total $21.4 billion. Increasing instances of wholesale bypass and heavy supermarket discounting have constrained growth for wholesalers. Despite accounting for a negligible proportion of the industry’s total revenue, Costco provides wholesaling services to businesses through bulk order services for business members. If the company follows its parent company’s model, its continuing expansion will likely lead to increased investment in its wholesaling operations. This would likely hurry along the exit of many smaller, independently-owned wholesalers, which are already struggling.

Aside from groceries and other purchases traditionally made at supermarkets, Costco also supplies a range of other consumer goods. These include clothes, hardware, electronics, cleaning equipment, pharmacy products, and toys and games. The consumer goods retail industry is estimated to be worth $161.4 billion dollars in 2016-17. As the company continues to expand, Costco is anticipated to increase its market share in this industry and put pressure on major consumer goods retailers, such as Wesfarmers and Woolworths.

Despite operating in Australia for less than a decade, Costco is already making its presence known across retailing and wholesaling industries. Although it is not yet a major player in any industry, this may change as the company continues to expand and increase its revenue growth over the next five years.

This article was republished with permission from IBISWorld.

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