Patrick Stafford | 30 January 2013

Australian Costco gets $50 million boost and turns its first profit

Big-box retailing is in full swing in Australia, with the local arm of bulk buying group Costco receiving yet another $50 million from its parent company in order to fund further expansion after reporting its first profit.

The move comes as the bulk buying industry continues to expand in Australia, with Costco planning an expansion which will bring multiple stores in capital cities across the country. The business received $140 million in 2012 to help open new stores.

But while Costco has made an impressive stamp on the food and grocery market in Australia, some analysts believe it isn't the supermarkets which should be scared. Instead, as companies such as Costco and Aldi expand, experts say it's the wholesale market that should be worried.

"The biggest losers here are the wholesalers," says City Markets analyst Peter Esho. "Costco is a wholesale model rather than a mainstream supermarket."

"It's going to nibble into Coles and Woolworths, and IGA, but I don't think at this stage there is going to be too much impact."

Esho points to Coles' own financial results, released today, which show food and liquor sales increased 3.9% in the second quarter on a like-for-like basis.

New figures lodged with the Australian Securities and Investments Commission show Costco turned a profit of $9.73 million during the year to September 2012, while revenue also doubled to over $609.5 million. According to Fairfax, the Melbourne and Sydney stores generated most of that revenue, a large portion of which comes from membership sales.

Costco Australia managing director Patrick Noone told SmartCompany the business is continuing its expansion plans, and is constantly looking for new locations.

"We're always searching," he says. "Always looking at ways to do things better."

However, he did say the lack of property available for big-box sites has been a challenge. "The lack of availability has been a problem," he says.

The business plans on opening locations across the country, including two or three locations in some cities. Adelaide is a possibility soon, although Noone said a Perth location may not arrive for a while.

The introduction of Costco into the Australian market has signalled a surge of big-box retailing. The local big-box industry has pushed for new laws to help businesses find suitable land more easily, as they require larger than normal sites.

Noone said Costco usually puts its case forward regarding zoning laws - its Auburn location in Sydney suffered some delays due to zoning disputes.

But the expansion of Costco shouldn't make supermarkets feel uneasy, says Esho. He argues the company is playing on a different field.

"I think ALDI is very well placed to defend itself, it has its own brands, exclusive brands, that run on a low cost model and are competitive. I think the impact on ALDI would be minimal."

ALDI has expanded to nearly 300 stores since opening here in 2001. Esho says the main impact will be directed at the German company, along with other wholesalers.

"There might be an impact if wholesaling draws people away from the main supermarkets, where that migration sees people buying at Costco and ALDI for main products instead of Coles and Woolworths."

Wholesalers will feel the pinch, he says. Metcash was in a position to be hurt, but the company has already restructured itself in anticipation of Costco's expansion.

Costco Australia managing director Patrick Noone has previously said the business wants to expand with two more stores in 2013. A second Melbourne store in the eastern suburb of Ringwood is currently being constructed.

Esho says despite the expansion plan, the existing grocery market doesn't have a lot to be worried about.

"I don't think at this stage there'll be too much of an impact, at least not at this stage – and it won't for at least a decade."

This article originally appeared on SmartCompany.

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