Trading with Costco Identifying how it plans to win and the supplier opportunities - IGD.com
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Trading with Costco
Identifying how it plans to win and the supplier opportunities
February 17
© IGD 2017 Page 1
Introduction This insight report was prepared by:
Stewart Samuel Based in North America, Stewart
Program Director, IGD Canada heads up all of IGD's research and
coverage on the region. He regularly
stewart.samuel@igd.com
travels across the US and Canada,
@Stewart_IGD visiting stores, and meeting with
senior retail and supplier teams.
Costco continues to be one of the most
successful retailers globally. For several
years it has delivered consistent sales and
profit growth, in the US and across its
international markets. Currently it is the
second largest retailer globally based on
sales.
At a time when other retailers have been
testing and developing new store formats
and aggressively pursuing ecommerce and
digital initiatives, Costco has remained
focused on its core offer.
However, the retailer is making a more
determined push with ecommerce and is set
to expand its presence into two new markets
this year.
In this report we look at how the retailer
plans to grow and develop over the next five
years, and the opportunities for suppliers to
engage in key markets.
© IGD 2017 Source: IGD Research Page 2
Inside this
report
Costco today and tomorrow
Costco in key markets
Strategic priorities
Supplier opportunities
© IGD 2017 Page 3
Costco today Costco operates over 700 clubs across nine countries, with over 86m members. It
plans to open its first clubs in France and Iceland this year. It also sells in China
through its online Tmall store.
While many of its existing markets offer significant expansion opportunities, regions
such as Latin America and the Middle East and Africa could, over the long-term, be a
source of future growth.
Current markets
Future markets
Ecommerce only
© IGD 2017 Source: IGD Research Page 4
Costco
tomorrow
Country $m 2016 $m 2021 CAGR % Clubs 2016 Clubs 2021
USA 86,579 109,865 4.9% 501 585
Canada 16,756 21,690 5.3% 91 110
Mexico 2,670 3,570 6.0% 36 41
UK 2,749 3,693 6.1% 28 33
Japan 2,611 3,131 3.7% 25 29
Australia 1,116 2,012 12.5% 8 15
South Korea 1,323 1,880 7.3% 12 17
Taiwan 1,165 1,746 8.4% 12 17
Spain 244 524 16.5% 2 6
Total 115,214 148,113 5.2% 715 853
© IGD 2017 Source: IGD Research Page 5
SWOT
Analysis
Strengths Weaknesses
• Successful operating model focused on the intersection of • Significantly invested in ‘big-box’ retailing; its model contrasts
quality and value with the shift towards smaller formats
• Demonstrated success with single core format, which has strong • Costco maintains a relative conservative approach to new store
appeal globally growth
• Continues to invest in developing its Kirkland Signature private • Current expansion plans are focused on tough and mature
label range, offering further headroom for growth European markets
Opportunities Threats
• The retailer could significantly increase the pace of international • A change in leadership at Sam’s Club, and the ongoing
expansion; Costco has no exposure in South America or the investment in digital initiatives could pose a stronger threat
Middle East within its home market
• Although it is increasing the pace of ecommerce investment, this • The development of alternative wholesale formats in Latin
is an area where it could move even more quickly America could limit further opportunities for Costco in the region
and in Mexico
• Auto replenishment and online subscription services for
commodity items
© IGD 2017 Source: IGD Research Page 6
With operations across nine markets, soon to be 11, we review Costco’s priorities
Key markets to across four of its current operations, and its future entry into the competitive French
market.
watch
USA
Canada
UK
China
France
© IGD 2017 Source: IGD Research Page 7
USA
Costco’s home market represents 75% of all
of its sales, making success here essential in
Sales 2017-2021f
determining the overall performance of the 120,000
company.
While Costco faces a significant competitor in 100,000
the form of Walmart’s Sam’s Club operation,
its growth has outpaced this business for 80,000
US $m
several years. 60,000
However, with a number of new initiatives
launched to re-position Sam’s Club, and 40,000
channel leadership established with its digital
and ecommerce programs, Costco could see 20,000
a more formidable competitor emerge.
0
2017 2018 2019 2020 2021
Club Online
The US market leads Costco’s ecommerce The US market accounts for around
initiatives, particularly in terms of half of all Costco’s new store openings
partnerships with third-party companies each year. The retailer continues to
which deliver its in-club offer. Success here see significant scope for further
could lead to similar partnerships being set expansion both with its core model
up in other markets. and its Business Centres.
© IGD 2017 Source: IGD Research Page 8
Canada
Canada has been one of Costco’s most
successful international markets for a
Sales 2017-2021f
number of years. 35,000
In addition to developing a proposition which 30,000
has resonated strongly with Canadian
shoppers, the retailer has faced limited 25,000
CAD $m
competition in the channel.
20,000
However, more recently Loblaw has started
to place an increased focus on its Wholesale 15,000
Club format, although the offer remains more 10,000
focused on business owners, compared to
Costco which benefits from a solid base of 5,000
individual shoppers.
0
2017 2018 2019 2020 2021
Club Online
As Costco approaches 100 clubs in Canada, Costco will open seven new clubs in
it is getting close to its headroom. However, the current financial year, including its
there is potentially room for more sites than first Business Centre outside of the
initially anticipated in order to relieve US. This represents a significant
pressures on existing locations. Expect to ramping up of new space as it looks to
also see a stronger focus on ecommerce. build on its existing success in the
market.
© IGD 2017 Source: IGD Research Page 9
United
Kingdom
Costco launched in the UK in 1991, and now
has 28 warehouses in the market, making it Sales 2017-2021f
Costco’s fourth largest national operation,
and the biggest outside of the Americas. 3,500
Owing to trading regulations, Costco UK has 3,000
a stronger ‘trade’ focus than other markets, 2,500
Sales £m
specifically targeting independent retailers
and caterers, both with discounted 2,000
membership and longer warehouse opening 1,500
hours.
1,000
The online offer was launched in 2012 and
has grown quickly (now worth almost 3% of 500
total sales). It is also rolling out gas stations
0
to expand its warehouse offer, with four now
operating and more in development. 2017 2018 2019 2020 2021
Expansion in the UK has been steady rather Club Online
than spectacular, slowed by restrictions in
development regulation. However, Costco New space is forecast to drive around
opens 1-2 sites each year, and sees overall half of total sales growth ongoing. As
potential for up to 40 in the market. well as adding new services, Costco
UK has successfully driven like-for-like
Future growth will also be supported by sales with ongoing improvements and
online development, as well as adding Price-marked packs for resale, targeting
independent retail customers. promotional activity focused in its food
services like gas stations to existing sites. and sundries categories.
© IGD 2017 Source: www.costco.co.uk and IGD Research Page 10Australia
Costco first entered the Australian market in
2009, with the initial stores among the most
Sales 2017-2021f
successful it has opened globally. Since then 3,000
the retailer has gone on to grow its estate
and attract new shoppers to its proposition; it
2,500
is estimated to have around 150,000
members.
2,000
AUS $m
It continues to leverage its advantage as the
only retailer with a complete food, general 1,500
merchandise and clothing offer under one
roof.
1,000
500
0
2017 2018 2019 2020 2021
The main aim for Costco Australia is to build Costco is expected to open two further
scale in major cities before embarking on the clubs in 2017, with its sales expected
roll-out of the brand to smaller cities. The to break the $2bn barrier in 2018.
market holds significant potential for the
retailer to continue growing share through a
run rate of one to two new clubs each year.
© IGD 2017 Source: IGD Research Page 11China
Costco entered China in 2015 through its
strategic partnership with Alibaba’s Tmall.
While this has been a major success for
Costco, no decision has yet been made
with regards to building a physical
presence. The partnership has enabled it to
leverage Tmall’s existing customer base
and logistics infrastructure.
Walmart continues to generate strong
appeal with its club format, Sam’s Club,
both through its physical stores and, more
recently, online through its partnership with
JD.com in China.
Although this suggests a solid growth
opportunity for Costco, the forecasted
growth for the online channel in China
provides the retailer with a solid run-way for
growth through continuing to grow the
product range.
© IGD 2017 Source: IGD Research Page 12France
To maintain hypermarkets and, albeit France is a price-focused market.
to a lesser degree, supermarkets’ Leclerc maintains price leadership,
Costco is expected to open its first club in relevance to today’s shoppers, with this accentuated by other’s recent
France this year. This has been in retailers in France have been strongly financing of price cuts, which has
development for a number of years as the investing in their stores to make them been enabled by buying alliances at a
retailer has focused on securing the right more welcoming. This will contrast national and regional level. In this
location for its launch. with Costco’s relatively austere in- setting, Costco’s membership model
This builds on its entry into the Spanish store shopping environment. may be harder to land with shoppers.
market in 2014. Costco will also open its first
club in Iceland this year.
Costco will open into an intensively
competitive market in France, with global
retailers – Carrefour, Casino and Auchan –
and price focused retailers Leclerc and Lidl
likely to be well prepared for its debut.
While retailers in France will look to compete
on price – especially Leclerc, which aims to
be price leader in the country – all are also
investing in their stores to make them more As retailers have invested in the price French retailers are more focused on
attractive places to shop, which will of branded items, so private label’s their proximity stores, to offset slower
differentiate them from Costco. share has fallen in volume and value growth in larger stores and as pick-up
Costco will struggle to expand quickly in terms. The strength of brands and points for online orders. This has seen
France, with the building of new stores their investment in marketing and the stores become more shopper and
strictly controlled. This could limit pricing could affect a key differentiator mission-focused. Given Costco’s out-
opportunities to build its brand with local for Costco, namely its Kirkland of-town store mode, this may limit
shoppers in the country. Signature private label ranges. opportunities to attract shoppers.
© IGD 2017 Source: IGD Research Page 13Strategic
priorities
Drive top-line growth through improving club
productivity
Improve ecommerce and digital capabilities
Expand its international footprint
Investing in the food supply chain
© IGD 2017 Source: IGD Research Page 14Drive club With over 700 clubs, Costco can add significantly to the top line through improving
the sales productivity of each club.
productivity The retailer is aiming to do this through reviewing the categories and broader
services that it offers. In particular the retailer is focusing on building stronger appeal
with younger shoppers.
Fresh foods Private brand Services
Costco is prioritising fresh food Costco aims to grow its Kirkland While Costco offers a broad range of
development, with a number of new Signature range to around 35% of services which help to drive club
products being added through its sales over the medium term, up from traffic, the roll-out of its fuel offer is
ancillary service areas, including 27% to 28% currently. The retailer is taking priority. The retailer is currently
bakery, deli, fresh meat and seafood. focused on pursuing opportunities in focusing on the US, Canada, Australia
It has also been adding multi-deck new and existing categories through and the UK. With little brand loyalty in
chillers to increase holding and display developing products with a higher the fuel segment, the retailer is
capacities in clubs. quality perception than the brand attracting new shoppers with its
equivalent, at a lower price point. consistent low-price approach.
© IGD 2017 Source: IGD Research, Costco Page 15Improve Costco’s ecommerce sales account for 4.7% of its total sales and continue to grow
strongly. The majority of these are generated in the US.
ecommerce The retailer has been a relative laggard in the channel, with the senior leadership
concerned with the impact on club traffic. However, recent investments in IT and
related infrastructure, along with on-going channel partnerships, indicate that Costco
capabilities is planning for ecommerce to be a more significant contributor to growth going
forward.
Product offer Customer experience Supply chain
Its online offer has been developed as The investments which Costco has Beyond its partnerships in the US,
complementary to its club offer and is made also support a better online Costco operates a delivery to home
non-food focused. We expect to see it experience, including better search model. However, it is likely to
offer more of its club offer online; in capability, faster checkout and complement this with a club pick-up
the US it is partnering with Instacart, shipping, and online returns option as part of its focus on the
Google Express, Shipt and Dolly to processing. However, further customer experience and optimising the
enable customers to purchase its in- investment will be required as the profitability of the channel. The retailer
club ranges. digital environment continues to is also adding a further dedicated
evolve. distribution centre in the US.
© IGD 2017 Source: IGD Research, Costco Page 16Expand its International markets account for around half of its new store openings each year
(10-15 clubs internationally), although this is expected to increase as the US market
becomes more saturated and the number of international markets grow.
international Beyond its physical clubs, Costco is expected to deploy its ecommerce operation into
existing markets.
footprint
Core clubs Business Center Ecommerce
With two new markets planned for This year, the retailer will undertake its Over recent years Costco has
2017, we do not expect Costco to first international expansion with its expanded its online operations to six
enter any additional markets over the Business Center model, opening in markets where it operates clubs, and
short term. Many of its existing Canada. This format is focused more China. We expect to see the retailer
markets offer significant opportunities on small business owners, including develop online offers in Japan and
for further expansion, and sustain its restaurants, convenience stores and Australia to complement its physical
current opening run-rate. food trucks. Success in Canada could locations.
raise the prospect of testing in other
international markets.
© IGD 2017 Source: IGD Research, Costco Page 17Investing in the
food supply
chain
Developing a broader natural and organics
offer is a priority for Costco, with its core
target customer group demonstrating a high
propensity to purchase these types of
products.
It has undertaken a number of initiatives to
support this, including investing in the food
supply chain, particularly in the US.
It has been working with farmers to help
them acquire land and equipment to grow
organic products - demand continues to
outstrip supply in a number of product
categories. In order to win a greater share of
its customers’ food spending, ensuring
reliable availability of these products is
essential for Costco.
The retailer is also in the process of
developing its own poultry farm, which will
eventually supply one-third of all its chicken
products. The retailer has been moving
towards offering more antibiotic-free and
cage-free chickens.
© IGD 2017 Source: IGD Research Page 18Growing
natural and
organic ranges
© IGD 2017 Source: IGD Research 2017 Page 19Supplier A retailer to back
for growth
We are bullish on Costco’s growth prospects
over the next five years, driven by continued
space growth, food expansion, ecommerce
implications initiatives and the robustness of its value
proposition through different economic cycles.
Kirkland Signature will continue to be a
Private brand is formidable competitor for many national
on the rise brands given its focus on pricing and quality.
Its premium positioning in some categories
makes it hard to defend against on quality.
Support its Costco will soon have three relatively new
international markets to manage and balance. Look for
ventures opportunities to support and grow the global
distribution of your products.
Costco is aiming to win with millennials, and will
Align with a continue to evolve its product offer in line with
shifting customer this. Review your product portfolio to see if there
target base are additional opportunities to supply, and where
you may be challenged by this shift.
Partner for The retailer is increasing the pace of
ecommerce as investment in ecommerce. Lok for
club offer shifts opportunities to build sales through this
online channel with Costco, particularly as it makes
more of its in-club offer available online.
© IGD 2017 Source: IGD Research Page 20Want to know more?
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