Is Costco coming to town?

Costco global site hunter Jim Murphy: "Ireland is a very attractive market for our business."
Costco global site hunter Jim Murphy: "Ireland is a very attractive market for our business."

Ten years ago, cash-and-carry giant Costco got a bloody nose when it failed in a bid to build a giant shopping warehouse in Ireland. Now it’s trying again, according to its international site-hunter.



20 August 2008

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Costco global site hunter Jim Murphy: "Ireland is a very attractive market for our business."

In 1998, US ‘shopping club’ giant Costco got planning permission to build a R15 million warehouse in Fonthill, west Dublin. However, An Bord Pleanála reversed the decision on appeal, on the grounds that the planned 11,500 square metre store was unsuitable for a site zoned residential and that it could adversely affect local traders. At a recent Bord Bia conference, a Costco executive said the company was looking at Ireland once again.

The low down

Based in Issaquah, Washington, Costco Wholesale Corporation was founded in 1983 by Jim Sinegal and Jeff Brotman, still the respective CEO and chairman. The company, which had sales of $63 billion (*40.7 billion) in its last financial year, operates a chain of 540 warehouses or ‘clubs’ in eight countries, including the UK where its twentieth location (Cardiff) is due to open in late July. They sell popular branded and selected private-label foods and household goods at low mark-ups to retailers and individuals who pay an annual membership fee of $50. By charging a fee, Costco can cover most of its operating costs, thus allowing it to sell product at very low prices – at 2.8 %, its operating margin is among the lowest in the industry.

The company’s business is based on achieving high sales volumes and rapid stock turnover by offering a limited mix of merchandise in a wide variety of product categories – from computers to car tyres, from flat-screen TVs to wine – at very low prices. This business philosophy was summed up as "good stuff at cheap prices" by Jim Murphy, senior vice president for Costco International.

Unlike supermarkets, which might carry 50,000 separate product lines or stock keeping units (SKUs), Costco averages just 4,000 SKUs, which reduces complexity and boosts its buying power and so, again, has the effect of pushing down prices.

House rules

Costco is unusual in that it doesn’t accept credit card payments outside its home market. In the UK, for instance, it accepts cash, debit and cheques but not credit. Explaining why not, Murphy said that the high cost of credit cards is borne by its customers and this went against the company’s philosophy of offering the best value to members. Costco would only accept credit cards in Ireland if its members were not disadvantaged, he said. "It’s a nice convenience and we’d certainly consider it in the Irish market but it would have to be a good deal for our members."

Costco’s membership conditions vary by country. In its home US market it is very open, the general public as well as small business owners can apply. In the UK, on the other hand, planning permission was granted on the basis of restricted membership, so only documented small business owners plus ‘certain employment groups’ such as teachers, hospital staff and government workers can become members. Were the same restrictions to apply in Ireland it would mean that hundreds of thousands of consumers would be excluded from shopping at Costco and that its operation would be more akin to the cash-and-carry operation seen in the UK.

Dermott Jewell, chief executive of the Consumers’ Association of Ireland, was in no doubt that such an outcome would be a big disappointment to Irish shoppers. "In the current environment, where prices are high generally and there is a fixed element of competition where prices don’t vary hugely between the major players, someone coming in with this level of challenge would appeal very significantly. If anyone can enter a market and reduce the status quo, I don‘t see too many consumers turning their back on it," he commented.

What about retailers, would they welcome Costco? That depends. When Costco was refused planning permission in Ireland in 1998, the impact on local traders was cited as a factor but, in fact, Costco would probably be good news for small retailers. In the US, ‘mom-and-pop shops’ account for a very large percentage of Costco’s business and there’s no doubt that the same low price and strong service ethos would appeal to small retailers here, too.

The pros and cons

Two other parties would also likely welcome Costco’s arrival. The first is its potential employees. Costco has a reputation for treating its workers fairly, paying them well and even offering generous health benefits. The second is suppliers. Although Costco’s low pricing suggests Costco drives a hard bargain with suppliers, and it clearly does, it eschews the adversarial approach favoured by some big retailers and instead treats them as partners in its business. "We treat our suppliers like our other stakeholders, in that we look after their interests," commented Murphy.

Having most to fear from Costco would undoubtedly be local wholesalers and cash-and-carry operators, which simply could not match Costco’s buying muscle and therefore low prices. But neither would the big retailers relish the sight of Costco coming into the market, particularly if it managed to do so on an open-membership footing.

It would be ironic indeed if Tesco, which pioneered the "pile ‘em high, sell ‘em cheap" philosophy back in the 1950s before going upmarket, were to be broadsided by a rival who is adopting much the same approach today.

From the horse’s mouth

It was confirmed by Costco International SVP and global site-hunter, Jim Murphy, in a subsequent telephone interview with Shelflife, that the company is once again looking at Ireland.

Murphy, whose father’s side originally hails from Limerick, said Costco was indeed hoping to establish a warehouse in Ireland, preferably in Dublin, but that nothing had been finalised yet. He also implied that the company was still smarting from its earlier engagement with the Irish market and had no interest in seeing history repeat itself.

"We are still interested but we’re going to wait until we find the right property and the right deal…and that we’ve got all the t’s crossed and i’s dotted, because quite honestly last time it was a little painful for us. We wasted a lot of energy and a lot of time and we don’t want to do that again."

He added: "Ireland is a very attractive market for our business. We think we would do well there and we feel our style of distribution would work well for small business owners and individual members as well. So we think there’s a great opportunity for our business but we just haven’t found the right deal."

Elaborating on what he meant by this, Murphy said, "It’s getting through the planning process, that’s the primary issue. It was the primary issue back then as well."

Murphy hinted that the sticking point is the large amount of space given over to food within Costco stores – over half of its business is now food. This made it a "different business" to Ikea, he pointed out, and would be seen in that light by An Bord Pleanála. So while the planning laws, specifically the cap on superstores, were relaxed to allow Ikea to locate in Ballymun, Murphy doubted whether the same policy would apply to Costco.

Playing by the rules

In any case, Murphy was adamant Costco did not want or expect any special favours under the planning laws. "We want to come in with the full blessing of An Bord Pleanála. We want to fit into the community and into the planning and if it doesn’t work, there are plenty of other places for us to go."

In response to the claim, implicit in An Bord Pleanála’s refusal of planning permission last time, that Costco would squeeze out local retailers, Murphy said that this was an "inaccurate" portrayal of the situation because worldwide Costco "does a very large percentage of its business" with small retailers.

Murphy would not say whether Costco was close to establishing an operation here but did reveal the company did not have a "permanent person" in Ireland, which would suggest that a deal is still some way off. 




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