Costco’s petrol price war ‘adding fuel’ to the supermarket fire: IBISWorld

COSTCO only has seven stores here but it’s making big waves. Its latest move could cause big headaches for Coles and Woolies.

FILE - A shopper pushes a cart outside Costco Wholesale in Danvers, Mass. in this May 27, 2009 file photo. Costco's fiscal second-quarter net income fell 15 percent, hurt by softer sales of some non-food items, weaker gross margins in its fresh foods business and the impact of weaker foreign currency exchange rates on its international results. Its latest performance missed Wall Street's view. The stock declined in premarket trading on Thursday March 6, 2014. (AP Photo/Elise Amendola, File)

BULK discount retailer Costco only has seven stores in Australia, yet it already pulls in more than $1 billion in revenue, accounting for a 1.2 per cent share of the $88.1 billion supermarket industry.

As it expands into the hyper-competitive world of fuel retailing, research firm IBISWorld is predicting the one-stop shop model will put even greater pressure on the dominance of Coles and Woolworths.

The bulk-buying giant is betting that its low-price strategy will also win over bargain-seeking motorists looking for the cheapest fuel, as customers have little to no brand loyalty to petrol stations.

Like German discount rival Aldi, Costco is primarily concerned with gaining market share in Australia. IBISWorld notes that the company has only posted positive before-tax earnings once since arriving down under in 2009.

“While supermarkets continue to compete on the basis of price, other factors such as convenience, product variety and quality have emerged as driving forces in securing customer loyalty,” IBISWorld industry analyst Brooke Tonkin said in a report today. “This helps explain the growth of Costco, which has steadily gained market share over the past five years.”

Store location is key, as shown by Coles and Woolworths’ attempt to broaden their reach by expanding fuel stations into mini-supermarkets.

“Costco’s expansion into fuel retailing is in line with this trend, as the wholesaler plans to become a convenient one-stop-shop where customers can buy all their groceries and fill up on petrol in the one location,” she said.

Costco first established a store with fuel pumps in Liverpool, NSW in November 2013. The introduction of a fuel station at the Brisbane North Lakes store in May last year led to a flurry of price cutting in the surrounding area as other retailers struggled to compete.

The problem for the other petrol retailers, however, is Costco’s $60 annual membership fee. The fixed source of revenue is the main reason the store is able to provide such large discounts, and that applies to its petrol as well.

In the North Lakes area, Costco was able to keep its prices up to 15 cents per litre lower than surrounding retailers despite their best efforts. IBISWorld notes than in the months since, Costco has continued to force down petrol prices in the area.

“Most consumers see petrol as an undifferentiated product and therefore purchase on price — there is effectively no brand loyalty,” Ms Tonkin said.

Costco currently has one store each in South Australia, Queensland and the ACT, two in Victoria and two in NSW. Its eighth location is opening in Moorabbin, Victoria next month will be the first in the state to have petrol pumps. A fourth Victorian store is likely to open in Epping in 2016.

The retailer can offer huge discounts thanks to its $60 membership fee.

Costco chief executive Patrick Noone at the Lidcombe store in Sydney.

The company posted earnings of $880 million in the 12 months to August 2014, up 43.2 per cent on the previous year, largely due to three new store openings. IBISWorld predicts it will earn nearly $1.1 billion over the 12 months to August 2016.

“Costco’s market share is projected to increase over the next five years, as new stores open and consumers become more aware of the diverse range of low-cost products available,” the report says.

“Membership requirements help to ensure customer loyalty and are likely to assist with continued growth. Costco has the ability to increase competition for discount stores such as Aldi and for wholesalers through the Costco business membership and its highly competitive prices.”

Ms Tonkin told news.com.au the push westwards would pile pressure on the supermarkets. “We expect Coles and Woolworths to keep losing market share to Aldi and Costco as they continue to open stores,” she said. “As Aldi enters South Australia and WA, it will take dollars away from Coles and Woolworths.

“Costco is still mostly focusing on the eastern states, but we’re expecting them to expand west as well, and when that happens you’d be expecting to see the same sort of market share declines for Coles and Woolworths as we’ve seen on the eastern seaboard once [the two discounters] get their store volumes up.”

While the big two will face competition in petrol, it’s the smaller retailers, including the troubled IGA-branded stores owned by Metcash, that will fare the worst.

“We’re expecting IGA to struggle,” Ms Tonkin said. “They have upped the ante, Metcash has invested an awful lot of money into its distribution behind the scenes to be able to fund its price cuts in order to compete with Coles and Woolworths.

“At the end of the day it does look like a lot of consumers are not visiting [IGA] stores as frequently. We’re expecting its market share to keep declining, but it probably won’t disappear entirely.”

Collectively, Australia’s supermarket and grocery stores and fuel retailing industries will generate an estimated $125.1 billion in 2015-16, and IBISWorld forecasts that figure will reach $134.5 billion by 2020-21. Coles and Woolworths currently account for more than 70 per cent of the supermarkets and grocery stores industry and 40 per cent of the fuel retailing industry.

Woolworths is planning a $65 million investment to refurbish its ageing stores, while Coles is reinvesting in staff hours to man check-outs and improve customer service.

“These strategies are designed to keep shoppers in-store for longer by presenting stores as foodie destinations, and attract greater sales through premium offerings such as ready-made meals and delicatessen products,” Ms Tonkin said.

But she added that Aldi is already transitioning its stores to a “market-fresh” approach in response, with more fresh food, branded groceries and ready-meals, which is expected to further increase supermarket competition.

“Costco is committed to expanding our fuel offer further in Australia, bringing quality and value to more of our members,” Costco Australia managing director Patrick Noone said in a statement. “We are delighted to have been able to offer significant savings to our members at the pump, just as we do throughout our warehouses, on everything from diamonds to detergent.”

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