(Editor’s note: This post has been updated with new information about Costco’s plans for France and Iceland.)
This is good news for American and British expats who like a bargain … and like to buy in bulk.
Costco – arguably the most popular retailer in the U.S. – is continuing its aggressive push into Europe with the opening of a new store outside Paris, and the planned May opening of a warehouse/store in Garðabær, Iceland near Reykjavík, of all places.
The move into tiny Iceland (population 332,000) comes only two years after the Kirkland, Washington-based retail behemoth first entered continental Europe with a store in Seville, Spain in 2014. (Costco has 28 stores in the United Kingdom, but with membership restrictions, those warehouse stores operate essentially as wholesales suppliers to qualified business owners.)
In 2013, Costco announced a plan to expand its operations by opening 150 warehouse clubs globally, with a specific focus on previously untapped international markets.
The time frame shifted a bit, with that location only opening now. The French media is posting that Costco is currently recruiting 200 people for that location.
You can see below Costco’s president in France, Gary Swindells, discussing the plan in pretty fair French for a Canadian.
Last year, Costco opened a store in Wembley, just northwest of central London. It’s the company’s third in the London area.
We’re thinking this is just the first wave in Europe.
In the 2013 announcement, CFO Richard Galanti said Costco’s plan is to build 32 new stores in fiscal 2016, 13 of those outside the United States. That includes the first French store and more locations in Spain. We tried to talk with Costco executives about their plans, but they declined. While Costco is forthcoming with industry analysts and major conventional financial publications such as the Wall Street Journal, its executives rarely grant interviews to the digital media.
Canada has been the primary focus of international expansion for retailer, with more than 80 locations. But other pins on the Costco map include Taiwan and South Korea (where it already has about a dozen locations), Australia (seven stores currently) and Turkey, which would be a new market.
Costco already has a well-established presence in the United Kingdom, with 28 stores from the Channel coast to northern Scotland. On the continent, it has a warehouse in Seville and a new store in Madrid as Costco focuses like a laser on Europe.
“We are interested in investing in the obvious four – Germany, Italy, France and Spain,” Costco’s international executive vice president James Murphy said last year at a consumer goods forum in Istanbul. Murphy said the retailer is “seeing some reductions in expensive real estate” in Europe. The slog through Europe has been slow, CFO Galanti said, because it’s “a tough place to get into, what with all the rules, regulations and permitting process, but we’re pretty interested in continuing that process.”
Plans for Spain include two more stores in the capital city of Madrid and another one in Seville, Spain’s fourth-largest city. Cultural and market differences are always a challenge for the American retailer. In Seville, Costco’s first Spanish location, Galanti said Costco found it had stronger sales in non-food items than it expected, while fresh-food sales were disappointing.
“It’s usually the opposite in new markets,” the executive said. Another ongoing hurdle is convincing suppliers to change their packaging in order to ship their items in three-pack or 12-pack containers on the big pallets Costco uses. Making these changes costs money and represents a leap of faith, although many are doing it.
Among other challenges, it takes longer to open warehouses abroad, unexpected foreign-exchange moves can impact U.S. dollar earnings and it takes time to get into the local groove. “You learn what sells and doesn’t sell,” Galanti said.
At home, Costco has grown to become the second-largest U.S. retailer only behind Walmart. But what has fueled Costco’s growth is its unique straddling of the marketplace. On the one hand, it is seen as a high-volume big-box discounter, like its bigger competitor. On the other hand, its actual model from its inception in 1976 as Price Club is as a purveyor of unusual one-of-a-kind items that aren’t likely available anywhere else. In the early days, it often described its model as a “treasure hunt.” It didn’t necessarily carry every brand, or even every category, but it had enough variety to win shopper loyalty and inspire return trips.
If there were a third hand to its strategy, of course, it would be the “price club” model of shopper membership. (Interestingly, the “price” in its original name did not describe the cost of its merchandise but the names of the two brothers who founded the company. Still, it was a serendipity that certainly helped drive its success.)
Surprisingly, the Costco membership fees – not sales – are the retailer’s primary source of profit. In its most recent reporting period, those fees accounted for $785 million in revenue, which certainly helped Costco maintain its equilibrium during the Great Recession of 2008 to 2010. In 2015, the membership renewal rate was an amazing 91 percent in the U.S. and Canada, and approximately 88 percent worldwide.
After a disappointing Q2 earnings report though, Costco executives just announced memberships in the U.S. and Canada will rise to $60 per year from $50 now. (Executive memberships will rise to $120 per year from $110.)
Costco has also been smarter about international expansion than Walmart was in its heyday. Walmart tended to go into foreign countries without well-thought-out signage translations or clear understandings of how people shop in other locations. In 2006, the Bentonville, Ark.-based retailer suffered an ignominious – not to mention costly – withdrawal from Germany after it couldn’t figure out German shopper culture.
In Mexico, company executives failed to realize Mexicans didn’t drive large SUVs or have large refrigerators or freezers in their home – exactly counter to the Walmart model of volume shopping. Also, Mexicans shop daily for fresh ingredients for each night’s dinner fare, rather than buying pre-packaged or frozen items. The scale of the Walmart stores was also overwhelming to Mexican consumers, used to smaller supermarkets and neighborhood bodegas.
Costco has gone to school on Walmart’s flubs. At the original Spanish Costco store in Seville, the meat section carries Spanish specialties such as octopus, rabbit and piglet, depending on the season. The store also carries Spanish olives, tuna made by Ortiz, a locally famous brand, and rows of hanging jamón ibérico, Spain’s answer to prosciutto.
A bigger challenge than local fare might be the size of Spanish families, which are small, and getting smaller. The fertility rate amounts to 1.3 children per woman, according to the World Bank, well below the 1.9 seen in the U.S. That means bulk purchasing is gradually losing popularity and packages are getting smaller.
So will Spanish customers, living in apartments and small houses, have need or room for 12-packs of paper towels and the like?
Costco insists its model will work because, as it has spread across Europe, it has managed to be successful in places teeming with condo and apartment dwellers – a little bit like Florida.