Costco to open local online store, but is it too late to the game?

From coffins to bulk toilet paper, Costco Wholesale is already known for offering Aussie shoppers products in every weird and wonderful category. Now, the retailer has its eye on the online space to give shoppers wider access to products.

Speaking to Fairfax this week, Costco Australia’s managing director Patrick Noone confirmed the company is looking to open a local online store in the next 12 to 18 months.

He says this will allow the retail chain — which Noone describes as “a cross between a David Jones and a Bunnings” because of its mix of brand names and discounts — to reach customers who might be located hours from the company’s nine warehouse stores.

Noone said Costco intends to open a distribution centre in Sydney’s west by 2019 and that centre will give the retailer the ability to establish a “dotcom business”.

“Australia is such a big country and our population is spread out, so it’s hard to get from Wagga Wagga to Costco in Sydney,” Noone said.

“It would be almost impossible for us to build a warehouse in Wagga Wagga so a dotcom business gives those people an opportunity to buy the items we sell.”

The move comes as retail experts continue to drive home the importance of seamless order delivery systems ahead of Amazon’s pending arrival in the Australian market.

Now that Amazon has officially released details of its Melbourne distribution plant, analysts say it’s time to up the ante on logistics before customers start to expect delivery timeframes as small as two hours.

Across the globe, traditional bricks-and-mortar discount retailers are also starting to move on online ordering systems: just last week, Aldi’s US operations announced a pilot program with Instacart to start home delivery services in three cities.

“It’s an interesting time to be in the unsexy area of logistics at the moment, but I definitely think it will become a highly competitive area,” Retail Oasis strategist Pippa Kulmar told SmartCompany when discussing the Aldi deal.

While there’s broad agreement that multichannel retail is a focus in the local grocery market, retail expert at Queensland University of Technology Gary Mortimer warns it’s not as simple as “flicking a switch”.

“Costco will be challenged in that it has a small fleet of stores,” Mortimer says.

Given the retailer deals in bulk purchases, the barriers to entry online would be significant, Mortimer believes.

“As they move into a multichannel format, they may look to restrict distances, they might look at a minimum spend,” he says. 

“I’m surprised to see that Costco are taking quite some time to get into the online marketplace, but that said, Aldi here doesn’t do online shopping. I’m always advising that just because everyone else is doing it, doesn’t mean you [as a business] have to.”

Despite all eyes being on plans for new online delivery programs in the local market, the scale of online grocery sales in Australia remains a sliver of in-store purchases.

According to IBISworld, the supermarket sector generated $105.3 billion in revenue over the past year, compared with $2.7 billion from online grocery sales.

Online groceries sales are expected to grow by 12.7% a year until 2022, but the market is still dominated by the big players, led by Woolworths with a 48.8% market share, according to IBISWorld data.

Pantry and frozen goods account for 30% of all items bought by Aussies shoppers online each year, but other product categories Costco focuses on account for smaller slices of revenue. Only 17% of sales in the online grocery space were for “non-food” related items in the last year, according to IBISWorld.

However, the statistics show that price still plays a significant factor in capturing grocery market share, and Costco’s foray into the online world could capture more of what IBISWorld calls the first, second and third quintile customer groups.

Together, these three groups of shoppers make up 41% of the overall grocery shopper market, and include lower income families and individuals.

These groups are credited with driving bulk purchasing and bargain hunting at businesses like Aldi and Costco across the country, and IBISWorld analysts say they will only be looking for more ways to access bargain deals in future.

“Consumers in this quintile are expected to continue viewing affordability as a product’s most important feature,” a 2017 IBISWorld report into the grocery sector explains.

SmartCompany contacted Costco Australia but did not receive a response prior to publication.

Never miss a story: sign up to SmartCompany’s free daily newsletter and find our best stories on Twitter, Facebook, LinkedIn and Instagram.