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EXPLAINED: What the 'Costco effect' means for Ipswich

PRICE WARS: A Costco store similar to this one in Canberra, is planned for Ipswich.
PRICE WARS: A Costco store similar to this one in Canberra, is planned for Ipswich. Bidgee / CC-BY-SA-3.0

AN EXCLUSIVE 'cult' where shoppers can buy a 10kg block of chocolate, a diamond ring or a casket in the same store is about to change how Ipswich families do their grocery shopping.

The company behind American bulk supermarket warehouse Costco has plans to expand into Ipswich and even before shovels hit the development ground, Ipswich is preparing for the full force of super-sized retail.

The city hasn't had anything like it before, a shopping experience that promises competitive prices, extensive stock range, a cult-like following and perhaps most importantly, a serious novelty factor.

Costco works on a series of principles to give it an edge on the competition but the weird and wacky things shoppers can put in their trolley with their bread and milk alongside the exclusive membership system mean the store is about to shake things up.

University of Southern Queensland marketing and consumer behaviour researcher Dr Rumman Hassan warns Costco will have serious effects, both positive and negative, on more than just the local retail market.

Workers, shoppers, businesses, suppliers and even fuel stations are in line to face the 'Costco effect'.

"That emanates from the fact Costco is such a big player, everything they do is grand, it's big, they take large scale to a whole new level and this intimidates a lot of the smaller players," Dr Hassan said.

Dr Hassan said lower prices were the main drawcard for the regular consumer.

"Costco is perceived to offer greater value and what that means for the lay person is the prices are lower. When we look at value we look at benefits and costs so consumers perceive they are getting a lot more than what they're paying for," Dr Hassan said.

"This whole concept they are paying less in comparison to traditional supermarkets is one of the driving forces. The other is Costco essentially has a product assortment or a collection of products of brand like no other retailer.

"Costco gives consumers the experience of purchasing like a business buyer would in a wholesale environment but in a retail setting."

Individual consumers are unlikely to be lured to Costco in the same way as large families that need to fill three trolleys a week.

Dr Hassan said in these situations, consumers would stick to regular grocery stores that don't need membership and where food comes in 200g packs.

"It has that novelty effect. Some people are drawn by that but if we think rationally, who will be drawn by buying in large quantities, essentially large families. A single person does not need 36 bottles of cola but for a large family it is a very attractive proposition to be able to buy in bulk and have those significant savings," he said.

"If they want to present something novel, like an American brand like Hersheys or Dr Pepper, that would have to come from the states. That adds to the novelty, you are getting something from a Costco warehouse that you won't get anywhere else."

The store works on a unique system that allows only shoppers who have paid their membership to buy products. It means consumers have paid for the privilege of shopping at Costco and eliminates window shoppers, reducing crowds and checkout lines.

Those who have paid their $60 and bear the silver badge of acceptance belong to a group of consumers who share the same values and traits - and obsession with bulk food.

"The Costco members are literally hard core Costco loyals and they say they need two to three trips to cover that membership fee in the form of savings so they are not bothered by that," Dr Hassan said.

"It is a club, there is a common bond and they have that sense of belongingness.

"It will have a cult like following of a certain segment of the consumer population.

"Members have a unique set of traits in terms of behaviour. People who are regulars... swear by Costco."

How Costco works

COSTCO is a membership warehouse club and uses customer membership fees to cover overheads and increase buying power.

The company has hundreds of locations worldwide, including nine in Australia, and provides a wide selection of merchandise including everything from groceries and electronics to clothing and cleaning supplies.

The company's first location opened in 1976 under the Price Club name, was in a converted airplane hangar on Morena Boulevard in San Diego. The company found it could achieve far greater buying power by serving small businesses and a select audience of non-business members. With that, the growth of the warehouse club industry was off and running.

Costco became the first company to grow from zero to $3 billion in sales in less than six years. When Costco and Price Club merged in 1993 to become PriceCostco, it had 206 locations generating $16 billion in annual sales. Since resuming the Costco name in 1997, the company has grown worldwide. During the past fiscal year (ended August 28, 2016), total sales were $116.1 billion.

Australian membership ranges from $55 to $60 for a year.

The economics of scale means items bought in bulk have a lower cost per unit. Take for example a 10kg block of chocolate for $179 works out as $3.58 for 200g, where the regular 200g blocks normally sell for $5.

"When we buy in large quantities it boils down to a very simple economic principle we call economic of scale where you per unit of cost goes down. Buying in bulk over a period of time, you actually save money. At the onset, it might seem like you're spending a lot but when you think about cost per unit, there are savings, even with the membership," Dr Hassan said.

Membership holders have a few rules they need to abide by before they can fill their trolleys with bulk good. Store rules read:

Thank you for keeping your children with you at all times, wearing shoes and shirts while shopping in the warehouse, allowing us to inspect briefcases and backpacks.

What's on offer:

'Gasoline' station

2.9kg of cake for $27

10kg block of chocolate for $179

5kg of Nutella or 6l of vodka

A casket or coffin and a boat

An engagement ring or wedding dress

A doomsday kit

A 93 inch high teddy bear

A $900 block of cheese

Topics:  costco ipswich business


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