Suggestions for Costco on Expansion: Part 2, International Expansion

February 22nd, 2012 · 14 Comments

This is my second post discussing how Costco could make the most of their brand to expand business.  If you didn’t catch it yesterday, my post was all about a recent Motley Fool article about how Costco could expand to be even bigger.  The author has three points, only one of which I discussed yesterday: e-commerce.  There’s a lot that Costco could do in that area to add some more business and maybe some new members as well.  But today, I’m on to the second suggestion in the article, which is all about international expansion.  Is it a good idea for Costco to be opening stores around the world?  Should they just stay focused on the US?  Is there more business to be gotten in the US than foreign countries could ever add?

I’m just going to repeat the three suggestions that the Fool.com article made:

  1. Bookmark Costco.com: You want more visitors, more frequently? Leverage Costco.com, one of the only virtual warehouses that comes anywhere near the variety you’ll find at Amazon.com. (Part 1 post)
  2. Stay home: Lest the online strategy chip away at the warehouse-and-membership model that has brought Costco this far, Jelinek and Co. need to home in on scouting out domestic store locations, putting international expansion plans on the back burner.
  3. Promote the brand: It may seem like everyone has heard of Costco, but the company has no official advertising strategy beyond targeted home mailings.

So, as someone that lives in the UK now, I have to stringently disagree with this plan of just focusing on North America and Latin America. Here’s a quote from the article that discusses why the author has this belief:

Between the physical footprint of each warehouse and the physical bulk of the items people purchase at Costco stores, this company’s concept may just be too big for European and Asian countries, whose residents often rely on public or mini-sized transportation and live in modest spaces that can’t store a year’s supply of paper towels. Stay close to home, where the concept of buying big at big value is ingrained in the culture.

I used to think this too, that the UK and Asia were probably not that into shopping at places like Costco because of the sizes of the products and transportation issues.  Of course, then I moved to London and realized how wrong I was.  The crowds at the Costco locations I’ve been to in the London area are just as big on the weekends as they were in the US.  And just like in the US, some people are buying a lot of stuff and some people are just buying a few well chosen items but they’re all there shopping away just the same.  While some of the houses might be smaller here or in Asia, that isn’t always the case.  Besides, I know people with small homes in the US that shop at Costco too.  Not to mention, there are a lot of items that you can buy at Costco that don’t take up as much storage as 30-some rolls of toilet paper.  I also think that for many people that live in small spaces they get better, or more efficient, about using their space for storage than people with larger homes.

When we lived in Austin our home was more than three times as large as our current flat in London.  It would seem then that I should be able to buy far less at Costco but that isn’t at all the case.  I still buy my loo roll there, it’s just now stored under one or both of our beds instead of in a closet or the bathroom cabinets.  In Austin, there was nothing under my bed but dust bunnies, but here I’ve got a lot of stuff stored there because I have to be more crafty about storage now that I have far less space.  But really, a lot of what you could buy at Costco doesn’t necessarily take up any more space just because you bought it there.  It’s a bit of a myth that everything is in huge, giant sizes that normal people can’t deal with in their homes, there are some of those things but not really that many and you don’t have to buy things that don’t work for you (how many times have I said this over the years?).  They sell a lot of electronics at Costco and I’ve noticed that the televisions there are the same size as you would get at someplace else, they just cost less.  Same goes for shoes, clothing, books, small kitchen electrics, housewares, appliances, bedding, linens, and even a lot of the food doesn’t create a storage problem.  And I’m not even considering things like eye glasses, contact lenses, prescription medications (though these aren’t available in the UK at least), tires, or alcohol and wine which could easily be worth the membership fees.

So, I think the space and storage theory is really a bit of a non-starter.  Transportation issues are a bit the same, as well.  When I go to my Costco, I take a VW Golf, which isn’t the biggest car in the world, but does hold a surprising amount of stuff.  In the parking lots here in the UK, you can see people in all sizes of vehicles – trucks, minivans, SUVs, tiny cars, bigger cars, average cars.  I can easily spend several hundred pounds on a trip to Costco and have yet to have a problem getting my purchases home in my little Zipcar.  The only time it was even tight, was when we bought two rather large mirrors that required extra care and space since we didn’t want to chip them.  What I haven’t seen so often here in the UK, but saw quite a bit in Austin, is people with a rental truck like a U-Haul to take home their purchases of furniture or plants.  But they still sell furniture and plants here, so those people must be able to get it home somehow.  Also, one one of our recent visits I saw a flyer for a delivery company that will get your stuff from Costco and deliver it to your home for you (not Costco, but a third party).  So, there are ways to get around things like the size of your car.  I would probably not be too thrilled to be taking public transport to and from Costco, but I imagine if it were my only option I would figure out a way to make it work so that I could take advantage of the savings.  I’ve seen people in Austin and New York take a taxi to Costco, so I guess you could do that in other countries too, right?

And what about Australia?  They represent Costco’s latest international expansion market and I definitely don’t think you’d say that they have the small house or tiny cars that we have in the UK or Asia.  Since there are only three locations in Australia, it would seem that they have a lot of good locations that are still Costco-less.  Since the new warehouse in Auburn, near Sydney, had one of the highest opening day sales totals in Costco’s history, I’m willing to bet that they will not be tapering off of further expansion possibilities in Australia anytime soon.

Asia is also a similarly hot expansion proposition for Costco.  At the end of 2011, Costco had 26 locations in Asia (Korea, Taiwan, and Japan) after opening five new locations in Taiwan and Japan.  Three of these openings were huge, with some of the highest opening-day sales and new member sign-ups in Costco’s history.  I’ve read (somewhere but I can’t remember where right now) that the warehouse in Seoul, Korea actually does the most business of all of their locations.  It would seem that everyone loves Costco, all over the world, no matter the country.  Who doesn’t love quality products at great prices?  It’s pretty hard to think that would not be a winning combination anywhere in the world, isn’t it?

So, clearly I take a completely contrary view to the Fool.com article on international expansion.  In fact, I think maybe they should branch out to a new country or two in Europe.  I think that Germany would be a good place for Costco to expand into Europe.  It seems like Costco would have some real appeal there with their focus on quality goods and low margins.  Of course, I don’t know how difficult it is for a company like Costco to buy the necessary land there and make inroads into the local retail scene.  I do know that Walmart tried to enter the German market a number of years ago with pretty much no success, to be polite (in reality it was a colossal failure).  Of course, as we all know, the difference between Costco and Walmart is enormous.  The biggest difference that I could see would be the higher quality items sold at Costco and that is something I think would have great attraction and appreciation in Germany.  Of course, I have heard from a number of people that they would like a Costco location in France.  France is one of those places where I would not have thought that a Costco type store would be welcomed.  But maybe I’m wrong.  I am not at all familiar with shopping habits or competition in France, so this might indeed be the perfect European country for Costco.

The author did have a good point about Latin America though.  I think Brazil in particular would be a great South American option since it is the largest economy in that area of the world.  In 2011, Brazil passed the UK as the sixth largest economy in the world, although their economic growth did slow in mid-2011.  But is there a culture there for shopping at a warehouse store like Costco?  Or would that be totally against how they shop and prove difficult, or impossible, for Costco to overcome?  Clearly, I don’t know the answers to those questions.  But I do think Brazil is a good possible point for expansion into South America given how well their economy is doing when compared to other parts of the world.

So, to sum up, I think global expansion is an important and necessary part of Costco’s business strategy for the future.  How else are they going to get to 1,000 locations in the next decade?  If you were unaware, that is one of Costco’s stated goals and will require them to open about 400 new locations during that time since they currently have right around 600 warehouses. I think the success of new international locations in the last couple of years is a testament to how well Costco has been received in other countries and those locations have certainly contributed positively to their earnings.  People in North America are not the only ones that like to buy decent stuff at great prices, nor are they the only ones to have the space.   It seems a good idea to diversify into other economies too, but I’m not an expert at this type of thing, luckily it seems that the people at Costco are.

I will continue the discussion tomorrow with my views on marketing and other thoughts about Costco expansion.  Meanwhile, feel free to comment and share your thoughts on Costco’s international expansion strategy and where they should or should not try to build new locations in other countries.  North American shoppers need not worry, Costco still has a huge focus on you: they opened 20 new locations overall in their 2011 fiscal year and only 5 of them were international locations.

To read the full Motley Fool article:

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14 Responses so far ↓

  1. 1 Jefferson // 2015.02.08 at 10:11 am

    When they go opening Costco here in BRAZIL ???

  2. 2 Falcone // 2013.09.20 at 11:43 pm

    Why not Costa Rica? I want to live there, not without a Costco

    • 3 Kimberly // 2013.09.21 at 12:47 am

      @Falcone – I love your reasoning! LOL Perhaps now that Costco owns Costco Mexico completely they will do more expansion in South America.

  3. 4 David // 2013.06.20 at 10:18 pm

    Many analysts do not get Costco because they are very different than typical retail outlets including their competitors Sams, BJ’s, and Pricemart in Central American and the Carribbean. Interestingly Pricesmart is run by a bunch of former Costco execs. If you do not get what Costco does by this time you are not paying attention and this will skew your view of what the company should and shouldn’t do. Analysts for years have griped about how well the company treats their employees but former CEO Jim Sinegal pretty much told them he didn’t care what they thought Costco was going to treat their employees fairly because it was the right thing to do. It also explains why the company has the lowest employee turnover of any retailer out there. The money saved on not having to train and hire new employees all the time like major competitor Walmart which has a massive turnover is glossed over by these same analysts. The Costco model works because they stick to it like glue. It works because they are dedicated to keeping their costs extremely low and selling a ton of stuff. If you sell a bunch of stuff you don’t have to have a huge markup on it to make a profit…..Sam Walton proved that!!

  4. 5 Steve // 2012.12.01 at 7:56 am

    I am an American living in brazil and shop at Sams club here. The line is never less than 30 minutes long, the service is terrible and the brazilians don’t care. Costco would be the same if they were here and not at the expense of sams club. If you don’t go to Sams here you have to go to 4 or 5 tiny markets in horrible traffic to do your shopping.

  5. 6 GORDON // 2012.07.14 at 12:48 am

    Now that it is confirmed TRADER JOES is coming to beautiful ASHEVILLE, NC, when the heck will Costco finally make the right decision and open a location?

  6. 7 David // 2012.07.13 at 11:15 pm

    I agree that being first into a new market can have benefits, but tyically Walmart rushes into a market and then spends billions correcting the mistakes they made by trying to beat everyone to the punch. Costco typically moves a little slower but learns form other’s mistakes and do it right the first time, thus saving money in the process. I am sure that the company is looking at these large markets but will only go into them when they feel confident in doing so in an orderly fashion rather than just jumping in with both feet to “have a presence” in the country. The company has always been slow and steady and it has kept them from making any major mistakes so far as they have continued to grow nationally and internationally. I do agree that they do not want to wait too long before entering these countries, but I would bet when they do enter the mainland they will have an immediate impact on Sam’s sales just as they do here.

  7. 8 Job // 2012.07.12 at 2:20 pm

    I’m with you, in fact I returned my Sam’s membership yesterday and used the cash to have a Polish Sausage lunch at Costco. I told Sam’s that the experience at Costco is worth the extra $15 a year. I’m just saying, Costco needs to look at tomorrow’s rising BRICS instead of just today’s affluent economic nations. Why? Because Wal-Mart’s beating them to the punch in those countries and I fail to see how it’ll benefit Costco to wait years before entering those countries vs. entering today in 1 or 2 key metros(just to have a presence).

  8. 9 David // 2012.07.12 at 1:14 pm

    I hope that Sam’s fares better in China and Brazil than they have in other countries for their own sake. However, one of the prime reasons they are having success is that Costco is not there as you stated. Where the two companies compete head-to-head Costco wins every time. The company wins in sales per square foot, sales per location, and customer retention. There are plenty of articles out there to support this so I will not belabor the point further. If you like Sams go for it, but I prefer the higher quality and customer service that Costco provides its customers while providing its employees a fair wage and benefit package…..something that WalMart has forgotten how to do. Having worked for both companies I can assure you that the difference between how the companies treats their employees is like night and day. I choose to back with my investing and purchasing a company that takes care of their employees as well as having a standout track record of sales and growth.

  9. 10 Job // 2012.07.12 at 12:30 pm

    But you cannot ignore that Sam’s Club in Brazil has been extremely successful and once again, with zero competition from Costco. Also, Taiwan and Mainland China are 2 very different consumer cultures and from what I’ve read and seen, Taiwan Costcos look far more Americanized then Mainland Chinese Sam’s Clubs. In fact, Wal-Mart and Sam’s Club are succeeding in Mainland China and Brazil exactly because they have adapted to the local tastes and flavors while keeping true to their American distribution model. Not saying Costco has lost their chance to succeed in the BRICS, but Wal-Mart is definitely aiming their sights today on tomorrow’s middle class.

  10. 11 David // 2012.07.11 at 9:42 pm

    The Indian government is restricting Sam’s to wholesale only operations and will not allow them to own more than 49% of any national chain which of course is not a controlling interest so what will happen there is still up in the air. If the national chain can leverage Walmart’s immense buying power it could prove to be successfull and postitively impact the company’s bottom line. However, if the company insists on trying to force the Indian entitiy to follow Walmart’s principles of business that are in place in this country, that is profits at any cost, the results could be less than spectacular.
    One of the easiest ways for Costco to expand quickly would be for them to buy out Pricesmart (PSMT) , which operates a similar concept warehouse club in the Caribbean and several South American countries and is run by former Costco execs for the most part.
    Costco is in China already, see the above post, and has had huge success there while Sam’s typically has struggled because they failed to take adequate time to learn the market and hire locals to manage operations there. This is typical of Wal Mart’s strategy in new markets and has been their demise several times already, most notably Germany, South Korea, and now Canada. For some reason this huge company does not understand that you cannot simply go into a new market and try to Americanize the market. What works here, or in Arkansas, does not work in many foreign countries and the company has been very slow to realize this for some reason. In their rush to conquer the world WalMart rushes into new markets withou conducting adequate market research on culture, taste, and customer needs and pays the price in losses. The company completely underestimated their most recent Canadian venture and after losing billioins they pulled the plug on their Canadian operations. If they cannot be successful in our closest neighboring country, what are the odds that they will be successful in other areas of the world? While the core company will continue to be successfull here at home because of their market dominance, the Sam’s club division will continue to be a drain and at some point will probably be spun off or sold to an investment group to protect the profits of the core business.

  11. 12 Job // 2012.04.22 at 12:32 am

    You forget, that Costco and Sam’s Club are engaged in a bit of a game of Risk. Costco has the USA, Canada, Mexico, UK, Taiwan, Japan, South Korea, and Australia. Impressive, right? Well, it is until you consider that Sam’s Club has the USA, Mexico, but also has Brazil and China without any Costco competition whatsoever. Further, Makro(which is the 3rd global player in this Warehouse game of Risk) just had its South African operations 51% acquired by Wal-Mart. Because of the Massmart/Wal-Mart buyout, don’t be surprised if Sam’s Club gets to Africa before Costco by way of rebranding. Also, India is on the radar for Wal-Mart through local partnerships for cash and carry operations just like Sam’s Club. So what we’re seeing is that Costco is aiming for today’s middle class while Sam’s Club is going for tomorrow’s BRICS. It’ll be interesting to see which strategy wins, but for now I think that the countries that get Sam’s Club first will be less inclined to switch to Costco when/if they end up coming.

  12. 13 David // 2012.02.29 at 7:05 pm

    As a Motley Fool subscriber I read the same article and came away with the same impression. Obviously the author does not understand the Costco business model in regards to advertising…..they don’t do it!! In addition the author didn’t do their homework in regards to Costco’s international locations which as you mentioned have some of the highest average daily sales in the company. I believe, at least when I was with the company, the Taipei, Taiwan store had the largest average daily sales numbers, but that is neither here nor there. Costco does their homework before they open a warehouse either here or internationally, and with the immense markets overseas, overlooking them would be akin to commiting retail suicide in this day and age.

    Roll Costco roll!!

    • 14 Kimberly // 2012.03.01 at 3:07 am

      @David – I’m glad I’m not the only one that read that article and thought they were missing an understanding of how Costco operates. The stuff about international expansion was particularly odd to me because as you state the international locations provide them with really strong business. To not continue to open stores in those areas would be really nonsensical. I would say something snotty how as an investor they should know more about the company, but I don’t know all the details of some of the companies I have invested in either. Of course, I don’t write about them in business publications either.

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