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:
- 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)
- 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.
- 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: