By Patrick Avenell
SYDNEY, NSW: The expansion of US warehouse retailer Costco in New South Wales and the ACT is expected to have a significant effect on the pricing of brand name products, including appliance and consumer electronics.
According to an advisory note obtained by Current.com.au, Macquarie Securities estimates that Costco’s first store, in Melbourne’s Docklands, currently generates $165 million in sales. This is not having a substantial effect currently, but with aggressive expansion planned, price erosion is expected to impact Costco’s rivals, including listed retailers Harvey Norman, JB Hi-Fi and the privately owned The Good Guys.
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“By July, Costco will have warehouses in Melbourne, Sydney and the ACT. The next step is…expansion to other states,” said Macquarie Securities consumer analyst Rob Blythe. “The expansion of Costco will influence pricing in the market catchments of its stores and resultant competitive impact on other retailers.”
“Costco’s expanding presence in Australia will impact the market both directly, through gaining market share at the expense of existing retailers, and indirectly, by influencing the perception of pricing in the market.
“While the direct effect of Costco will be felt more in the medium term as warehouses are progressively rolled out, the indirect impact on prices will be felt as soon as Costco enters a market.”
Price erosion has been a serious issue for the consumer electronics industry over the last decade. Although online retailers have often been blamed for undercutting Bricks and Mortar retail, the Canon Consumer Digital Lifestyle report, released on Tuesday, attributed widespread value decreases to increased retail competition.
Should Costco continue in its expansion, Blythe predicts that its effect on traditional retail would be disproportionately high.
“While we estimate that with 25 stores Costco could achieve sales of around 1 per cent of the total market, the indirect effect on competitor prices and industry profitability is substantially greater,” Blythe said.
“Costco Australia’s average prices are 35 per cent lower than a full line supermarket. If general prices declined by 15 per cent with 25 warehouses, this could reduce the value — not volume — of total retail sales by up to an additional 4 per cent.