Costco and Woolies drive big-box format

Posted by Nicole Eckersley on 28th December 2010

Supermarket aisle - shopping trolleyAs Woolworth’s foray into the hardware sector draws nearer, and US giant Costco’s second Australian store approaches, new battle lines are being drawn across the big box retailing sector, with business information analysts IBISWorld predicting we will have more than 300 retail superstores by 2015, generating $24 billion a year.

The new generation of retail superstores span hardware, homewares, groceries, cosmetics, automotive goods, apparel and more, and with Woolworths’ big box stores being modelled on US joint venture partner Lowes’ Home Depot, IBISWorld General Manager (Australia), Mr Robert Bryant predicts this retail-friendly format will not only rival market leader Bunnings Warehouse, but also give Kmart, IKEA and new player Costco a run for their money.

Australia’s retail sector will be worth $269.2 billion by 2015, according to IBISWorld, an increase of 12.4% from 2010, with retail superstores accounting for 9% of revenue.

“While the average supermarket currently generates about $35 million each year, we anticipate the typical new format of supermarket-meets-hardware-meets-homewares megastore will generate $80 million in annual sales by 2015 – accounting for a significant share of the retail sector’s total takings and creating serious competition for current players,” said Mr Bryant.

The appeal of so-called warehouse clubs, such as Costco – offering discount prices for an annual membership fee – has not really been tested in Australia, although Costco’s strong performance since its opening in August 2009 (the new arrival generated $8.94 million in its opening fortnight) would indicate that this type of retailing may take much firmer hold here in the future.

The megastore format has already been extremely successful in Australia within particular industry sectors, explained Mr Bryant, such as Harvey Norman in the homewares and electronics department, Dan Murphy’s liquor and the Good Guys for white goods.

In the hardware sector, Bunnings already operates 167 big box stores, with expansion of around 12 stores per year scheduled until at least 2015. However, the latest breed of superstores to hit our shores, such as Costco’s Melbourne outlet, expand their reach way beyond a single sector – all under one roof.

“It’s all about low price, high volume and the convenience of one-stop-shopping,” said Mr Bryant. “Woolworths’ move into big box retailing is taking the battle already being waged with Wesfarmers in the supermarket sector to a new level, although they’ll be competing in a slightly different format since they’ve opted to follow the Home Depot retail-friendly format rather than the Bunnings’ style warehouse layout.”

“Woolworths has indicated it intends to expand at an average rate of 30 stores per year between 2011 and 2015 as it looks to exploit its ability to penetrate high-density shopping centres and take advantage of the burgeoning Queensland housing development sector,” added Mr Bryant.

Woolworths has already secured entitlement to 12 sites and is in final negotiations for another 15 sites for Greenfield development nationally. Its destination home improvement stores will each span around 10,000+ square metres, with the first set to open in 2011.

“In response, we anticipate a number of Bunnings Warehouse megastores will expand their product range to tackle their new Woolworths’ rivals head on by stocking additional product lines in areas including kitchenware and home furnishings.”

Bunnings currently accounts for 42% of the hardware retailing industry, and although it has displayed considerable growth over the last five years, the industry as a whole has actually declined at an average 0.9% per annum.

“This decline is largely a result of the slowed spending stemming from the GFC; however, it would also suggest that the battle for the consumer dollar will become extremely fierce with such rapid expansion by another player,” said Mr Bryant, “however, trends in the United States suggest that big box stores perform well regardless.”

Warehouse or big box retailers have been enormously successful in the US, with average growth of 4.9% per annum over the past five years to reach US$385 billion. In fact, big box retailers account for almost 10% of the total US retail spend, outperforming the total retail division which has grown at just under 1% per annum in the five years to 2010.

“Despite its strong performance, growth in US big box stores has now slowed somewhat with the limited availability of space for new locations and difficulty introducing additional product lines and this may be one of the reasons companies such as Lowes and Costco are now looking to the Australian market,” said Mr Bryant.

Within the big box sector in the US, food and beverages account for the largest product share with 37%, followed by electronics, entertainment, sporting goods and toys with 22%, apparel, accessories and jewellery with 16%, home furnishings with 14% and other items including pharmaceuticals, optical and gas stations with 11%.

Outside the new Woolworths expansion into home improvement superstores, IBISWorld believes Costco will be the new force to be reckoned with on the local retail landscape.

“Costco accounts for nearly 60% of the US industry with its 400+ establishments, and while we only have the one store so far, the second will open in Auburn in Sydney next year with a floor size five times bigger than a typical Woolworths or Coles supermarket.”

And while Bunnings has been quite vocal about ‘unfair competition’ as the new Woolworths venture looms, Mr Bryant warned rivalry in Australia’s expanding retail superstore sector is only going to intensify over the next four years, by which time IBISWorld expects we’ll boast 300 megastores along the lines of the new Woolworths format, Bunnings, Costco and IKEA.