Costco hints it’s ready to say G’day Down Under

ISSAQUAH, WASH. —Costco hasn’t entered a new foreign market in eight years, but that could change in 2008 as it explores opening its first store in Australia.

Costco’s prospective move into Australia has come up in two earnings calls this year and has been the subject of several analysts’ reports dating back to 2004. And while Costco says it intends to enter Australia in the near future, it doesn’t have a site selected for its first store yet, or even a clear window of when it will happen.

“Optimistically, if we were able to find the right site and get through the approval process without a hitch, we could have a store open in Australia by late 2008,” said Bob Nelson, Costco’s vp of financial planning and investor relations. “But realistically, we’re looking more at 2009 or even 2010.”

Nelson acknowledged Costco has a team in place in Australia scouting sites in major markets like Melbourne and Sydney. And he said Costco sees it as a prime destination for its next foreign market. “From a cultural standpoint, it seems like a great fit,” he added.

That’s because Costco already has a major presence in Canada and the United Kingdom—its largest and third-largest foreign markets, respectively—and believes they’ll provide a good template for expansion in Australia. But Costco is notoriously deliberate about the way it expands overseas and an opening in 2008 would be a surprise.

Rumors of Costco’s imminent move to Australia were touched off during an Oct. 10 earnings call when Costco evp and cfo Richard Galanti said, “It’s pretty much common knowledge we’ll be going into Australia during the next year.” More grist for the mill came from a Credit Suisse report in October that suggested Costco would be opening “three to five stores in Australia in 2008,” a prospect Costco dismissed. “That’s just not going to happen,” said Nelson.

Australia does represent a lucrative market for Costco with little competition. A report from Coriolis Research in late 2004, which predicted Costco would “open its first store in Australia in 2005 and New Zealand in 2007,” said the only real competition on the continent is Campbell’s Cash & Carry, a membership club that now has 52 stores that cater mainly to small businesses. Other competitors include general merchandise retailer Woolworth’s and its Big W stores, and the Cole’s supermarket chain, which is currently on the sales block.

For the most part, U.S. retailers have steered clear of Australia. Kmart has 187 stores there but they’re licensed outlets operated by Cole’s. The fact that Australia has a population of only 21 million—about half the size of Canada—is one reason along with its remote locale, which makes it difficult and expensive to supply stores.

But Costco may be an exception. “They get a lot of their product from local sources so distribution shouldn’t be as big a deal to them,” said Geroge Whalin, president of Retail Management Consultants in San Marcos, Calif. “And it’s a familiar culture.”