“As more consumers look online to do their shopping. It seems only natural that we would add an online store to our offerings”
Costco Australia Managing Director, Patrick Noone (The New Daily)
Costco Online Store background
Costco is one of the last major retailers to embrace an e-commerce service. Some suggest Costco US executives believed that customers would purchase more in store (impulse purchases) so they did not wish to have an online offer. Some suggest Costco has only recently embraced e-commerce due to Amazon purchasing Whole Foods in the US (Fortune, Time). Others suggest Costco has embraced e-commerce due to millennials in the US not wanting to drive and shop in a Costco warehouse (Time). Whatever the reason why Costco is now actively pursuing an omnichannel approach.
A simple overview of Costco online store in USA.
2001 Costco offered its online service, costco.com for business customers in the US. (Freelibrary) Deliveries were made by 3rd transport companies, e.g. Instacart, for most regions. In some regions, Costco used their own vehicles to deliver the order. Customers that purchased via Instacart did not have to be members, were charged delivery fees and did not necessarily get the same price as in a Costco warehouse. (Wikipedia).
2017 Costco offered its revised e-commerce service, CostcoGrocery, for US customers.
The revised offer includes free same day delivery for grocery orders, including fresh, if the order is over $35. Item prices will be higher than the local warehouse prices plus a 10% service fee. Delivery is via a third party service, Instacart (Costco).
This revised offer also includes a free 2 day delivery for non-perishable food and grocery, if the order is over $75. No weekend deliveries for this service. This service is only available to members. (Costco, Time)
Costco Australia Online Store
Costco Australia has discussed having an online store for some time now. In 2017 Patrick Noone, Costco Australia Managing Director, informed the media of their plans to have an online store by 2019 (AFR). The new warehouse in Kemps Creek Sydney is due to open in March 2019 and could allow Costco Australia to offer an online store (9 news). Costco Australia website still states Costco.com is only available to North American residents (Costco).
Costco Australia Online Store Strategy
Costco Australia exact plans for their Australian online store have still not been released. Personally, I believe Costco Australia would have reviewed Amazons unsuccessful launch (SMH) into the Australian market in December 2017. Therefore, Costco Australia will ensure they are ready to launch successfully. Based on quotes from Patrick Noone (detailed below) I believe the main objective for Costco Australia online store will be to ensure all Australians are able to purchase Costco Australia range of non-perishable products in the long term. Secondly the business is prepared to slowly build their online sales.
“It’s going to be successful here, it’s just a matter of getting the right infrastructure in place to launch it,” Mr Noone said (SMH).
“Australia is such a big country and our population is spread out, so it’s hard to get from Wagga Wagga to Costco in Sydney. It would be almost impossible for us to build a warehouse in Wagga Wagga so a dotcom business gives those people an opportunity to buy the items we sell.” (AFR)
‘Mr Noone said he had no online sales targets, but in the US Costco is now generating online sales around $US6 billion, representing 5 or 6 per cent of total sales. “I don’t know what it will be here for us, it will be interesting to see”, he said.’ (AFR)
Costco Australia Online Store Offer
With regards to the actual offer I believe Costco Australia will have a similar offer to Costco US in the long term.
As outlined above, personally, I believe Costco Australia will slowly build their online business. The initial offer could be limited to non-perishable items, with a short (2 day) delivery period for metro offers. These items would only be sourced from the new DC in Sydney. Amazon Australia is already able to offer a similar delivery timeframe by partnering with Australia Post (CBNC) and sending stock from their Melbourne DC. At a later date, Costco could improve the offer by offering a delivery service for fresh and non-perishable items (in limited geographic areas). These items would be picked in their warehouses and would be delivered to customers in a defined geographic area close to the warehouse to ensure product quality/freshness. This service would then be similar to the US CostcoGrocery service.
To achieve a fresh and non-perishable delivery service from warehouses in Australia Costco will have to consider 2 distinct options. Costco Australia could manage the logistics in house or outsource it. In Australia retailers such as Coles and Woolworths pick, pack and deliver e-commerce orders to customers. In the US Costco has outsourced the delivery to a third party, Instacart. In the short term I suggest Costco will adopt a similar model to Coles and Woolworths and pick, pack and deliver e-commerce orders from warehouses to customers.
“it’s just a matter of getting the right infrastructure in place to launch it,” Mr Noone said (SMH).
‘That would include home delivery options and possibly click and collect from stores’ Mr Noone said. (SMH)
The reason for this is a national service, similar to Instacart in the US, is not currently available in Australia. There are a number of different delivery services heading this direction in Australia. They range from retail specialists like Your Grocer, through to restaurants specialists like UberEats. In the longer term, Costco will probably partner with a 3rd party service provider (same model as the US). Instacart may even enter the Australian market. Aldi US is using Instacart at more stores now, for same day deliveries (Reuters), so Instacart could even enter the Australian market to deliver Aldi and Costco same day deliveries …
In the US deliveries can be made within an hour (Costco). Amazon owned Whole Foods also offers delivery within an hour in the US. Personally, I don’t think Costco Australia will offer deliveries in this time frame in Australia, yet. Coles and Woolworths still have customers order the day previous to delivery, so Costco will probably adopt similar timeframes for orders from warehouses.
Costco will have an additional fee (delivery fee) added to cover the freight from store to the customers business / home. Amazon Australia, via their Prime subscription service, can offer ‘free delivery’ to Australian customers. Other retailers, such as Coles and Woolworths, normally offer free delivery for large orders over $X and charge a sliding scale of delivery fees for small to medium $ orders.
As Costco Australia has lower margins than Coles and Woolworths (AFR) they will probably charge higher item prices online, to cover the in store cost of picking and packing the order (same as US model). Woolworths does offer the same prices online and in store for items but personally I do not believe Costco has the margin to absorb the in store picking and packing costs.
Summation
The Australian retail market is changing quickly. International retailers such as Costco, Aldi and Amazon are offering Australian customers different shopping experiences including online stores.
Costco Australia will launch an online store in 2019. This online store will probably offer a similar type of service as the Costco US site. Importantly for Costco Australia the online store will give them the opportunity to serve more customers in Australia and continue to grow their brand / sales. The major issue that Costco Australia will need to address is supply chain. The fact that Australia is physically large with a small population can create logistical problems that even Amazon seems to be struggling with.
The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.
Thank you,
Tim Bowen
