Costco economics: make this bigger, drop the price - walking the floor with Patrick Noone

Even Costco’s New Zealand boss Patrick Noone can’t believe how much cheaper the US firm’s new Auckland store is than its competitors.

Costco’s New Zealand managing director says he popped to retail rival Farmers and was surprised to see a three-pack of Calvin Klein-branded men's underwear for sale for more than $100. 

A three-pack of Calvin Klein-branded men's underwear at Costco? It’s selling for $37.98 at the global retailer’s brand new Westgate store in west Auckland which opened early on Wednesday morning.

“I couldn’t believe it,” Noone says. “And I believe it’s the same for jeans, and with everything. There’s fat in this market.”

That will be welcome news for NZ consumers, grappling with ever-rising inflation and a cost of living crisis.

The American retail giant brings competition across a number of markets; petrol, groceries and fresh produce, tyres, hearing aids, prescription glasses – and of course, all the other nice-to-haves you start to expect at Costco like branded televisions, outdoor furniture and branded discount clothes, underwear, shoes, Christmas decorations and even diamonds. 

It has opened its first store, and has flagged it may open further stores in Christchurch and Wellington. There are murmurs there may be a new store announcement for 2023.

But many of its items do look different. Costco is obsessed with value and bulk buying.

A pack of sausages might be a six-pack at your usual supermarket. Or a punnet of blueberries will be sold in a small pack.

Costco blueberries only come in a 1 kilogram pack, with a price tag of $59.98. Strawberries are also available, but only in bulk, for $26.98.

The trays of fresh meat are huge. The famous cakes are a similar size.

Want one tube of lip balm? Unlikely at Costco, but you could buy a bulk pack of Burt’s Bees with many different kinds of its branded lip balm, instead.

The focus on size, and value, is relentless.

Noone is blunt about why.

“Members pay a membership to shop here, they need to save money. If we don't do our jobs properly, then we don't exist. So that is a great motivator. Constantly, every day.”

That membership in New Zealand is $60 a year for a regular shopper. The membership is the not-so-secret special sauce that makes Costco such an interesting player, and proposition for consumers.

The membership underpins the savings the firm is able to pass on to its members. The fees paid every year allow Costco to drive prices down, which Noone says is the deal it has with members. Pay the membership, save when you shop.

There was recent talk of the US membership fee potentially being increased, but Noone says that was a “North American” discussion. NZ's membership price is set.

Noone himself is working hands-on with suppliers to decide what a product sold at Costco Westgate looks like. What size will it be? (Big.) Does it need to be a two-pack, or a three-pack, or more? Costco goods need to have as little packaging as possible. (Keep costs down). And it also needs to be a good size for filling a pallet. (Efficiency).

And of course, it has to be “the best quality,” Noone says.

Noone says the thing that excites him most about this new store is working with New Zealand suppliers – which he calls partners – to create new versions of their products to satiate the Costco market.

The firm had a Zoom call attended by something like 600 NZ food producers before opening. Enterprising types might send Noone a message on Linkedin.

Noone says Costco will work with NZ suppliers on everything from what the packaging looks like, to the size, to the recipes, to the production, and once the products have been tested in the Auckland store they may well be rolled out to Costco stores in other countries – if they sell well.

“The feedback will be in the sales,” Noone says. And he will be checking sales regularly. Every couple of hours, he says, he’ll be looking at what people in the Auckland store are buying.

“Looks pretty normal so far to me,” Noone says, as he looks into the trolleys being pushed past.

Noone picks up a meat product made in New Zealand for the store, branded Grandpa’s. He turns it, looks at it from different angles. He seems pleased with what he sees, but says there are improvements to be made.

“This is a new vendor of ours. They're making a good product, a great product. In Australia, that product would be double the size. And a very competitive price point. But perhaps in the future, we'll work with these guys and say, how can we drive more value into that? How can we make it better for the member to buy more, but save more money as well?”

Noone sees another product from Grandpa’s. This one is “probably a little too retail size for us”, he says.

It’s not big enough. It’s not Costco-sized. But the product is excellent, Noone says.

“We'd like to probably have that a third bigger, or a half bigger again,” Noone says. “And if we did that, we can actually have less packaging and drive that price down. So it's $14.99 now. Maybe we can make it $20, but double the size of it, for example.”

Noone says the firm buys about $400 million worth of New Zealand made goods, and when it embarked on its NZ store the retailer looked at how much it already bought that was NZ made, and “we were shocked”.

For example, Costco in Japan was selling carrots from a NZ supplier. Now Costco has better visibility of the New Zealand products it sells, it can sell those products both in New Zealand but into other markets too, Noone says.

“Now that we are here in the marketplace working with partners, I think we will see that number [$400m] grow.”

Noone sees another new New Zealand product. Again, he says the packaging is excellent. It's eye-catching. 

“But can we make it bigger? And drive more value into that as well?”

Noone doesn’t buy into the idea that bulk won’t work in New Zealand. That somehow our shoppers are different

He says that view is “snobbery”.

“When we first opened in Australia in 2009, I remember there was a lot of retail gurus on TV, saying 'you know, it's not going to work here, because the people don't have big freezers. They have small cupboards, we’re not Americans here.' But the secret is, around the world, people are all the same. They want to buy great stuff and save money doing it. And so that's all we do. We provide that great stuff and save people money doing it.”

And the people did come to Costco’s first day.

One floor of its 800-strong car park building was almost full by 7.30am, and the strong consumer appetite for the new store saw its official opening dragged forward.

In the end it was a low-key kick-off, a spokesperson says, with a decision made to just cut the ribbon and let people in, rather than have them queuing and crowding outside the mega store.

Noone says he thinks it was a record turnout for an opening. 

Why were shoppers there? Competition, says one. 

“Finally,” she says to Noone. “I’ve been waiting for Costco to come here for years.”

“I’m sorry it took so long,” Noone says.

Another shopper says she knows Costco from the US and Canada. She says she’s not looking for anything in particular – some groceries, a bit of Christmas shopping, maybe some new headphones.

But she wishes this NZ Costco had more kids’ clothes. 

“Other stores I’ve been to had more.”

No one has really been talking much about Costco and clothes.

But Noone thinks it’s a “major.” Branded clothes, sold cheap, are a key part of the Costco offering, and he believes there is plenty of competition it can inject into New Zealand.

Noone says competition makes “us all work harder.”

“I think the people that benefit from competition are the consumers. Our members will benefit from us always being on guard to make sure we do the right thing. And the consumers in other markets will be the same way. So, I think it's a good thing for New Zealand that we've got this global retailer here bringing the merchandise from overseas, that's available now in the big markets of the world. I think that's a good thing for New Zealanders."

Costco by the numbers

$100m to build Auckland store

$60 annual membership fee

$55 annual membership fee for business

800 car parks at Westgate

14,800m² Auckland store size

More than 275,000 employees globally