Channel Focus: Understanding Channels to Help Grow Your Brands – Warehouse Clubs

In today’s market, the fight is on to grow retail share. With the major Supermarkets in a fist fight, new entrants gaining share at pace and consumer demand driving new demand in alternate channels, brand growth opportunities are there to be taken or lost.

This is why our focus at Next Reality Group is to help brands grow through better understanding of consumers and retail channels. We use this understanding to develop and execute sales and marketing plans that bring great products and experiences to new and different places.

Part one of our Channel Focus series examines one of the newer and most discussed channels in Australian retail, the warehouse club channel. It differs from the traditional cash and carry model (e.g. Campbell’s) specifically in range, customer focus and economic model. The single warehouse club operator in Australia is US-based Costco Wholesale, which currently operates 3 buildings, one each in Melbourne, Sydney and Canberra. Unconfirmed estimates would place current annualised turnover ~A$800 million, a fairly impressive result in less than two years of operation.

What makes the channel different?

So many things, but let’s start with the scale. The sites are generally 10-12,000 sq. meters of selling space, and they are definitely warehouses; low frills, low-cost, entirely engineered for “hard-shopping”. The large trolleys and flat beds are a tip off that the pack-sizes are usually much larger than you’d find in conventional channels. Despite the size of the building, its range is very focused – a well-run club carries ~4,000 skus, so choice is somewhat forced. The business caters to both wholesale and retail customers (or members, as we’ll discuss in a moment) so its appeal is pretty broad. In markets where the model is most developed (US, Canada, UK) the split between wholesale and retail turnover (as judged by card type) is roughly an even split.

Most people know that the format requires a pay-to-shop opt in that is important for a few reasons. One, it presents a revenue and profit stream that is critical to the financial success of the format (it drives anywhere from 70-90% EBIT). Two, it locks in annual customer behaviour, the psychology being that once the fee’s been paid it behoves the member to get as much value for it as possible, therefore more spend, etc. (Amazon adopted a similar approach with its Prime offer several years ago). Third, and perhaps most important it sets the operator up to be totally focused on member (customer) value (as opposed to category value) – if an offering doesn’t perform it’s deleted. And fast.

Because it’s the epitome of high volume, low margin, warehouse clubs need to drive intense sku velocity and maintain extremely low operating expense margins to make the proposition work.

What are the growth prospects?

There’s been speculation running rampant about how many warehouse clubs the Australian market could handle and how many Costco itself, as the only current entrant, might plan to open. Some management commentary and back of the envelope catchment maths suggest that 20 clubs is not beyond reality. That suggests the potential of a $3-4 billion channel before it’s all done, and at a rate of 2 per year that total would be achieved before the end of the decade, a pretty tidy sum.

What does it take to succeed in this channel?

For suppliers selling seeking to optimise the potential of the channel, a few considerations are worth bearing in mind:

• Does your pack/format support multiple uses?
• What’s your value proposition v competing channels?
• How tight is your supply capability – this is per sku volume your firm has probably never experienced
• Can you focus on the item opportunity (despite all the category management/marketing training you’ve done and espoused)?
• How does your selling/marketing organisation measure channel success? are those KPIs in line with the format model? What must change?
• Can you sell your organisation on the potential in a way that moves it to think and act differently?

Interested in building your business at Costco? Email Phil Bonanno: phil@nextreality.com.au