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business

Wholesale expansion

Costco is preparing to enter the Spanish market The giant American discount chain will be opening outlets in Seville and Madrid next year

A customer outside a Costco outlet in Hackensack, New Jersey.
A customer outside a Costco outlet in Hackensack, New Jersey.RON ANTONELLI (BLOOMBERG)

Everything at Costco Wholesale Corporation is enormous. The jars of top-brand mayonnaise are the size of those you find in restaurant kitchens, and the bottled water comes in containers that leave little room for much else in the trunk of your car. It's not because US consumers are voracious buyers - though they are. It's the strategy the US discount chain follows for its loyal customers. The company is now preparing to enter the Spanish market with the opening of two outlets in the spring and summer of next year, Costco's chief financial officer, Richard Galanti, told an analyst conference on its annual results last month.

The philosophy of the third-largest retail chain in the United States is simple: offer the members of its purchasing clubs a limited number of top brands at the best price possible. Costco has more than 50 million members worldwide. The annual membership fee is 55 dollars, both for individuals and companies.

The history of this distribution giant, which sells anything from food to luxury goods, goes back four decades to a converted hangar in San Diego, where it opened an outlet called Price Club serving products to small businesses. However, its owners realized they could also tap the retail market. A few years later it opened its first Costco warehouse in Seattle.

The two chains merged in 1993 when the group had 206 outlets and annual sales of 16 billion dollars. The aim of the original management team was simple: to keep costs low and pass on the savings to its members. And the more the membership base grew, the better positioned it was to negotiate the prices for the top brands it purchased, while its outlets became more cost-efficient. The model still remains valid and has been rolled out overseas.

Spain will be the site of Costco's first warehouse on continental Europe

In its latest financial year to September 1, 2013, Costco posted net income of 2.04 billion dollars, up from 1.71 billion a year earlier as sales grew 6 percent to 102.870 billion. Membership fee income of 2.286 billion dollars came on top of sales. Its customer base has a higher income than Wal-Mart's and as such its main competitors are Target, Sam's Club and BJ's Wholesale.

The company has assets of 30.283 billion dollars and operates 638 warehouse outlets worldwide, including 454 in the United States. Its second-biggest market is Canada, where it has 85 outlets, followed by Mexico with 34 and Britain with 25. It is also present in Asia, with around 20 centers in Japan, nine in South Korea, plus stores in Australia and Taiwan.

As part of the firm's ambitious overseas expansion plan headed by Jim Murphy, who operates out of Seattle, Spain will be the destination of the first warehouse Costco will open on continental Europe. It plans to open in Seville in April of next year and then in Madrid in July. These are just two of the 36 new outlets it will open throughout the course of 2014: half of them are in the United States, with five in Australia, four in South Korea, three in Japan, three in Canada and one in Mexico.

To put the scope of the planned expansion in 2014 into context, Costco has opened 42 new outlets in the past two years. The increase in sales area was 4.5 percent last year, to 8.4 million square meters.

Sales and earnings have grown an average annual 15 percent since 2009

"We're speeding up the expansion process," says Murphy, who is senior vice president for international operations. More outlets will be opened in Spain if those planned for Seville and Madrid take off. "We're always looking for organic growth," Murphy says. CostCo first had the idea of opening in Spain 15 years ago and believes now is the right time to go ahead with those plans despite the ongoing crisis in the country.

Murphy's way of going about things helps explain why Costco is one of the best performing companies on Wall Street. Its share price has tripled since the past financial crisis and its sales and earnings have grown an average annual 15 percent since the US economy bottomed out in March 2009. Costco's market capitalization is around 51 billion dollars, and the company is ranked 22nd in the Fortune 500.

It has achieved all this with a profit margin of under 15 percent, which is lower than that of its peers, because a good part of what it earns is invested in expansion and in improving the conditions of its workforce. Costco pays its warehouse workers 20 dollars an hour (seven more than Wal-Mart) and provides them with medical insurance and a pension. The company's co-founder James Sinegal retired two years ago without having overseen the laying off of a single worker.

"We seek the same loyalty from our workers as we do from our customers," Murphy says. He points to the fact that 98 percent of the management appointments at the company are in-house, as is his case. Murphy himself started off moving stock in a warehouse. "If the employee feels good in the company, he is more productive and efficient," he adds.

In principle, the two Spanish warehouses will operate along very similar lines to those in the United States, Mexico and Korea, but one of the targets it has set itself is to come up with a new sales model. Its warehouses are normally one-story, with Costco opting for two levels only in the case of high-density populated cities. The Madrid project will open in the Ciudad de la Imagen development on the outskirts of the city and will entail an investment of 12 million euros and have a sales area of 13,500 square meters, Murphy says. The only thing that will be different is the food products on offer.

Costco Wholesale Spain, the subsidiary that will operate here, has just completed a capital increase of 15 million euros to finance its investments. The company estimates the Seville outlet will create an initial 200 jobs in the area, which could increase to 300 depending on how the business takes off. The figures are similar for Madrid. The company has already started recruiting.

The logic behind the choice of Seville as the first outlet in Spain is simple. Murphy explains that the southern city has grown a lot in the past few years and has a population of around one million within a maximum radius of half-an-hour by car. It also has a high number of small businesses, which it is aiming to attract with its low prices. Individual customers are expected to come by word of mouth, as Costco does not spend money on advertising.

France is the other market Costco is looking at as part of its European expansion plans. It wants to open about 50 outlets in the next five to 10 years to break into a sector that is controlled by Carrefour, Auchan and Leclerc. However, the French authorities have put obstacles in the way of its development plans.

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