COSTCO EYES BIG EXPANSION
Growth could put squeeze on grocers
TORONTO Costco is aggressively stepping up its expansion in Canada after years of strong success in this market, a move likely to put even more of a squeeze on traditional grocers such as Loblaw and Sobeys.
The U.S. warehouse club giant, which has annual sales of close to $21 billion and 91 stores across the country, will open seven new stores in fiscal 2017, the company revealed on its fourth-quarter conference call with analysts. That is about double its most robust annual expansion rate.
“I think the fact that we are opening so many right now has to do with very strong sales over the last few years,” said Richard Galanti, the retailer’s executive vice-president and chief financial officer, said during the call after market closed on Thursday.
“We have been enjoying five per cent to none per cent (same-store sales) in local currency in each of the last few years up there, and so it keeps getting stronger.”
Same-store sales are a key indicator of retail strength, tallying performance at units open for more than a year.
In Canada’s mature markets, there might sometimes be cannibalization to older outlets when Costco adds new stores, Galanti said, but “the business that’s added net of cannibalization, we’ll find that existing members will then be shopping more frequently, because they are closer.”
Costco, whose Canadian members pay a $55 annual membership fee to be able to shop there, said about 90 per cent of its members in the U.S. and Canada renew memberships annually. Galanti gave no update on the growth ceiling for the company’s warehouses, though Canadian executives had earlier pegged the number at about 110.
Typically, Costco opens one to three warehouses a year in Canada, noted analyst Keith Howlett of Desjardins Securities, who said the latest news bodes ill for traditional grocery companies, in particular Empire Co., owner of the struggling Safeway brand in Western Canada and Sobeys in the East.
“Costco Canada has been an outstanding success and dominates the wholesale club segment,” Howlett wrote in a note to clients Friday.
“The membership warehouse club format remains primarily a threat to conventional supermarkets rather than to the hard discount channel (such as No Frills). Empire, as the largest operator of conventional supermarkets in Canada, would appear to have the greatest exposure to Costco.”
The analyst estimated opening a Costco Canada is equivalent to opening four to five conventional supermarkets.
“Our estimate is that Costco Canada, Walmart Canada and Metro are clustered together with similar national market shares,” the analyst said. Metro operates only in Quebec and Ontario.
An August report from Guelph, Ont.-based Kevin Grier Market Analysis and Consulting said Canadian grocers have seen their market share threatened by general merchants such as Walmart and Costco in recent years: In 2015, grocery retailers’ share of Canadian food sales was about 78 per cent, down from 84 per cent in 2010.
Between 2004 and 2015, the general merchandise channel’s rate of growth for food sales increased at a compound annual rate of 11.6 per cent, according to Statistics Canada.
In the same period, the grocery channel’s food sales increased at a compound rate of just over three per cent.
Howlett noted that Costco Canada’s same-store sales growth appeared to be moderating in the fourth quarter, which ended Aug. 28.
Its same-store sales rose four per cent in August, below the five per cent rate of the entire fourth quarter and the full fiscal year samestore sales rate of eight per cent.