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Retail giant's South Australian setback

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US retail giant Costco’s entry into the Adelaide market has hit a snag with the Licensing Court knocking back its application to sell cases of wine, beer and other alcohol.

Costco is spending an estimated $20 million on its Kilburn site due to open in November – the first of three planned South Australian stores.

Costco had applied for a “special circumstances licence” to sell around 300 lines in bulk form – cases of beer and wine, as opposed to six packs and single bottles.

It had argued that normal retail liquor merchant’s required it to sell products in a form that is not profitable in the Costco big warehouse bulk buy format.

However, the application drew objections from Woolworths, the Albion Hotel and the Empire Hotel.

The court rejected the application on the basis that it would set an “undesirable precedent” that “might compromise the interests of the liquor industry and its appropriate regulation and control”.

At the hearings in August, one of Costco’s founding directors flew to Adelaide to plead the case and outline how and why Costco’s retail model is different to other retailers.

The US giant’s vice president and director, Patrick Noone, told the Licensing Court how some 20 years ago, when working in Canada, he became involved in a new retail concept known as a warehouse club.

After some mergers and name changes that club became known as Costco Wholesale.

He detailed how over time Costco has opened stores all over the world.

It has 466 stores in the United States, 88 in Canada, 33 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in South Korea, 10 in Taiwan and six in Australia.

A summary of his evidence to the court explains that the business model is focussed partly towards being a wholesale facility for small to medium sized businesses with the expectation that they will buy goods for reuse or resale and a cheap retail facility for individual customers.

“Its competitive edge arises as a result of a combination of bulk purchasing, lower overheads and membership fees,” the summary says.

“It buys everything in as large a quantity as possible so the production runs tend to be longer leading to lower prices.

“The stores resemble warehouses. They have concrete floors. They use steel racking. Most merchandise is palletised. The stores do not have any of the frills or neon signs and the like that other retailers might use.

“Membership fees in Australia are $60 a year. They are US$55 in the United States and similar amounts elsewhere.

“Membership sales for the Adelaide store have commenced. Before it started taking memberships here, it had about 1,500 members with a South Australian postal code. As the opening date nears, Costco expects to have signed up several thousand new members.

“The store will have over 650 car parks each of which will be longer and wider than standard shopping centre car parks.

“This is in the expectation that customers will be returning to their vehicles with trolleys laden with goods.

“Customers typically shop at a Costco just under once a month. They generally spend about $175 per shop, excluding petrol.

“The stores sell a vast array of goods ranging from car tyres to expensive jewellery, watches, hearing aids, outdoor patio equipment, swim and sporting goods, gardening items, clothes, deli goods, meat, bakery items and electrical appliances.”

Costco told the court its business model for the Adelaide store liquor section would have around 267 product lines.

Noone said this was different to a typical BWS store which can be expected to carry more than 2000 items.

He said that Costco attempts to buy the best quality items at the best price and to bring them into their stores in pallet quantities. He said that to carry more items would be very labour intensive which is a very different business model to the one under which it operates.

“All of our pack sizes tend to be larger except for wines, which we stock out by the case; so it’s just not in our DNA to have hand-stacking like that going on all the time,” Noone told Judge Brian Gilchrist.

“Also we just couldn’t carry the number of items that they carry; so the 2000 I’m seeing here at the BWS would be counterproductive to us, and it’s not our system. We would be a loss – it would cause us an enormous amount of extra costs to carry those things, hand stack them every day; take item maintenance on those things; com shop everything there on the floor, and then bringing a pallet of 2000 items means I would have to store 2000 pallets in the warehouse, and I just can’t do that.

“So the reason we keep our stock nice and tight is we can buy those pallet quantities, and we can either store them or stock them out right away.”

He said that none of the liquor products would be refrigerated.

Gilchrist asked Noone if it would be inconvenient to have one section selling only liquor, isolated from the rest of the store, having its own checkouts.

“Yes, it was very inefficient, because the member would have to line up and buy her wine or beer and then stop the whole shopping process, and then be able to walk out on the floor and go back and line up at the front end again.

“So for them it was an extreme frustration. Not having that register now means that people can do one shop, and they can get in there and get out quicker. It’s a very simple process, and it’s been very successful for us as well.”

In considering the application, Gilchrist said there were three elements of the Costco model that do not fit a normal retail merchant’s licence.

“First, is the fact that it only wants to sell no more than 300 lines.

“Second, is the fact that it does not propose selling to members of the public. It only wants to sell to its paid up members and employees.

“Third, it does not wish for the licensed premises to be physically separate from premises used for other commercial purposes.”

Gilchrist agreed that such a business model meant that Costco would not qualify for a retail liquor merchant’s licence.

That left him with the retailer’s application for a special circumstances licence.

Gilchrist was concerned that to allow Costco a special licence might have a flow-on effect.

“It may set an undesirable precedent for the grant of further special circumstances licences,” the judge concluded.

“What would prevent another applicant putting up the same business model with a membership fee of say $20? If that were allowed could another suggest the same model with a $10 fee?

“Many retail stores run loyalty programs.

“Many retail stores can be expected to wish to sell take away liquor.

“It would not take a lot of imagination for a retailer to construct a loyalty program in a way that mirrored Costco’s business plan.

“If this application were granted it might set a precedent that might result in a proliferation of such licences that might compromise the interests of the liquor industry and its appropriate regulation and control; might fail to ensure that the liquor industry develops in a way that is consistent with the needs and aspirations of the community; and might fail to ensure that the sale and supply of liquor contributes to, and does not detract from, the amenity of community life.

“I have come to the conclusion that in all the circumstance it is appropriate to exercise the discretion adversely to Costco and to refuse the application,” Gilchrist concluded on Thursday.

And with that, a retailer that’s investing more than $50 million and creating hundreds of jobs, was sent packing.

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