Five years in the making: How Costco will shake up NZ retail

A real estate investment specialist worked with a group patiently and quietly for five years to bring the world's second-largest retailer, Costco Wholesale, to this country.

Brent McGregor, the Auckland-based executive chairman of real estate specialists CBRE New Zealand, was cited by Westgate landowner Mark Gunton of NZ Retail Property Group this week as being crucial to the deal behind the arrival of the American giant with net annual sales the same as New Zealand's entire GDP.

McGregor was somewhat reluctant to take the accolade, but acknowledged this week: "I just worked hard for a long time. It's part of a global relationship and we just chipped away at it for five years."

Brent McGregor of CBRE broked the Costco deal. Photo/CBRE

After CBRE Australia worked with Costco on a number of deals, McGregor said the New Zealand arm of the business first made a connection in 2014.

"For obvious reasons, Costco wanted to investigate the Auckland market as a first entry into New Zealand and our involvement was to confidentially identify a number of site options and prepare demographic and drive time analysis for each potential site and then marry this up against Costco's mandate," he said.

More than 12 Auckland sites were initially considered in the following four years "and after one or two dead ends", Westgate was chosen, McGregor said.

The deal team comprised real estate, town planning and legal advisors locally working with Costco, he said, naming senior research director Zoltan Moricz and the retail valuation and advisory service headed by Tim Arnott.

Costco announced it would build a full-format store with a "fuel station, tyre centre, food court, optometrist, hearing aid services, groceries and homewares".

Costco Wholesale's arrival in this country will give Kiwis access to far cheaper groceries and consumables, according to Auckland-born Minneapolis resident Mark Charlton, who cited weekly petrol saving as just one example.

"I save around US.37c/gallon on petrol," said Charlton, a regular Costco customer who also cited discounted tyre deals with a road hazard warranty programme included.

"Costco is going to have a very positive impact for consumers that will lead to lower prices," Charlton said.

His household pays a US$120/year membership but he says the savings, Costco's 2 per cent rebate on purchases plus a Visa card cash-back deal more than make up for that outlay "so essentially our membership is free. We shop for milk, bread and many other groceries at local variations of Pak'nSave and New World and tend to shop on a daily basis for what we are cooking for dinner. We go to Costco less regularly but spend more than US$100 when we do go."

The quantities are big but the quality high and it draws families, Charlton said: "Even the carts are twice the size or more of regular shopping carts."

"Toothpaste comes in five-packs, dental floss nine-packs, toilet paper 30-roll packs, paper towels 12 rolls, gin and vodka 1.75L bottles. If one has a party or a holiday dinner, it's economical to get the huge meat, fish and ready-made packs. Negatives are storage and having that much on hand. Maybe those without self-control eat or drink more because of huge quantities in the cupboards or fridge," Charlton said.

Auckland lawyer Gervais Laird, who moved to Australia with his family said he and his wife Kara walked into Sydney's Costco at Auburn to just look - but spent hundreds of dollars.

"You end up walking out with $500 worth of stuff you had no idea you needed," Laird said this week.

"There is so much stuff at Cosco, it's insane. You buy in bulk so it seems cheap - everything from coffins and spa pools to bulk food and toilet paper."

Costco might draw about 300 cars an hour to its planned $90 million Auckland store, but is yet to apply for resource consents to build the store, not due to open till 2021.

Costco Wholesale Australia and New Zealand managing director Patrick Noone and real estate director Abdul Deeb attended Tuesday's announcement of the arrival. Asked about potential retail trade, Noone said: "It could be around 300 cars an hour but it will be busiest Saturdays and Sundays."

Costco Wholesale Auburn Warehouse, for example, is open 10am-8.30pm weekdays and 9.30am-6.30pm weekends, giving a 58-hour trading week. Each of Costco's 11 Australian stores get about around 600 cars/hour on average.

If Costco draws 300 cars an hour in Auckland and trades similar hours as Auburn, that could mean nearly 1m annual vehicle visits. CBRE chairman Brent McGregor agreed with that methodology and the numbers.

• HOW THE DEAL GOES
Noone said Costco would buy the 3.3ha site on the Maki St/Gunton Dr corner between Harvey Norman Westgate and Mitre 10 Mega, bounded by State Highway 16. The flat site has never been built on previously. Costco will only buy NZRPG's land when resource consents are secured. As yet, those consents haven't even been applied for but Noone expects that to be next month.

• STORE SIZE: NOT THAT BIG
The Westgate store will be 14,000sq m compared to Henderson's new half-finished Nido Living furniture store of 27,000sq m. Kiwi Property at Sylvia Park has more than 100,000sq m of floorspace when the mall and bulk retail centre across Mt Wellington Highway are added together.

• PRODUCT RANGE: NOT THAT MUCH
Costco Wholesale Westgate won't stock a big range: "We carry about 3500 items compared with supermarkets which carry about 30,000," Noone said. He cited the example of peanut butter, where often a store might only stock the Skippy brand - super chunk and creamy - yet sell in massive 1.3kg jars at a significant discount.

• TIMING: TWO YEARS AWAY
Noone said Costco is about to apply to Auckland Council for consents, probably lodging applications next month. Although the land is zoned correctly for Costco, he doesn't expect construction to begin till next year. Opening target: 2021.

• STORE ON ONLY HALF THE SITE
A 1.4ha store is planned for the 3.3ha site. Noone said the store would, somewhat unusually for Costco on a stand-alone site, be two levels: ground-floor store, with roof-top parking. Much of the land surrounding the building is needed for truck movements and turning, as well as landscaping, but also for the stand-alone fuel station. As CBRE's Brent McGregor notes: "Fuel will be a key drawcard to get people to the site." At Costco Epping in Australia, fuel is being sold for A$1.59-A$162/litre.

• BUT THE SAVINGS - HOW THEY DO IT
One of the world's largest wholesale brands buys and sells in bulk, forms strong relationships with suppliers and suffers very little goods handling. Noone said at Westgate on Tuesday: "They [suppliers] only package it once for us and we have no-hands stacking. We're typically selling for 25-30 per cent less." Pallets are container-shipped in, trucked to the store then seamlessly fork-lifted onto the floor. Cutting advertising, limiting stock, and building up its own brands are other key strategies.

• MEMBERSHIP MODEL - NO PRICE YET
Noone said Costco had not yet decided what NZers would pay to join Costco's 94m-membership club. Costco's Australian site shows it costs a gold star card costs A$60/year while a business member pays $A55/year.

• HOW IMPORTANT IS COSTCO?
New Zealand's GDP was $293b in the December 2018 year. Costco's net sales were, coincidentally, precisely the same at $293b in the year to September 2, 2018. It employs 245m people, operates more than 750 warehouses and has 94m members. Last year, it opened 21 new stores. Noone said Craig Jelinek, president and chief executive, would attend the opening of Costco's first NZ store.

WHO'S WHO

Patrick Noone of Costco. Photo/supplied

• Patrick Noone
Managing director, Costco Wholesale Australia and New Zealand, will head operations here. He has lived and worked in Canada and Australia. He announced the arrival this week and attended the press conference at Westgate.

Mark Gunton at Westgate. Photo/Nick Reed

• Mark Gunton,
Founder and owner of NZ Retail Property Group which owns the 3.3ha site where Costco will build, controls privately-held business, no NZX presence, worth about $600m. Developing Auckland's first new town centre after Manukau and Albany. Leases the Crown's 13,777ha Argyle Station, Southland.

Campbell Barbour of NZ Retail Property Group. Photo/NZRPG

• Campbell Barbour
General manager, NZ Retail Property Group, focused on the ongoing investment in and development of the company's property holdings. He is also chairman of the NZ Council of Retail Property.

Brent McGregor of CBRE broked the Costco deal. Photo/CBRE

• Brent McGregor
Executive chairman, CBRE New Zealand
Over a five-year period, brokered the deal between landowner NZRPG and Costco, "but I don't want to be a credit-taker because there's a big team behind it", he said citing two talented, experienced colleagues: research headed by Zoltan Moricz and the retail valuation and advisory services team headed by Tim Arnott.