The real foe for Coles, Woolies

The real foe for Coles, Woolies

Amazon’s CEO, Jeff Bezos, recently overtook master investor Warren Buffett on the “richest person in the world” list, to now be second only to Bill Gates.
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To be fair to Buffett (not that he cares), he’s slipped a few places because he’s given billions away to charity. Regardless, Bezos’ rise – on the back of Amazon’s astonishing and continued success – is extraordinary. So, when reports surface that Amazon is apparently due in by the end of next year, people take notice.

Humans notice the big, the new and the flashy. And while Amazon will undoubtedly make a splash when it arrives – and thereafter – one of the most significant challenges is already here, in the form of Costco.

Yes, Aldi gets all the press in the grocery sector, and for good reason, but Woolies and Coles should, and I’m sure do, have their eyes firmly on the US-based warehouse store chain, Costco.

n investors who own shares in Woolworths or Coles’ owner Wesfarmers need to pay attention too.

Just as Aldi is unconventional in its approach to groceries, Costco is also one out of the (big) box in its approach to business – and not just because you have to buy a year’s worth of toilet paper at a time.

Costco’s founder Jim Sinegal was an unconventional businessman. He’s stepped down from his post as CEO, but the culture he founded lives on??? and it makes Costco formidable as a competitor.

Firstly, the company’s membership club format is at the very heart of its operation. So much so that the stores themselves run essentially at break even – almost all of Costco’s profits are made from sales of its yearly memberships. That means it can (and chooses to) keep prices very low – essentially just high enough to make sure it doesn’t make a loss. That keeps customers loyal. Very loyal. And that scale lets Costco put cost savings into lower prices.

Next, the company pays its employees well. Too well, according to Wall Street. “If only you were less generous with your employee healthcare,” they say. And the company is sometimes referred to as the world’s largest co-op as a result. But Sinegal and his team refuse, believing that good pay and conditions lead to higher morale, lower turnover and better customer service.

Then, there’s the story, possibly apocryphal, but in all likelihood true, about the time one of the company’s buyers boasted to the boss that he had just screwed down a supplier to offer Costco an even lower price. “Go back to them,” goes the story, “and offer them more.” Sinegal had realised that the supplier couldn’t afford to lose Costco’s business, so was selling below cost to keep it. He wanted low prices, but more than that wanted long-term mutually beneficial relationships with its suppliers.

These are deeply unusual approaches to business. But Costco has turned them, along with strong, smart leadership, into huge competitive advantages. And a share price that has increased more than 10-fold over the last 20 years (almost 15-fold including dividends). Foolish takeaway

Plenty of articles have been written about Aldi’s impact on the n grocery scene. More have been written about the likely disruption to come when Amazon arrives on our shores. But Costco might just be the dark horse – the retailer that manages to carve out a decent-sized niche for itself based on some unconventional methods. And if you’re still not convinced, remember that Amazon’s own membership program, Amazon Prime, owes much to Costco’s own success. Imitation, after all, is the sincerest form of flattery.

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Scott Phillips is the Motley Fool’s director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool’s purpose is to educate, amuse and enrich investors.