Costco Expands Its Global Reach

Many retailers aim for global expansion, but not all cases are synonymous with profitability. Fortunately for Costco, its Australian expansion has been profitable and shows great promise.

Jan 4, 2014 at 8:30AM

Costco Wholesale (NASDAQ:COST) has delivered 3.2% top-line growth and 4.6% net income growth over the past year. The stock has appreciated approximately 22.9% over the same time frame, and currently yields 1%. These aren't astronomical numbers, but they're solid across the board. Interestingly enough, Costco is no longer simply a North American enterprise. Given Costco's aggressive and so-far profitable expansion into Australia, it's a positive sign that Costco is capable of successful global expansion. Let's take a look at Costco in Australia as well as all the benefits and potential that come along with this expansion.

Aggressive growth
Costco first established a presence in Australia in 2009. In 2011, it seemed as though Australian consumers weren't taking to the new brand well, as Costco suffered a $13.2 million loss in the land down under. In 2012, things changed quickly, when Costco delivered a $9.7 million profit, but this was primarily due to a $13.4 million tax benefit. The year 2013 offered the most realistic results, with Costco delivering a tidy $1.8 million profit. On the top line, Costco saw $612 million in 2012 and 2013. 

Any company seeing these types of numbers is going to want to grow in that geographic area. Costco recently opened its fifth store in Australia -- in Melbourne to be exact. This store will serve the Eastern suburbs of Melbourne, which complements Costco's other Melbourne location that serves the Western suburbs. Looking ahead, Costco aims to open its third store in Sydney as well its first stores in Brisbane and Adelaide. The idea of a third location in Melbourne has also been mentioned.

All of this information might pique your interest in Costco's Australian prospects, but we still haven't covered the most important aspect of this operation, which is competition ... or lack thereof.  

Different competition
When you think of big-box retailers operating on an international level, it's highly likely that Wal-Mart Stores (NYSE:WMT) is the first company that comes to mind. Though Wal-Mart has explored the idea of entering the Australian market, and despite Aussies calling for Wal-Mart to set up shop on their home turf, Wal-Mart doesn't have a presence in Australia. This fact alone is an enormous positive for Costco.

Not only does this eliminate the threat of the largest retailer in the world, but it gives Costco a significant head start if Wal-Mart does eventually decide to enter the fray. It took Costco 18 months to get its latest Melbourne warehouse approved to be built. Wal-Mart would face the same type of time constraints, making Costco's head start even larger. 

If you search for Target (NYSE:TGT) stores in Australia, you will find them. While you will find everything from clean aisles, broad product diversification, and even the Target symbol in front of these stores, they're all owned by Wesfarmers, not the Target you're thinking of. Wesfarmers owns the rights to Target Australia as well as Kmart Australia.

These Target and Kmart stores will still present competition for Costco, but the real competition will come from Woolworths and Coles (the latter not to be confused with Kohl's). The good news for Costco and its investors is that Costco uses parallel sourcing. In other words, instead of using a single vendor, different sources are used for a family of related items. This allows Costco to pass on the best deals to consumers, which drives foot traffic and makes Costco successful. Therefore, Costco is likely to achieve market share gains in Australia.

Global domination?
Investors should not get carried away. Costco is still one-fifth the size of Wal-Mart in regards to capitalization, and Wal-Mart has a much larger global footprint. However, while Wal-Mart has delivered 17.70% top-line growth over the past five years, Costco has grown at a faster 45.93% on the top line over the same time frame. In addition, Costco's bottom-line growth over the past five years of 71.42% is superior to Wal-Mart's 28.33%. In addition, Costco offers more growth potential, as it looks for profitable opportunities and exploits them Australia being a prime example. Costco's business model and highly strategic upper management make it worthy of investment consideration by all Foolish investors. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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