There are words that wink at ministers of the treasury. Low GDP debt ratio, high credit rating, and also Costco – the third largest retailer in the world. In February 2022, it was then Foreign Minister Yair Lapid who spoke about bringing the company to Israel, and now, in February 2023, it is Finance Minister Bezalel Smotrich – who last weekend addressed a letter to the CEO of Costco, offering him to come to Israel.
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Should the government intervene in the free market? Is the Costco model even relevant to Israel? To what extent is the country an attraction for an international company of this size, and why was the letter sent specifically to Costco and not to another chain, such as Walmart, for example?
The warehouses are used up
Costco, founded in 1976, was recently ranked among the top ten Fortune 500 companies in the US. In January, its sales were about $16.8 billion, an increase of 7% compared to January of last year. The company has about 850 warehouses, of which about 580 are in the US in Puerto Rico and about 110 in Canada. It is active in 12 other countries, including Iceland (see below).
What makes the network so successful? First, it has huge warehouses, where every centimeter is used. Second, the business model is not based only on profit derived from sales, but also on its membership club: at Costco, customers are required to pay annual “membership fees”, and only members can purchase there.
This ensures payment in advance from a huge number of users, which in October 2022 is estimated at 114 million people. Since customers pay membership fees in advance, they are motivated to shop at the chain stores whenever they need something. This ensures Costco a steady stream of revenue, and loyal customers. According to publications, membership fees make up more than 2% of the company’s revenues.
While many retailers invest in the shopping experience, Costco takes a different approach. The chain stores are huge warehouses, the goods are arranged on simple surfaces, and the products are sometimes still packaged as they came from the manufacturer (similar to what was customary in Israel in the Universe chain).
The prominent categories are food, clothing, appliances and electronics and home furnishings. The variety is limited, and includes only items that the chain has found to be worthwhile to buy – and in huge packages. How is this possible? First of all, because the chain buys directly from the manufacturers. Second, it undertakes to purchase from them in large numbers, which helps it buy cheaper, and sell to customers at cheaper rates.
In addition, one of the critical points in Costco’s business model is the inventory cycle, which is less than ten days. This procedure allows her to obtain large quantities of goods from the manufacturers, at better credit rates than the competitors, and also to save on storage space.
But not only the branches attract the buyers, but also the chain’s ancillary businesses – for example the adjacent gas stations, where the price is cheaper compared to the competitors. There is also a program for selling new or used vehicles, through cooperation with about 3,000 agencies. Another arm is house sales services.
All these contribute to the fact that even in the last year, Costco continued to register an increase in revenues and profits. However, according to estimates, it is expected to raise membership fees soon, since it usually does this every 4.5 years, and the last increase was in June 2017. Currently, a regular subscription costs $60 per year, and a premium subscription that provides additional discounts costs $120.
The international competition
In the last year, the competition in the Israeli food retail industry increased, when two international chains announced their entry into the country. In March, the entry of the French Carrefour was reported, through Electra Consumer, and in the last six months dozens of Carrefour brands began to be sold in Mega and Beitan Wines branches, which are currently being converted to the branches of the international chain, at prices that are sometimes tens of percent lower than corresponding brands.
At the end of December Shufersel and Amit Ze’ev announced that they would bring in the Dutch retail giant Sapar. “The chain’s products will be marketed at fair and significantly lower prices than is customary in Israel, thus contributing to the lowering of the cost of living in Israel,” Shufersal CEO Uri Waterman said at the time. Will an American chain also find the market in Israel enticing enough to come?
At Costco, it is customary to enter countries with an international orientation, and make an adjustment to the target audience. As mentioned, Lapid wanted to bring Costco and Walmart to Israel, but since then Walmart CEO Doug McMillan has managed to rule out an imminent entry into Israel in an interview with Globes. “This is not a good time for us to expand geographically,” he explained.
Recall that since 2013 “Osher Ad” has been importing Costco’s private brand products, called Kirkland. These include toilet paper, garbage bags, fabric softeners and a variety of household products.
“Any entry of another player into the Israeli food market is a welcome move that can reduce centralization,” says Attorney Rachel Gore, director of the government sector at Lobby 99. “On the other hand, one must take into account the chain’s distribution model, which is based on the fact that There are huge houses with room for huge packages, and it is not necessarily suitable for the small apartments in Israel. So there is a question about its effectiveness.”
“Start with regulation”
And what do you think about it in the industry? “Smotrich should ask Costco, ‘What do you lack in order for you to come. What do I need to address in terms of barriers,'” says a senior official in the retail industry. “Lower tariffs, lower regulation, and the international retailers will fall in line.
“He should also ask the chains that came here what they need in terms of tariffs on cheese, Israeli baking, the standard, the whole kosher issue. Israel has stronger kosher than all the Jews in the world. There are things that Jews all over the world eat, and only in Israel they don’t.”
The senior also mentions that Israelis are more similar to Europe in tastes, especially to France and Italy. “Chips or chocolate from the USA are not tasty to us, because they have too much fat, salt and sugar. We are also a small market, so not the first on the list. Despite this, if the regulatory barriers are changed, the chains will already come, because it will be easy to do business here.”
This is how Costco managed to reach 70% of Icelanders
In 2017, Costco entered Iceland, which has only about 370,000 inhabitants, which means it is a very small market, even more so than Israel. A few months later, the Icelandic media reported on an increasing number of customers joining the network and on the difficulty of local producers and farmers to compete on prices.
Today, about 70% of Icelanders hold a card for the network, and pay it a subscription fee (more than double the rate in the US).
There are several reasons for this success. The first is that the chain offers a variety of products at lower prices compared to other chains in the country. In addition, Costco’s gas is about 30% cheaper than competing gas stations. Some also mention the chain’s long opening hours, which are significant in a country where weather conditions may make it difficult to arrive at certain hours.