After a lengthy bureaucratic journey, Costco is poised to begin building its first French warehouse. But it’s walking into a supermarket war with other retail titans — and experts say it’s going to have to work really hard to succeed.
After four years mired in a thicket of red tape, Costco Wholesale is getting closer to opening its first warehouse in France, a key building block in its slow but sure-footed global push.
Now the hard part begins. When the Issaquah retailer opens the store, possibly next spring, it will land right on the doorstep of some of the world’s most powerful retailers: Carrefour, Auchan and Casino, which run huge hypermarkets selling a dizzying assortment of food and other products.Costco has been successful from Canada to Australia by offering deep discounts on a limited number of quality products. Its French rivals have been mired in a costly price war for two years, gaining market share from existing discounters and making Costco’s advantage less clear, experts say.
“The French retailers, especially Carrefour, are not going to give anything up,” says Jacques Dupré, director of insights and communications at retail consultancy IRI.
Yet others say that the price war has made France’s grocery market volatile and could favor Costco.
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The French market is a new test for Costco’s international effort — an important component of its future growth as the U.S. market becomes saturated with its big warehouses. Already nearly half of the warehouses it opens every year are abroad.
France — wealthy, sophisticated and centrally located — would be Costco’s third European base after the U.K. and Spain, and would help scale up its continental ambitions.
“It begins to look like a European network,” says Yves Marin, a Paris-based senior manager at management-consulting firm Kurt Salmon.
But this is also the country where Uber sparks violent protests from taxi drivers and the government passes laws to protect bookstores from online giant Amazon.com. Similarly, Costco faces powerful incumbent retailers and wary regulators.
Costco’s head of international operations, Jim Murphy, said the company would wait “until we have something firm to discuss” before commenting on the details of its French operations.
But Gary Swindells, the head of Costco France, has spoken to the media there often, allowing for a glimpse of the company’s ambitions for the country.
These dreams, which began to take shape in 2011, are big. Swindells told a French trade journal that Costco envisions opening up to 15 warehouses in France over the next decade.
As a point of comparison, Costco has about 20 warehouses in Japan, a country with twice the population of France and where it has operated for more than 15 years.
Getting a blessing from France’s punctilious bureaucracy to hang its shingle has taken years, in part because rivals keep petitioning regulators against it.
Mostly they’ve objected to Costco’s entrance in a field where they say there are already too many competitors, therefore endangering jobs. They’ve also criticized the pedestrian looks of its proposed warehouse.
A first attempt to build a warehouse in the eastern Paris suburb of Bussy-Saint-Georges, approved by local authorities, was rejected in 2013 by the national agency overseeing commercial development after local opponents appealed.
The government agency determined Costco’s warehouse “wouldn’t be harmonious with its environment,” and its architecture would have a “low quality” aspect, according to a document posted on its website.
In May 2014, Costco had a breakthrough: Regulators greenlighted a 120,000-square-foot warehouse in the southern Parisian suburb of Villebon-sur-Yvette, an area known for its high concentration of research parks — and the site of Carrefour’s global headquarters.
But according to French daily Le Figaro, Carrefour and Auchan appealed, pushing back the estimated opening date from late 2015 to spring 2016. Neither company responded to a request for comment.
Retail workers have also weighed in. Local newspaper Le Parisien reported 200 employees of Auchan in Villebon signed a petition last year against Costco, accusing it of unfair competition due to its very low margins. The local leader of the union, Myriam Cherati, didn’t respond to an emailed request for comment.
Costco still doesn’t have a French website, and a LinkedIn search yields only a few employees, including a head of human resources who previously worked with Starbucks in France. Nevertheless, French retail analysts are confident that the end of the regulatory road is near.
According to an internal presentation slide available on the Web and dated April, Costco aims to get 50,000 members by its opening date and 100,000 within a year.
The turf Costco would be walking into is crowded and volatile, as big retailers spurred by weak spending after the recession sought to increase market share in 2013 by cutting prices.
The resulting price war has led to deflation in the price of consumer packaged goods; annual inflation for these was a negative 1.6 percent in March, according to consultancy IRI. The fierce competition has also dented sales.
Auchan, the 14th largest retailer in the world, saw domestic comparable sales drop 2.2 percent in 2014.
Groupe Casino, the 13th largest, saw a 2.1 percent drop in comparable sales in France, excluding gasoline sales. Profits for its French unit fell 28.1 percent.
Carrefour, which the Washington, D.C.-based National Retail Federation says is the world’s third-largest retailer after Wal-Mart and Costco, did see some weak domestic growth: 1.2 percent.
Analysts say the pricing pressures will continue. At the end of 2014 major French retailers grouped into four big alliances to better press suppliers for lower prices.
That led to an outcry from suppliers, which are seeing their profits squeezed — and led France’s antitrust regulator to warn that if consolidation among buyers continues, manufacturers and food suppliers could be endangered.
Costco’s entrance into this fluctuating market is bound to make a splash, as there’s nothing exactly like it: It sits between richly stocked markets like Carrefour and “cash and carry” wholesalers that sell only to other businesses.
As a result, “the traditional hypermarkets are nervous,” says Marin, the Kurt Salmon management consultant.
“The time is right for Costco,” he says, as the cards are all up in the air, and Costco can use its global heft to strike extra good deals with suppliers for the limited universe of products it purveys. (Costco typically stocks 4,000 different types of products, versus up to 80,000 for a Carrefour hypermarket.)
Costco’s limited offerings give it an operational advantage: Inventory is easier and less costly to manage, providing a buffer against competitive pressure from Internet retailers that has taken a toll on more complex hypermarkets, says Ken Perkins, an analyst with Morningstar.
IRI’s Dupré is more cautious about Costco’s chances. He says French consumers like a lot of product diversity — something Costco doesn’t offer. Paying a membership fee may make some consumers balk.
Also, the company will have to scale up quickly to really get good deals and make a mark, even as it fights off stubborn local competitors and growing Internet sales on electronics and other big items.
“They’re going to have to fight hard,” Dupré says.
In the end, Dupré recommends taking a close look at Spain, another eurozone country where Costco opened last year and where the retail environment is similar to France. If it succeeds there, it might succeed in Paris as well, he says.
Costco had a huge turnout when it opened its store in Seville, Spain, and plans to open two more this year, in Madrid. But sales are “a little under our plan,” said Chief Financial Officer Richard Galanti in an earnings conference call earlier this year.