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Costco opens another front in retail war

US discount retailer's second warehouse-format store in Melbourne suburb of Ringwood is "ground zero" in its battle with supermarket leaders Woolworths and Coles.

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US discount retailer Costco has funnelled another $110 million to its Australian operations to help fund its rollout of big-box warehouse stores as the world's eighth-largest retailer intensifies the competitive battle with Woolworths and Coles.

The extra dollop of funding from its US parent has already helped Costco construct and open its fourth and fifth warehouse stores in Australia this year, giving it two locations in Melbourne and Sydney. The discounter is already building its sixth store, in Brisbane, and another is to follow in Adelaide soon.

It is believed that Costco is also scouting possible locations for its third store in Melbourne. It opened its maiden Australian Costco warehouse in Docklands in 2009 and a store in Ringwood last month.

G.H. Mumm wine at Costco. 

Pics supplied.

US parent invests another $110 million in Australian expansion as locals warm to its membership model.

Australia has delivered strong returns for the US-based Costco, with fresh documents lodged with the Australian Securities and Investments Commission showing Costco Wholesale Australia raked in $612 million in revenue from shoppers in 2012-13.

These are hundreds of millions of dollars in sales that otherwise would have gone to supermarket industry leaders Woolworths and Coles, or to a range of bargain retail banner groups such as Target, Kmart, Big W and The Reject Shop.

The ASIC documents also reveal that Costco, which has been in Australia for five years, has now strung together its second consecutive profit, ringing up a full-year net profit of $1.81 million in fiscal 2013, down from a profit of $9.73 million in 2012. An income tax benefit of $13.4 million helped boost its 2012 bottom-line result.

Costco Australia made a loss of $13.2 million in 2011.

As its revenue races towards $1 billion it is unclear what proportion of Costco Australia's sales for the 52 weeks to September 1, 2013, was sourced from purchases at its warehouse format stores and how much was derived from selling membership to Costco shoppers.

Costco charges $60 for membership, which allows shoppers to walk the aisles of its huge warehouses, which sell everything from birthday cakes, hearing aids and wine to diamond rings, jeans and American chocolate. Some US analysts have joked in the past that Costco's actual business is selling membership, with its supermarket merely the side business.

Costco Melbourne and Sydney are believed to have more than 100,000 members each, and the recently opened stores in Ringwood, and Crossroads at Casula, NSW, are expected to drive further membership growth into 2014.

Costco's US parent, which has more than 500 stores in the US, Canada, Mexico, Britain, South Korea and Japan, is constantly talking up its Australian operation in earnings updates, describing it as one of its most successful overseas expansion stories.

Costco has demonstrated its confidence in Australia's embrace of its model of shopping by pumping more investment dollars into its local subsidiary. According to ASIC documents, Costco Australia received $70 million from its parent company in equity funding in 2012-13, which was then topped up by a $40 million capital contribution in late calendar 2013 to help with the rollout of new warehouses.

It is hard to gauge the market share of Costco in Australia, but with hundreds of thousands of members around the country and more than $600 million in annual revenue, the US retailer is certainly ratcheting up the competitive pressure on Woolworths and Coles as well as on the second tier of bargain and discount stores.

Further pressure on the grocery heavyweights is expected to come from Costco's plans to offer petrol discounts to its members, muscling in on Woolworths' and Coles' own fuel offers, which takes in more than 1200 supermarket-branded petrol stations and their popular shopper docket discount schemes.

Costco Australia is cashed up and ready to take on the majors. The ASIC documents show the business is sitting on more than $46.5 million in cash as well as a deferred tax asset of $11.2 million at the end of 2013.

As at September 2013 Costco employed 1211 people in Australia.