Costco kicks off European drive in Spain
Costco Wholesale opens its first euro-zone store this week in Seville, bringing steep discounts to a part of Spain hit hard by the global economic crisis. While flooded with new members and job applicants, Costco still faces many challenges.
Seattle Times business reporter
Costco across the globe
Here’s a breakdown of the Issaquah retail giant’s reach:
U.S. and Puerto Rico: 463
Mexico: 33U.K.: 25
South Korea: 10
Source: Costco Wholesale
Seville was the place from where Spain led the exploration and conquest of the New World.
Now one of America’s top retailers, Costco Wholesale, is bringing its family-size, deep-discount deals to Seville as the first step for its own dreams of conquest on the economically battered European continent.
Costco’s 145,000-square-foot warehouse, scheduled to open Thursday, is already making ripples in Spain’s fourth-largest city. It has suddenly created hundreds of relatively well-paid jobs in one of the areas worst hit by the eurozone’s downturn, with a jobless rate of 34 percent.
By March more than 148,000 people had applied for the Seville warehouse’s 250 jobs, said Diane Tucci, who leads the company’s operations in Spain.
“Unbelievable,” said Tucci. “The first week we got 20,000, and it was like: ‘Oh my god.’ We had no idea we’d get that reception.”
The average starting salary is $25,000 a year — more than twice Spain’s minimum wage.
Seville — and soon Madrid — will test Costco’s ability to expand overseas, as it pursues its goal of approaching 1,000 warehouses by the middle of next decade, up from 652 now. Yet Europe, while one of the richest regions on the planet, may prove extra-challenging, due to its graying population, well-entrenched competition from homegrown discounters, and lingering financial woes.
Costco already has warehouses in the U.K., Canada, Mexico, Australia, Taiwan, South Korea and Japan, and about 31 percent of its employees are outside of the U.S.
Nearly half the warehouses Costco plans to open this year are outside the U.S., versus 20 to 25 percent five years ago, company executives have said. Other countries offer a critical source of growth amid increased competition at home from Amazon, Wal-Mart Stores and other large retailers.
“There’s a lot more open space in some of these international markets,” said Dan Geiman, an analyst with McAdams Wright Ragen.
The economic crisis not only brought an unprecedented throng of aspiring employees to Costco’s doorstep, it also made real estate cheap and prompted local authorities to speed up permitting. That created favorable conditions for Costco, which had been considering an entry into the market since the 1990s.
The Seville warehouse is in a development originally conceived, at the height of Spain’s ill-fated real estate bubble, as a hub for media companies.
Costco may have timed its bet well: Spain’s economy returned to growth mode in late 2013 amid booming exports. And neighboring Portugal, about an hour and a half by car from the Seville Costco, said in early May it would pull out of an international bailout plan due to improving finances.
Another warehouse in Madrid may open sometime in 2015, Tucci said. Costco executives say France is next.
But spreading the company’s gospel beyond its traditional North American footprint has its difficulties: new competitors, different laws, and a public that’s unfamiliar with the brand.
“And we charge people to get in the door,” said Jim Murphy, Costco’s head of international operations, acknowledging the challenges.
Sevillano officials are elated. The mayor, Juan Ignacio Zoido Álvarez, said in a statement that Costco’s $50 million investment is “a guaranteed success,” and already has helped draw other companies to the development where it’s located.
It also gives Seville, which once was the commercial hub of the Spanish Empire and is home of what Spaniards claim are the remains of Christopher Columbus, a one-up on haughty Madrid.
“Seville is proud” to host the retail giant’s first eurozone store, “ahead of great cities such as Madrid or Paris,” Zoido said.
Knocking on doors
To drum up business in Seville, Costco is resorting to old-school tricks: knocking on the doors of small businesses to let them know how they can save money by becoming members. Costco representatives have been doing this since February.
To reach potential individual members, Costco asks big employers to let its representatives address staff in break rooms.
Costco’s first members in Seville showed up uninvited: They knocked on a trailer at the construction site, asking to sign up before the company was even ready, said Tucci. It turned out they were a couple from Puerto Rico, who had been members there.
So far 14,000 members have signed up sight unseen, a number that Tucci called “outstanding.”
What remains to be seen is whether Spanish customers will have room for 12-packs of paper towels and the like, since many live in apartments and houses that are relatively small, at least compared to the U.S.
But Tucci says that Costco manages to be successful in places teeming with condo and apartment dwellers — Florida, for instance.
Another hurdle is convincing suppliers to change their packaging in order to ship their items in three-pack or 12-packs on the big pallets used by Costco. Making these changes costs money and represents a leap of faith, although many are doing it, executives said.
“Even though we’re getting bigger, in Spain not many people know us,” said Murphy. “All that took years of development” in the U.S.
Lluís Martínez-Ribes, a professor of retail at ESADE in Barcelona, one of Spain’s top business schools, says Costco is setting itself up for a huge challenge by opening its first store in an area where the economic crisis obliterated a big part of the middle class. Prices in Seville are already heavily discounted, and people there increasingly buy in neighborhood shops in small quantities, without burning pricey fuel to drive to a shopping center.
In Madrid, where there’s a large middle class that likes driving to big box stores, “They’ll do very well,” Martínez-Ribes said. But, “They’ll have to be patient” as they adapt to Spanish habits. “It’s a big cultural challenge.”
Another thing to consider: Costco will face very different demographics than in North America. In Spain, families are small — and getting smaller: The fertility rate amounts to 1.3 children per woman, according to the World Bank, well below the 1.9 seen in the U.S. That means bulk purchasing is gradually losing popularity and packages are getting smaller, Martínez-Ribes said.
Costco’s Murphy said Seville was a “very attractive market” for many reasons, including a population of about 1.3 million within a 30-minute drive of the store. There are also many small businesses. Murphy is confident that the warehouse’s “unique mix of goods” will attract customers, including from nearby Portugal, he said.
When Costco opens a new overseas location, it generally sends very few employees from its home operation.
Tucci said buyers from the new Spanish outpost, tasked with finding merchandise that meets Costco’s quality standards and Spanish tastes, were flown to Issaquah so they could soak up the company’s ways.
Costco is famous for its no-frills approach to retail, offering steep discounts on a limited selection of brand-name items that range from chicken nuggets to luxuries such as diamonds. Constant novelty in its lineup is also part of its strategy. So is treating staff well.
When Costco goes abroad, generally close to two-thirds of the products sold in a store originate in that country, said Murphy.
At the Seville Costco, the meat section will have Spanish specialties such as octopus, rabbit and piglet, depending on the season. The store will carry Spanish olives, tuna made by the locally famous brand Ortiz, and rows of hanging jamón ibérico, Spain’s answer to prosciutto.
But many products would be familiar to Seattleites, including favorites such as Kirkland Signature-brand chocolate-coated almonds, peanut butter and nuts. The company says many of these products have been very successful in other international locations.
Costco’s cafeteria will sell its famous hot dogs — yes, for 1.25 euros with tax, roughly the equivalent of the $1.50 U.S. hot dog when sales tax is added.
Another impact of Costco’s arrival could be the addition of new local companies to its network of global suppliers.
“The great benefit for Spain is the entry into the Costco system of many Spanish products,” said Luis Fernando Esteban, honorary consul of Spain in Washington and Oregon.
So far only a few Spanish products are sold under the Kirkland Signature brand, such as manchego cheese, a popular sheep-milk cheese made in Don Quixote’s homeland of La Mancha, and saffron.
Tucci said that, personally, she’d like to see one of Spain’s signature products sold worldwide in the Kirkland Signature lineup.
“I would love to have a jamón ibérico,” she said.
Ángel González: 206-464-2250 or firstname.lastname@example.org. On Twitter: @gonzalezseattle