Costco to open first business centre in Canada — a move that could ‘devastate’ wholesale distributors

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Hollie Shaw | December 14, 2016 | Last Updated: Dec 14 12:12 AM ET
More from Hollie Shaw | @HollieKShaw

AP Photo/Rick Bowmer, File

Costco’s move to open a business centre in Canada, to be christened with an official ground breaking ceremony in Toronto Wednesday, could disrupt the business of traditional office and restaurant supply distributors, experts say.

With an assortment that includes bulk grocery items, office furniture and supplies, professional cooking equipment and cleaning products, Costco Business Centre will also likely draw in its fair share of corner store operators and curious consumers. With 80 per cent of the business centre’s merchandise consisting of items not sold in its warehouses, there is also little concern of overlap between the company’s two businesses.

The first location in Canada, open to all regular Costco members and part of a rapidly expanding business offshoot for Costco in the U.S., will open in Toronto in March. Costco’s business centres open at 7 a.m., three hours before warehouse stores open in Canada, and close at 6 p.m. through the week and 4 p.m. on Saturday.

The move makes a direct play for small restaurant, business and convenience store owners who buy from Costco because they are too small to do business directly with a company such as Unilever, and for office supply companies whose business models are based on higher margins.

If they work on the same gross margin…that will significantly disrupt the wholesale market

“This could devastate some wholesale distributors,” said Bruce Winder, partner in Toronto-based Retail Advisors Network, noting elements of the new business will compete with Grand and Toy, Staples, and manufacturers and wholesalers in food office and furniture supply such as Unisource Canada Inc., Sysco Canada and Teknion Ltd.

Costco Business Centre will also compete with Amazon Canada’s business in dry grocery, technology, and paper. The business centre will offer next-business-day delivery to commercial addresses and has its own fleet of trucks, Costco said.

“Costco operates on a 15 per cent margin at retail,” Winder said. “If they work on the same gross margin (for the business centre), which I believe they do, that will significantly disrupt the wholesale market, because wholesalers work on a margin of anywhere from 30 to 50 per cent.”

With annual sales of close to $21 billion and 94 warehouse stores across this country, Costco Canada is embarking on an aggressive expansion in fiscal 2017, opening seven warehouse stores as well as the business centre. Typically, Costco opens one to three warehouses a year in Canada, one of the company’s most robust markets.

In the first quarter of fiscal 2017 ended Nov. 20, same-store sales rose four per cent at Costco Canada (or five per cent, excluding gas and foreign exchange), the retailers strongest performing market. By the same measure, sales were up one per cent in the U.S.

“Canadian consumers are extraordinarily price conscious and Costco is viewed as a place with low prices, along with Walmart and No Frills” said Kevin Grier, a food industry analyst based in Guelph, Ont.

Between 2004 and 2015, grocery retailers’ food sales have increased at a compound annual rate of just over three per cent. In the general merchandise channel — dominated by Costco and Walmart Canada — the rate of growth for food sales was 11.6 per cent. “It must be very painful for grocers — it is astounding how these general merchandisers keep growing.”

Costco operated 11 business centres in the fiscal year ending Aug. 28 and will have 15 open by the end of 2017, including the Canadian outlet.

“The arrival of this new concept in Canada will enable Costco to better respond to the needs of Canada’s business owners,” said Andrée Brien, senior vice-president and senior general merchandise manager at Costco Wholesale Canada.

“We can now offer these members a distinct product selection, more convenient hours and the option to deliver to their place of business. As a result, we hope to also bring new consumers to discover the benefits of a Costco membership.”