The challenge Costco faces operating in New Zealand

A customer pushes a shopping cart past pallets of toilet paper at a Costco store in Kentucky. Photo / File

The world's second-largest company is taking a huge bet on a pint-sized market.

Dr Bodo Lang, head of marketing at the University of Auckland Business School, says bulk goods retailer Costco Wholesale will face a significant barrier operating in the New Zealand market: its subscription membership-only model.

New Zealanders are not familiar with the concept of paying a membership fee in order to shop at a store and, with the high cost of living in this country, Lang said he was unsure if people would be willing to pay such a fee.

He also questioned whether New Zealand had the population size for the business to be able to turn a profit here.

"You definitely need a big base to make it work - that's the problem that many large overseas retailers have really struggled with here," said Lang.

Auckland's population of 1.7 million would be enough to service Costco's planned $90 million West Auckland store. However, Lang said there were no other cities or areas of the country that could service another store 14,000sq m in size.

But to have just a single store in this country would mean the US-headquartered retailer would not be able to leverage its scale and in turn deliver the cost savings it was famous for, he said.

A store the size of IKEA - another discount retailer though not membership-only, on average 20,000 sq m in size, requires one million people located within a one-hour car drive away radius in order for it to be successful, Lang said.

"Costco is one of those places that will have a similar business model and will need multiple stores but I can't quite see how they would have critical mass anywhere else. Even the Wellington region is a fraction of Auckland, and so is Christchurch."

Lang said he was surprised by the retailer's decision to launch in New Zealand given the market size but said this could be attributed to retail growth in Australia stalling and retailers there needing to expand out to sustain growth.

"New Zealand is a very small market ... there's probably only Auckland where it could work successfully."

Lang said savings at Costco could be less than the 25-30 per cent it is famous for as the retailer would unlikely be able to sell the same quantity of product it could in the Australian and United States markets.

As a result, Costco's membership fee, which is about A$60 in Australia could be higher in this country. Costco would need to educate consumers on the value its membership offered in order to be successful here, he said.

Costco operates close to 800 stores around the world. Photo / Getty Images

Retail NZ general manager of public affairs, Greg Harford, agreed that Costco's membership fees would be its biggest barrier to entry in New Zealand.

He said this way of shopping was a foreign concept to New Zealanders; one that did not exist outside of niche online websites.

Harford said Costco's business model was hinged around selling memberships: "That will pose a bit of a challenge for them because they will need to demonstrate that value proposition to the customer in order to get them to sign up."

Charging a membership fee allowed the company to offer lower pricing as the company had subscription revenue coming in to cover the cost of purchases, Harford said. "Costco is a huge international brand, lots of people in New Zealand know of Costco and they're active in the Australian market so they already will have a bit of a loyal brand following but whether people here will be willing to shell out a membership fee I guess we'll have to wait and see."

There are few membership-only retailers in New Zealand, and certainly no large-scale mainstream retailers.

Harford said the Costco retail model was not part of the "Kiwi psyche".

"Typically when we go to the shops we're looking for a really good deal and we're expecting shops will be open to all-comers and anyone who wants to shop there is usually welcome in most New Zealand stores, but [Costco] is just a different model of operating - one we haven't seen."

Harford said he was not aware of any retailers in New Zealand who operated a membership-only retail chain. "Part of the issue facing any retailer in the New Zealand market is scale and population density - we're quite a small market and if you break it down the markets within New Zealand are relatively small. Unless you've got significant scale behind you often it is going to be difficult to introduce new innovative models such as the Costco one."

Greg Harford, general manager of public affairs at Retail NZ. Photo / Supplied

Profit margins for retailers in New Zealand are small. On average the net margin in retail in this country recorded at 3.7 per cent, according to Retail NZ.

Harford said small profit margins meant retailers needed to have scale behind them to pass on savings benefits to shoppers and to be successful.

Costco's arrival in New Zealand would ramp up competition among local retailers, said Harford. "New Zealand retailers are already looking very closely at their pricing, some retailers have moved towards adopting everyday low pricing models anyway, but I think the arrival of Costco will put a bit of extra competitive pressure in the market."

Costco's decision to launch in New Zealand was a "vote of confidence" in the New Zealand retail market, he said.

New Zealand has outperformed every Australian state except New South Wales over the last five years in terms of sales growth.

Costco is the world's second largest retailer after American multinational Walmart. Costco surpassed $212 billion in net sales in the year to September - just shy of New Zealand's total national gross domestic product of $293b in the 2018 year.