(Bloomberg) -- About a half-hour south of Paris, a uniquely American import has opened for business.
The store's aisles brim with beauty and bulk, side by side. One-kilogram (2.2 pound) wheels of Mont D'Or cheese sit near 4,699-euro ($5,509) Breitling watches. The Yanks demand that the locals fork over an annual fee of 36 euros ($42) just to walk in the door.
France, meet Costco Wholesale Corp. In June, the world's largest warehouse-club chain opened in the suburb of Villebon-sur-Yvette, between Orly Airport and Ecole Polytechnique. Having succeeded in spreading its treasure-hunt shopping experience across North America, Asia and the U.K., Costco is infiltrating the global heart of refined taste.
The stakes are high for Costco. Its U.S. customers are shopping less frequently as they get older, new locations are cannibalizing existing ones, and the younger set is spending more online. That's spooked investors -- Costco's shares have barely budged this year despite solid sales growth -- and put more pressure on stores outside the U.S., which account for about 28 percent of Costco's $129 billion in revenue.
“They've done well in the U.S., but the competitive landscape there has changed dramatically,” says Arun Daniel, a senior fund manager at J O Hambro Capital Management in Boston. “They cannot sustain that long-term, so where can they show growth? Internationally.”
Hey, Big Spenders
In a historical sense, France is a natural for Costco. The idea of putting a wide range of affordable stuff under one roof came from a Frenchman, Aristide Boucicaut. He took over a modest Paris shop called Bon Marche in 1852 and expanded it from 300 square meters (3,200 square feet) to 50,000, inventing the modern department store. In the 1960s, French retailer Carrefour SA pioneered the “hypermarket,” combining a Wal-Mart-like selection of dry goods with groceries in suburban big-box stores.
The French are also among the biggest retail spenders per capita in Europe, according to researcher PlanetRetail RNG, and the nation is on track to see its strongest economic growth since 2011 under business-friendly President Emmanuel Macron.
However, the French are notoriously focused on quality rather than quantity, and prefer to patronize small neighborhood merchants.
But the success there of fast-food giants like McDonald's Corp. and Subway Restaurants debunks the stereotype of the snooty, exacting shopper. In fact, the French spend nearly half their food and household goods budgets at hypermarkets.
Crowded and Cutthroat
The 500 billion-euro French retail market is crowded and cutthroat. A half-dozen companies control most of it, and they've spent the past decade engaged in a brutal price war. German discounters Aldi and Lidl have elbowed in, too, luring penny pinchers.
The price war has taken a toll. In August, Carrefour, France's biggest retailer, suffered the biggest-ever drop in shares after saying business wouldn't improve in the second half of the year. Casino Guichard Perrachon SA, another big player, reported the first revenue decline in two years at its French hypermarkets as more spending goes online.
“The climate has been punishing,” said Ray Gaul, an analyst at Kantar Retail in London. “Each operator fights the others to gain fractions of market share.”
The locals aren't always welcoming. British retailer Tesco Plc pulled out of France in the late 1990s after just five years in the country. Marks & Spencer Group Plc just closed its flagship store on the Champs-Elysees. Costco's first attempt to open in France, in a suburb east of Paris, got local approval but was rejected by national regulators after rivals appealed. (Criticism was tres French; the store was deemed to have lame architecture.)
Brutal Market
“I do find it surprising that Costco went into this market,” said Andrew Gwynn, an analyst at Exane BNP Paribas in London. “It's such a brutal market, and it's a big ask to pitch their unique proposition.”
Costco is famous for keeping expenses low and refusing to take more than a 15 percent markup on its limited assortment of items, betting that manufacturers will accept the lower price in return for higher volumes. A recent comparison of 110 items by French retail analyst Olivier Dauvers found Costco's prices to be 21 percent cheaper than a nearby Carrefour.
But it's not just about shopping on the cheap. Costco will also offer high-end products like local Charolais beef, said Gary Swindells, a Quebec native who runs its French operation.
The warehouse includes the all-American brands you'd expect from Costco -- Coke, Levi's, Reese's, Jack Daniel's. Swindells said the French have also flocked to items he was told would never sell, such as muffins, cookies and pancake mix.
Suddenly It's Luxury
Being in France provides an additional benefit as Costco can source French goods -- Pasquier macarons, Fleury Michon charcuterie -- and ship them to warehouses around the world.
“It can be an everyday product in France, but you take it abroad and suddenly it's luxury,” said Tim Campbell of Kantar Retail.
On a recent Monday afternoon, 20-something brothers Alain and Matthieu Sita wheeled their oversized cart through the 148,000-square-foot warehouse. They'd driven an hour to stock up on pizzas, meat, paper products and shredded emmental cheese.
One of the obstacles confronting French shoppers is the size of much of Costco's merchandise. It's tough to stuff pallets of toilet paper into a Renault Clio, the country's favorite car.
But Alain Sita has one problem licked.
“I have an American fridge,” he said.
Other shoppers might take longer to assimilate, like Elodie Mercier, who ducked in to grab two rotisserie chickens and a pizza for the family dinner that night.
“I'm just looking around,” she says, not tempted by the cases of 2006 Dom Perignon (115.99 euros a bottle) that commanded the center of the beverage section.
Memberships started small at the first French Costco -- 10,000, below the 30,000 that Costco typically gets. There's no e-commerce component, which could be a drawback given the popularity of curbside pickup of online orders. But the store's membership now totals 49,000 and is growing by about 900 a week, according to Swindells.
Swindells said he'll start the application process for a second site by the end of the year, and envisions about a dozen Costcos scattered around France over time.
“It will not be easy,” said Kantar's Gaul. “But once they open in a country, they never leave.”
To contact the reporters on this story: Matthew Boyle in New York at mboyle20@bloomberg.net, Robert Williams in Paris at rwilliams323@bloomberg.net.
To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Bob Ivry
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