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Giant Costco Opens in Melbourne!

How did we miss this? A giant Costco has opened in Melbourne down at the Docklands. Costco is discount warehouse shopping at its finest. The mammoth stores are stocked to the gills with everything from nappies to red meat. The store in Melbourne opened its doors yesterday morning around 4:30 AM.

And none too soon! The big box retailers are soon to be dinosaurs. They are living monuments to cheap energy and globalisation. Only cheap energy and cheap global labour make it possible for goods to be shipped this far and sold this cheaply.

We thought this era of retail decadence was well and truly over with the Global Financial Crisis. But the Costco opening is a nice, nostalgic coda to the whole era of misallocated real resources and capital. While the suburban-retail-housing economy of America crumbles, Australia has built a small shrine to that way of life down in the Docklands.

Mind you, we don’t have any problem with lower prices. There’s a bit of snobbery about American attitudes toward Wal-Mart and other giant retailers like Costco. After all, isn’t it a good thing when a large part of the population can reduce the amount of money it spends on basic food and necessities? These stores really do lower prices on the things people buy every day. To that extent, they should be celebrated as an achievement of capitalism.

Of course there are consequences to organising your economic life around discount retailing. Mom and pop shops-mostly neighbourhood places with friendly faces (if higher prices)-can’t compete with goods and textiles imported by the container ship full from Asia. The folksy local retailer is crushed under the heel of the big box with the big global footprint.

This necessarily changes the job market too. Some small businesses-usually the largest employer in an economy-go to the wall if the big box retailers start popping up everywhere. More and more jobs in the economy shift to lower-wage retail sales. Fewer people are employed making things and more are employed selling them (often on credit).

Gosh. It feels like we’re writing a history of what happened to the American economy over the last twenty years. Cheap oil, credit, the container ship, sophisticated logistics systems…all of these combined to deliver a one-off massive decrease in the cost of living for Western workers. Whether or not the lower cost of living resulted in a higher quality of life is a different question. And the trade off was the slow erosion of real wages from globalised labour.

Anyway, the appearance of the Costco in Australia is like a time machine from the retail past arriving. A massive Tardis from Dr. Who, filled with the cheapest underwear on offer and mountains of washing detergent, deeply discounted. We will probably head on down this weekend to see if they have Coca Cola by the barrel.

Nothing in the market can compete with our excitement about the appearance of Costco. But yesterday we speculated that energy would be the best inflation beater of the next ten years. And out in Perth, The West is reporting that, “Australia is on the verge of another WA-led resources boom that promises to dwarf the last surge, lock in thousands more jobs and be worth billions of dollars to WA businesses.”

The paper refers to the Gorgon LNG project. Gorgon is not, at least in this case, an ugly, snarling, snake headed female figure from Greek mythology. Nope. In this case, Gorgon is a $50 billion Liquefied Natural Gas (LNG) project that aims to produce 40 trillion cubic feet of LNG off the coast of Barrow Island in Western Australia. The project exists because energy itself is no longer cheap, but still in demand.

The main partners in the development of Gorgon are Chevron, Exxon Mobil, and Royal Dutch Shell. In fact, just last week Exxon signed a $25 billion deal with India’s Petronet to sell 1.5 million tonnes of Gorgon LNG to India each year for the next twenty years. That’s a big off-take agreement. There will be more, probably from firms in India, China, Japan, and Korea. Asian power utilities prefer cleaner-burning LNG in their electricity producing plants.

A final investment decision by the partners is expected early next month. But that’s a near certainty now. With the WA and Federal governments granting the environmental permits necessary, there was only one big hurdle left, and that was cleared yesterday. Once it’s played out, the Gorgon field has been identified as a place to store captures carbon dioxide.

Yesterday, the Federal government indemnified the partners once the site is closed. That essentially means that the gas partners are responsible for producing LNG. The Federal government, meanwhile, assumes any risk if there is a problem with using the site as a place to store captured carbon dioxide.

Gorgon is Australia’s biggest energy project. But it is not one punters will probably make much money on. The big companies involved in the project have massive global exploration and production portfolios. As big as Gorgon is-and as important as the off-take agreements are to firms in Asia-Aussie punters ought to look at the three or four other prospective LNG producing regions in Australia.

This is what your editor and Kris Sayce have been up to for the better part of the last six months. Kris has cherry-picked the best plays from Queensland’s unconventional LNG plays near Gladstone in the Australian Small Cap Investigator. Over at Diggers and Drillers, your editor has looked at other unconventional gas plays, mostly natural gas trapped in sandstone formations in certain basins around Australia (so-called ‘tight gas.’)

Who knows which projects will end up prospering? No one yet! Already, some of the stocks are prospering on the speculation. Investors know that energy is Australia’s most valuable long-term commodity export. The smaller players in the market are already pricing that development in.

We still have a few energy-related projects to add to our resource shopping list. We don’t think we’ll find them at Costco. But maybe we will finally find some Captain Crunch!

Dan Denning
for The Daily Reckoning Australia

11 Comments

  1. Ned S says:

    Globalisation is going to come to an end through a lack of cheap energy? (And labour?) Don’t think so. Unless it’s in about 10 million years when we’ve used the last of our uranium.

    There are plenty of smaller neighbourhood stores where I am. They are all operated by recent immigrant families. Despite the fact that I don’t live in an area that has many recent immigrant families at all. Guess longer term Aussie types don’t have the family structure or love of long hours and weekend work to make them pay?

  2. Ned I agree with you..I think Globalisation has a long way to go yet. I think Dan is still adjusting to a world where the U.S may no longer be the economic centre of attention. He is starting to sound a lot like a Brit during the years when their empire was shrinking.

  3. Dan says:

    I don’t know if you all remember, or have ever witnessed what supermarket chains have done to small businesses, and what companies such as Costco (or Aldi) are doing, yet again. Initially the supermarket chains undercut the competitors (small butchers, specialty shops and the like), but once the competition closed down and there was nothing left in the shopping strip apart from hair dressers and cafes, the prices went north and the markup is now much higher than was ever imposed by the local family businesses which have since closed.

    Nowadays the only way to get a decent price in a supermarket is if there is a direct competitor across the road – and even then it’s highly suspicious that there is a deal of price fixing going on.

    Having monolithic mega-shops with everything under one roof does not benefit the local community (or competition). It might be more efficient from a capitalist point of view (easier to generate profits and decrease operating costs, plus easier to corner the market and fleece the consumer, plus the possibility to gamble on the company at the stock exchange), but it does not enrich the local community or strengthen local economies. This is what peeves me when I read about these supposedly cheap stores. It’s a fallacy that they save you money – you just end up taking more junk home than you used to.

  4. beyondtool says:

    Time for some homework:
    http://www.storyofstuff.com/

    Last time I looked uranium was neither cheap nor plentiful, nor renewable(unless you have time to harness the next star exploding).

  5. Ned S says:

    Seems I exagerated regarding the abundance of uranium (although not nearly as much as I thought perhaps?) – This bloke reckons there is enough for 1.6 million years:

    http://www.miningweekly.com/article/abundant-uranium-reserves-make-nuclear-viable-longterm-option-consultant-2008-11-27

    While oil and gas are only good for 100 years and coal for 500. Costs? No idea what he knows but I assume it’s way more than me – The storey (in relation to doing clever things with thorium and fast breeder reactors and plutonium) goes “Kenny said that while the technology existed to implement these options, it was unnecessary for most countries to implement this, as they had a big enough resource of conventional uranium at a reasonable cost.”

    Thanks for the link beyondtool – I truly am a primitive though – My dialup connection doesn’t like movies.

  6. Sean says:

    Per Dan:
    “Initially the supermarket chains undercut the competitors… , but once the competition closed down and there was nothing left in the shopping strip apart from hair dressers and cafes, the prices went north and the markup is now much higher than was ever imposed by the local family businesses which have since closed”

    That’s what is so great about Costco, they don’t raise their prices! The prices you see now are the prices – period. Every department has a markup percent that they can NEVER go over, the max I ever heard of was less than fourteen percent. Most, if not all, are below that.

    And:
    “…but it does not enrich the local community or strengthen local economies”

    I disagree, a store like Costco creates hundreds of jobs and brings more people to the area. Costco is a destination. Just give it some time, you’ll see the difference a Costco makes vs a WalMart, etc.

  7. Smitty says:

    Dan’s understanding of Costco is limited, at best. many industry analysts consider it the “anti-Walmart.” It has a strict policy regarding the treatment of its suppliers’ employees, and it is committed to sustainability and urban revitalization, the latter clearly evidenced by the Docklands opening.

    Costco pays high wages and offers excellent health benefits to its employees. It’s also a boon to “folksy mom and pop” businesses, because it carries a very limited selection withing any product category, it offers typically large-quantity packaging, and payment options are minimal. Small businesses can easily carve a niche in the marketplace which Costco cannot and will not compete against.

    Cheap energy and labour are not the driving forces behind Costco’s success. The forces that make Costco work are buying power, efficiency, membership fees and volume sales. Costco has a strict limit on mark-up (14 percent maximum) and never carries “seconds” or loss leaders.

    A bit more research and understanding on your part might have been advisable.

  8. Kevin says:

    Mr. Denning,

    What?? “There’s a bit of snobbery about American attitudes toward Wal-Mart and other giant retailers like Costco.”??

    I have to agree with the above post by “Smitty”. I am from the US and comparing Wal-Mart to Costco is like apples to oranges. Costco is a very well-respected company worldwide. Costco has always taken care of their consumers, employees and shareholders alike.

    Wal-Mart on the other hand is a different story. They have been known to cut corners and treat their employees like rubbish. Wages and benefits are not comparable at all. The founding principles may have been similar at the beginning, but Costco has held true to their own. If you would have done a little more research on “company culture” and interviewed a couple employees from their respected companies and also a few frequent shoppers at each establishment, you might have got a different perspective. I can tell you jumped to a few conclusions and this article sounds more like a commentary rather than factual. I know you ment well but just be careful.

  9. Mark says:

    “Mom and pop shops” This IS an Australian site – right?? .au? Australian flag on a map of Oz? Or was it “tung-in-cheek”.

    It is sad to see the decline of “Mum and Dad” shops though they largely disappeard in Oz decades ago. Some resurgents are making a comback – a butcher opened locally at more than competative prices for the big supermarkets.

    But you must consider logistics. Costco is right next to the port – a few hundred meters in fact – you could trolly the goods to the store if arriving by ship. The key thing is what are the shoppers doing driving many kms to Costco in their absurd 4×4′s? In some cases to save a few dollars and the corresponding environmental costs when most have shops up the street. Problem is the majors distribution centres are usually in far outer suburbs so my imports come to the nearby port – are moved to the outer subs – then back again to the inner suburbs for me to access. Which is better? Maybe I’ll just wipe my botbot with a leaf? Wear the left over “big box” instead of clothes?

    I live a few kms from Costco so giving it a go isn’t too hard to reconcile – I will even try to cycle on the bike path if my carrier can cope with the return journey!

  10. lucas says:

    In regards to the avaibility of Uranium mentioned here,

    Uranium 235 is estimated at the moment to last for about 100 years and
    Uranium 238 ( which is used in the fast-breeder reactor ) there will be sufficient resources for about 14000 years.
    Quote ” Lomborg The scept. environmentalist “

  11. Diane says:

    AS an American who shopped Costco regularly when I lived in the states, I can give a big thumbs up to Costco and the products they sell. Prices remain consistant, products remain consistent, they shelves are well stocked and items are of better quality than most stores here in Hobart sell. They carry named brand clothing, electronics, food and because of buying power can under cut both Coles and Woolies with their prices — why should the public get ripped off by Coles and Woolies when you can shop in a clean, well lighted environment with plenty of employees to assist you if necessary. So it costs $60 to join bid deal, you save that much with your first major purchase. I’m glad to see some American companies putting a stop to the monopoly of Australian overpriced overrated items. It has long been a complaint of mine that the Aussie public is getting ripped off with everything.

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