The Costco Craze

The U.S. wholesale giant Costco opened in Iceland in May, taking advantage of the retail boom that has slowly grown up since the 2008 Icelandic financial crisis. As with most American visitors, Icelanders expected Costco’s presence to be cumbersome. But no American has shaken us quite like Costco.

The megastore’s multifaceted selection has had drastic effects on the Icelandic economy on many fronts. While some consider that Costco’s arrival has generated healthy competition, others see it as another invasive U.S. corporation overthrowing local business. Regardless, Costco is a force to be reckoned with, reorganizing and revitalizing Icelandic commercial power structures.

“Best quality products” for “consistently lower” prices

“Costco offers high quality products and known labels for a significantly lower price than the usual shop,” reads Costco’s Icelandic website, plastered with imported images of smiling American staff. And Costco’s promise of the “best quality products” for “consistently lower” prices has met with booming success. Queues of Icelandic customers can routinely be found lining up outside the superstore, and, according to a recent Bloomberg report, a quarter of the population has already signed up for a 4,800 ISK annual membership.

A 40% increase in cargo flights

Icelandair has reportedly experienced a 40% increase in cargo flights since last July, which Gunnar Már Sigurfinnsson, CEO of Icelandair Cargo, largely attributes to the sudden increase in demand for imported Costco products. “We need to transport a lot of products for them,” Gunnar told Fréttablaðið.

Icelandic produce can’t compete

Unsurprisingly, the flood of cheap foreign commodities is causing problems for domestic producers. Local strawberry growers have had to lower their prices significantly, while some have even stopped picking their strawberries this summer. The Icelandic strawberry is usually in extremely high demand, but this year, the high quality product simply cannot compete with a Costco price tag.

Costco has had a noticeable impact on the sale of Icelandic tomatoes too. “There’s been a significant decrease in the sale of Icelandic tomatoes. That is just a fact,” Gunnar Þorgeirsson, Chairman of the Icelandic Association of Gardeners, told Vísir. Gunnar hopes that negotiations with Costco will result in the possibility of selling Icelandic products at the warehouse: “That way the customer will at least have a choice between an imported or a local product,” he said.

It is easy to condemn Costco and curse every polluting cargo flight that comes in while high quality Icelandic strawberries rot in our greenhouses.

Costco is also raising the bar when it comes to oil prices, selling their petrol for 169.5 ISK per litre, whereas the overall price of petrol in the country has not fallen below 170 ISK since 2007. The record low prices took Icelanders by such surprise that rumours of fixed oil prices and magic Costco petrol went flying.

Costco selling products under production cost

Papco, Iceland’s only toilet paper manufacturer, has suffered a 20-30% drop in sales since the arrival of Costco, forcing the company to lay off six staff already. Alexander Kárason, Papco’s assistant-CEO, says Papco cannot compete with Costco’s ability to sell their products under production cost. As he told Vísir, “That’s something we can’t compete with, as we have to buy our raw materials, and the paper, at world market prices.”

Costco not yet a dominant market player

It is illegal for dominant market players like Papco to sell their products below production cost in Iceland. Since Costco has yet to be labelled a dominant market player, the warehouse can continue to lower their prices. However, it appears as though Costco is quickly approaching dominant market player status, with food and drink prices falling by a whopping 1.2% in the first month after the warehouse opened, as reported by Arion Bank’s research division.

Healthy competition for local retail giant

If you are pro small business, you merely have to compare Costco to one of Iceland’s bigger retail players, and suddenly the Costco-craze takes on a grayer light. Hagar, a local retail giant that operates a number of Iceland’s biggest chains—including Bónus, Útilíf and Zara—has suffered tremendously since Costco opened. Hagar reported a drop of 28% in its shares in May and an 8.5% drop in sales in June.

Costco is quickly approaching dominant market player status, with food and drink prices falling by a whopping 1.2% in the first month after the warehouse opened.

But Costco is not the only retail giant taking advantage of Iceland’s repealed tariffs and excise duty; the Swedish clothing-retail company H&M is opening two stores in Iceland this fall. Hagar has already closed several of its clothing outlets in anticipation.

Costco is a step toward a stronger Icelandic economy

It is easy to condemn Costco and curse every polluting cargo flight that comes in while high quality Icelandic strawberries rot in our greenhouses. But while local industry may be losing now, these ripples of change are significant steps toward the formation of an Icelandic economy that can be a sustainable player in the global economy.

A lesson of consumer responsibility

Let Costco continue to shake up Iceland’s retail empires and invest in the economy. And let Costco be a lesson of consumer responsibility to the Icelandic customer (who is embarrassingly weak to materialistic fads)—namely, that we still have the choice to support local industry. The Icelandic market should welcome foreign competition, and celebrate it as a driving force for change and a reminder that variety does not exclude choice.