Will non-Costco grocery prices rise in Iowa City area?

The opening of the area's first Costco warehouse club Wednesday in Coralville could mean higher grocery and beverage prices at other local stores, if academic findings are any indication.

Grocery prices at other stores tend to rise after the entry of a Costco store into their market, according to a National Bureau of Economic Research study by economists Art Carden of Rhodes College and Charles Courtemanche of University of North Carolina-Greenville. The study was released last year.

Faced with Costco's bargain-basement grocery prices, the 2011 study found that other grocery retailers simply decide they'd rather compete on quality, freshness or customer service.

The Costco effect found that a Costco's arrival increases competitors' grocery prices by 1.4 percent in the short term and 2.7 percent over the long term.

Previous research findings had indicated that the arrival of the rival discount membership warehouse chain Sam's Club reduces prices by 1 percent to 1.7 percent in the short-term, and about four times as much in the long run.

The researchers theorized that Sam's Club, based in Bentonville, Ark., has a different effect than Costco because of its focus on targeting small business customers rather than individuals.

Sam's Club doesn't operate a store in the Iowa City-Coralville area. Its nearest location is in Cedar Rapids.

Retail centers don't get much more concentrated than Coralville. Retail sales average $37,630 per capita - higher than any municipality in the state, more than three times the statewide average, according to Iowa State University's Regional Capacity and Analysis Program.

That is expected to increase when Costco opens. Annual sales at Costco stores averaged about $150 million last year, according to regulatory filings.

Coralville is already home to a Hy-Vee store, a Walmart, a New Pioneer Co-op and numerous other stores that sell grocery items.

The study said Costco's impact on nearby grocery prices was virtually the opposite of the effect seen when rival Sam's Club opens a membership club. The opening of a Sam's Club store or a Walmart tends to cause grocery prices to decline in nearby stores.

Even as city leaders welcome Issaquah, Wash.-based Costco, retailers in Coralville and Iowa City are waiting to see how it will affect the market.

Hy-Vee spokeswoman Ruth Comer said the company has competed against Costco in other markets such as  Des Moines and Kansas City, and considers it a good operator.

Comer said Hy-Vee gives its local store directors a great deal of autonomy in store operations.

"It's about close to our customer, knowing what they want, and listening to customers and not what our competitors do," Comer said.

"Bier Guy" Doug Alberhasky manages John's Grocery, a small, independent market that specializes in craft beers and wines near the University of Iowa in Iowa City. Alberhasky has no delusions that it will be possible to compete with Costco on price.

"When you talk about cherry-picking the top-selling items, buying in volume and selling on price, that's them," Alberhasky said.

Alberhasky said one of the beer distributors he spoke with said, "How is it going to look that for years we said we're never going to offer a quantity discount on this item, and now that Costco's going to come in we're going to offer a quantity discount?"

"I don't expect to lose any sleep about it," he said. "We're a destination store."

He said John's Grocery long ago had turned from competing on price to emphasizing product selection, product knowledge and customer service in its beer and wine area.

The Costco effect was strongest on fruits, vegetables, meats and drinks. Research also has documented Costco's paying of higher wages than discount rivals and its tendency to attract higher-income shoppers by offering more upscale merchandise.

A Costco Warehouse shopping primer

Where: 2900 Heartland Drive, Coralville

When: Opens 8 a.m., Wednesday, June 27

Membership requirements: Business members qualify by owning or operating a business and pay an annual fee of $55 to shop for resale, business and personal use. Gold Star (individual) members pay a $55 annual fee, which includes a free household membership. Executive members pay a $110 fee that offers a variety of discounted consumer services.

What: Costco is a price concept membership store that differentiates itself by offering its private-label Kirkland Signature products that are designed to be equal to or better quality than national brands.

Departments include a gas station, bakery, meat department, produce department, deli, optical department, one-hour photo, pharmacy, tire center, hearing aid center, food court and wine and liquor section.

Payment: Members who don't want to pay with cash or check at Costco can use American Express, a Costco credit card, a Costco cash card, or a debit card.