Retail watchers are all atwitter with a number of key developments recently which threaten to change the way we shop down under. First, there was the opening of US giant Costco’s first Australian store. Second, the news that Woolworths would seek to challenge Bunnings stranglehold on the hardware sector.

With 550 stores (or more accurately, warehouses) worldwide, Costco pioneered what is today known as the ‘big box’ format, where the store space is more akin to an aircraft hanger than a supermarket. Stock is moved around the concrete floors in pallets on forklifts and customers are required to pay a membership of $60 a year for the privilege of shopping.

Why you might ask? Well for the savings, of course. Products are only sold in bulk quantities (you can find a price list here) and unlike its fledgling competitor Aldi there is a selection of familiar brands among the vast number of products sold under the house label (although I do have it on good authority that the vodka Costco sells under the Kirkland label at $89.95 for 1.75 liters is made by the same distiller that makes luxury tipple Grey Goose).

Costco’s pile ‘em high and watch them fly maxim has been combined with a strict focus on cost control and one of the best supply chains in the world, tranforming the business from a single store grow in 1983 to the US$22 billion behemoth it is today. Having the founder of Microsoft and the right-hand man of the world’s greatest investor on board as company directors probably didn't do them any harm either.

At first glance, the establishment of a single store in Melbourne shouldn’t represent much of a threat to Australia’s cosy supermarket duopoly. But the opening of the store comes hot on the heels of Woolworths news that it intends to open a chain of hardware stores to rival Bunnings, the great profit centre of rival supermarket owner Wesfarmers.

The announcement explained that Woolworths would buy hardware supplier Danks Holdings for $88 million to provide it with the supply chain with which to stock up to 150 stores across Australia starting in 2011. The strategy also sees the US$32 billion hardware giant Lowes take a 30% stake in the venture, and presumably offer Woolworths a great deal of strategic advice.

This wasn’t entirely unexpected. After all, word tends to get around when you begin sizing up 150 massive retail spaces and a medium sized supplier of hardware. But that doesn’t make the announcement any easier to take.

Wesfarmers is still trying to digest its $20 billion acquisition of Coles and execute a turnaround strategy that is expected to take five years or more. This includes not only turning around the performance of thousands of supermarkets across Australia but also figuring out how to make a profit from a host of other leftover brands including Kmart and Target.

Meanwhile Woolworths, having already demonstrated its proficiency with hotels and poker machines (not to mention an unusual detour into 2G telephony are now focusing their efforts on maiming an opposition in a rebuilding phase and on hitting them where it hurts.  Whatever the outcome, it is shaping up to be an exciting battle where both have much to lose.