In the 1950s Sol Price said “I’m going as far as the boys want to take it,” a reference to his expansion plans for the wholesale warehouse store model he’d pioneered. Through a later merger his firm would go on to make Costco the American giant it is today.
Price would never have envisaged his concept reaching China – which in the 1950s was busy evicting capitalists – but plans are afoot to launch a debut Costco store in Shanghai, according to local media.
Huxiu.com warns that Costco will be competing in a country where other American retailers such as Home Depot and Best Buy have failed. Even Walmart has found it a struggle, despite adapting its offering to something that resembles a more Chinese-style shopping experience (tanks of live fish and piles of pigs heads, for instance).
With the Sam’s Club franchise, Walmart has pioneered the wholesale membership model since it opened its first China outlet in Shenzhen in 1996. As the only retailer with a ‘pay first, shop later’ ethos, it must convince customers more accustomed to daily shopping to buy less frequently and in bulk. The effort seems to be working: last year Sam’s Club reported more than 1.8 million members across 15 China stores with 3 to 5 new clubs to open this year, including new locations in Nanjing and Changsha. Last year, for the first time since its arrival more than two decades ago, Sam’s Club raised its membership fee (to Rmb260 or $39.32).
Costco has made inroads elsewhere in Asia, with 26 warehouse stores in Japan and 13 in South Korea. The challenge in China is that it doesn’t have a local supply chain, although it has spent three years testing the market through sales on Alibaba’s Tmall Global website and shipping the goods from warehouses in Taiwan and the US.
The hurdle for this kind of model is that sales incur import taxes. So when Costco announced a few weeks ago that it would start selling goods online through Tmall’s domestic site, local media were soon suggesting that the retailer must be securing the kind of local operating licence that will allow it to open physical stores.
Costco’s business is built around a limited number of products (up to 3,700 in the US and an expected 800 items in China), which are sold in cases, cartons and multipacks. Gross margins can be thin but the company derives more of its operating income by selling annual memberships, which give shoppers access to its stores and a range of other services, including healthcare.
One attraction of the wholesale offering is that it has helped Costco to defend its market share from online sellers in a range of products that consumers generally buy in person, including meat, gasoline and groceries. That holds out hope that Costco could hold off some of the challenge from online rivals like JD.com and Alibaba in China.
If it does launch in Shanghai, Costco may also choose to ape Sam’s Club strategy in selling more expensive products than in other parts of the world. According to local media, Sam’s Club has been successful with a small selection of higher-end imports: hair dryers from Dyson are mentioned and bottles of expensive wine. This summer it also made headlines for selling the first shipments of American beef, after Beijing relaxed a longstanding ban on US imports of that meat.
Huxiu.com agrees that Costco will have to customise its offering for Chinese shoppers, although it wonders whether the retailer might want to review service standards that allow members in its other markets to easily return their goods (another differentiator from online sales, analysts say, where returning products can be fiddly and expensive). Huxiu’s view is that there are risks to making the same offer to shoppers in China, however. “In the US, Costco serves middle-class consumers with reasonable spending power and morals. On the other hand, Chinese customers (and there certainly could be many of them) will be frenzied in the desire to return goods. We fear it will end in tears,” it concludes.
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