Will Costco Succeed in China?
As a successful warehouse club in North America, Costco was famous as its membership and lower price. China, the most favorable market for every company in the world, has rapidly developed in the retail industry in recent years. Costco is seeking to open the first physical retail store in Shanghai, but the different consumption concept and shopping habit will become the obstacle for Costco to break into this huge potential market. Both internal and external factors will influence the success of Costco in China.
How Costco did in China?
Costco is already famous in the retail industry in China because of Costco’s good reputation among Chinese who live in North America and Costco’s unique business model. Its model is referenced by a lot of Chinese company such as MIUI whose owner think highly of the business model of Costco and use it in the new retail model of MIUI. Costco keeps their gross margin at 14% and gains profit mainly from the fee of membership. It is this business model make Costco’s products have the lowest and the highest quality among the same products offered at other local markets. In other words, people pay the service of Costco to choose a product with low price and high quality.
Costco first entered China in 2014 with a digital presence when it began selling on Tmall Global, Alibaba’s cross-border B2C platform designed to sell international products to Chinese consumers. Costco found success on the B2C platform with its assortment of American goods and the strength of its private label Kirkland Signature brand and was recognized on Singles Day 2015 as the retailer with the highest sales volume. In September 2017, Costco opened a storefront on the Tmall platform, the B2C platform for local retail operations. On the local platform, Costco augmented its current assortment of food, health & beauty and clothing, by expanding to new categories including consumer electronics and wine. This strategy helps Costco build a reputation among Chinese consumers, gain information on their shopping habits, and obtain permission from the Chinese regulator to open stores legally.
What is the Obstacles?
But the business model used by Costco in online retail is totally different. They still meet a lot of obstacles to success when running a physical store. First, Costco will lose their advantages in pricing if they import their products and pay heavy tariffs. It’s so hard to keep low price and high quality unless Costco localizes its supply chain. It is very time-consuming for Costco to select goods from Chinese local product. And Walmart has done these for more than 20 years.
In additions, Costco opens their store in the suburb and focus on the consumption habit of low-frequency bulk purchase. However, not only the penetration of private car is much lower in China than in North America, but small storage space in Chinese home will not allow people to drive so far to do a bulk purchase. If a warehouse-styled wholesale supermarket like Costco can’t dish out periodic shipments and achieve an acceptable product turnover rate, it will definitely result in blazing high deficits for the company, especially from the loss of its cold and chilled food product.
the main competitor of Costco is Sam’s Club of Walmart. Sam’s Club has the same business model with Costco and has entered China 20 years ago. Sam’Club changes their location from suburb to their own shopping mall in the urban area and gives up the low price to focus on good quality. They also change the target market to the upscale market. All these changes show that Chinese either go to the cheap and convenient supermarket or high-end supermarket. As a new entrant to the Chinese market, Costco has to spend more time and money to attract new members because it takes Sam’s club 20 years to get only 1.5 million members. Besides, the cooperation of Walmart and JD will present great pressure to Costco.
Why Costco Should Expand into China?
Although it is so hard for Costco to enter the Chinese market, it still needs to process this expansion for amounts of potential benefit. According to the company’s latest annual report, margins for Costco in international markets are almost twice as high as in the United States. Assuming current margins for international stores translate to China, Costco could expect gross margins in excess of 20% and net profit margins of 4% for Chinese stores. Besides, Costco is highly dependent on its North American market. Any significant slowing in North America drastically impacts Costco’s financial performance. Although certainly not a cure-all, an expansion into China could alleviate Costo’s over-reliance on North America.
Expanding to China is an opportunity not only for Costco but also for Chinese people. Costco will promote the development of the new consumption habit in China and increase its earning and global influence. A new Costco will open in Shanghai soon and we will soon know that will Costco succeed in China.
Master of Management
Global Business Project Fall 2018