Costco is performing pretty well in China. The US wholesaler officially entered the Chinese market in August 2019, when its first physical store opened in Shanghai.The opening weekend marked a hive of activity– there were three-hour waits for parking spaces and thirty-minute queues at the checkouts. It caused local authorities to shut the store down for a few hours to ease the traffic congestion building on the neighboring highway. In November 2021, Costco opened another store in Suzhou, which is its second store in China.
As ofJune 2022, Costco in China has announced its plans to open 7 additional stores, mainly located in Shanghai, Guangdong, Jiangsu, and Zhejiang. Among them, the Shenzhen Longhuamen store will be the largest Costco flagship store, and Costco’s South China headquarters will also be located in Shenzhen. The announcement of opening stores created a buzz among Chinese citizens, according to Baidu Index.
Costco in China: how to do it right
Costco’s long-established business model is to sell products in bulk, allowing consumers to benefit from wholesale discounts. Critics accused such a sales model of being incompatible with the Chinese market, specifically highlighting that the vast majority of those in East China live in small apartments that do not have the necessary storage space for goods bought in bulk.
These criticisms are not unfounded; rather, they are based on the precedent of Western retailers entering China but failing to establish themselves or expand. For example, Walmart sold itsChinese e-commerce businessto JD.com in 2016; Amazon also withdrew after failing to compete with the domestic Alibaba in 2019. By 2018, Marks and Spencer joined the exodus of Western retailers. EvenCarrefour, once China’slargest foreign retailer, sold 80% of its stake in Chinese stores to Suning International. A clear pattern emerged of Western retailers failing to grow in China. This article will examine the key elements of Costco’s business strategy that allowed it to expand in China successfully.
What did Costco in China do differently?
1.Establishing itself online presence before opening an offline store
Five years before opening its doors in Shanghai, Costco in China operated throughflagship storeson multiple e-commerce platforms. Tmall Global, JD.com, and Ymatou all sold Costco’s goods to consumers across Greater China. Not only did these partnerships allow Costco to build a reputation for itself by becoming a household brand name, but they also provided Costco with analytics to detect where they were gaining the most traction, which products were selling the most, and who the target consumers were. Thus, by the time Costco became a brick-and-mortar business in China, it had a clear understanding of where they should be located (East China due to higher average GDP and increasing consumer awareness of foreign brands) and whom they should be targeting (thegrowing middle-classwho are providing demand for foreign products and premium goods).
2. Marketing its productsas premium yet affordable
Premiumization – establishing products as high-quality, affordable, and accessible to rival goods – has never been more important. AsChina’s middle-class grows, the demand for luxurious products is soaring. Costco’s business model of selling products in bulk is highly cost-effective when it comes to upmarket brands. For instance, Costco supplies high-end bags hailing from designer brands such asChanel,Hermes, andPrada. This marketing strategy of offering branded products at more affordable prices aligns with middle-class consumers’ desires to purchase good quality products at more affordable prices. In order to maintain affordable pricing and high operating efficiency, Costco warehouses usually only carry around 2000 to 3000 SKUs in China, which is a distinct competitive advantage as compared to local supermarkets and therefore makes it more selective when it comes to choosing what brands to associate with.
Costco in China appeals to consumer demands forpremium foreign goodsand provides a means to acquire luxurious local goods at lower prices through their wholesale discounts. For example, the upmarket white liquor brand Maotai typically sells for 2500 RMB, but at Costco, it sells for1499 RMB. In November 2021, before the opening of Costco’s Suzhou store, people were lining up before sunrise to snap up premium liquor like Maotai and Wuliangye. Besides appealing to consumers who desire luxury products at less expensive prices, Costco’s marketing strategy is enticing to producers. Representatives of Maotai remarked that they were glad to be cooperating with Costco to reduce their reliance on other intermediate sales companies who raise their prices for consumers, which fail to benefit the spirit brand itself.
3.The allure of exclusivity
A highly significant element of Costco’s marketing strategy is its membership program. Shoppers require a Costco membership to shop at the retail giant, with standard membership costing 299 RMB. On the first day of opening the Shanghai branch back in 2019,139,000customers signed up for its membership. This number grew to more than 200,000 cardholders within the ensuing opening months. The success of this membership program – which quickly surpassed Costco’s goal of attaining 100,000 members – highlights how successful Costco’s business model has proven to be in China.
A membership program reinforces the notion that Costco is an exclusive place to shop and reaffirms to customers that their loyalty allows them to access benefits (in the form of wholesale discounts) that non-members fail to reap. Furthermore, an annual membership is more likely to cultivate customer loyalty, encouraging habit formation in which members choose Costco over other retailers, becoming reliable consumers.
Notably, some Chinese consumers are preferring purchasing products from Costco through Daigou instead of joining the membership program. On Chinese e-commerce platforms like Taobao and JD.com, consumers can easily find a Costco Daigou to satisfy their shopping needs by paying around 8% to 10% Daigou fees on top of the original price of the products.
4. The Shopping Experience
Costco’s marketing strategy suits the retail needs of consumers, but it has also created a culture or lifestyle that is compatible with China’s market.IKEA, the Swedish furniture giant, is a predominant example of aWestern brand succeeding in the Chinese market. Not only does the minimalistic furniture suit any culture, but the shopping experience of going through the store from top to bottom turned trips to IKEA into a complete experience. Costco is similar in this sense – consumers have been noted to spend up to three hours in the store, embracing the experience of looking through crates and piling goods upon their trolleys.
Thus, Costco succeeded where other traditional retailers failed: they created a consumer experience that elevated one’s typical retail shop into an enjoyable day trip where customers can peruse stock, eat at afood vendorwithin the building, and enjoy the process of shopping at Costco.
The double-edged sword of the Covid-19 Pandemic
Whilst theCOVID-19 pandemicposed a severe threat to the longevity of many businesses across different industries and sectors, Costco has managed to not only survive but to capitalize on the lockdowns. The uncertainty surrounding the disease and the unprecedented lockdown saw an increase in consumer demand for buying products in bulk, propelled by the uncertainty of how long they may need to be confined in their homes. Costco’s wholesale model was fervently welcomed by customers stocking up on toilet papers and other essentials as the world entered such an unprecedented period. Globally,Costco’s salesreached 195.9 billion dollars (around 1,311.5 billion RMB) in 2021, an increase of 17.49% from 2020.
The flipside of the pandemic is that many consumers shifted to online stores. However, as Costco had established itself in the e-commerce market, though physical stores may have gained less traction, it still acted as a competitive vendor in the online market for fresh produce and essential goods.
Due to another wave of the pandemic in 2022, Costco’s Shanghai Minhang warehouse was closed on March 28. From May 18 to June 1, Costco Minhang warehouse was opened to only activated memberships in the precautionary zones (防范区) of Huacao township with vouchers issued by the government and negative nucleic acid test results within 48 hours. To compensate the members who were unable to shop due to the temporary shutdown, Costco extended the membership validity for members in Shanghai and Suzhou.
Although the pandemic has brought more uncertainties to Costco’s existing stores in China and put its plan to open more stores in China on pause, Costco’s ability tomatch consumer-specific demands during the pandemicsuggests that more stores could materialize in China’s retail landscape.
Key Takeaways from Costco’s China market strategy
- Costco’s business strategy ofselling in bulk proved to be compatiblewith China’s market demands,aided by the pandemicand the frenzy of hoarding.
- Consumers are satisfied with access topremium branded goods at more affordable prices,targeting thegrowing middle classsuccessfully.
- Costco’smembership systemandits shopping experienceare effective atfostering consumer loyaltyand cultivating habitual shopping.
- Cooperation with e-commerce platforms helped Costco in China to expand its influence and reputation in the Chinese market, especially due to the impact of the Zero-COVID lockdowns.
