US warehouse retailer Costco opened its first store in China today, against a background of an escalating trade war between the US and China and at a time the local economy is showing signs of slowing.
The giant store will open in a suburb of Shanghai boasting a catchment of 2 million consumers and follows a four-year program by Costco to build brand awareness among local consumers through a presence on Alibaba’s Tmall Global.
The company has a target of signing up at least 100,000 members to make the venture viable.
Costco’s business model relies largely on the sale of memberships giving consumers the right to shop there, with tight margins on products and large pack sizes giving the brand a cost advantage over traditional supermarkets.
Richard Zhang, Costco’s senior vice president for Asia, said the membership model was not foreign to locals.
“Chinese consumers are ready to pay for a membership card that grants them an exclusive privilege to buy at a warehouse store, it’s not a new concept in the country,”
Costco also takes encouragement in that – despite the failures of European hypermarket chains Carrefour, Tesco and Metro in the Chinese market – its US rival Sam’s Club, operated by Wal-Mart on a similar business model, has been trading there for 20 years.
“A mature market saves us efforts in educating customers.”
However Jason Yu, GM of Kantar Worldpanel China, is less bullish about Costco’s prospects there.
“The Chinese market is very complicated and requires retailers to innovate and localise,” he said.
Local retailers like Hema, Alibaba’s tech-enhanced food store network, are proving popular with consumers and can adapt quickly to changing consumer preferences.
“Local retailers are reaching out to customers via all distribution channels while foreign retailers are not so flexible to adapt to new situations,” he said. “The old way of a large and all-inclusive hypermarket doesn’t work in China.”