Costco in China

Success of Costco in China: the business strategies behind the expansion of the US retail giant

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Costco’s adventure in China 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 neighbouring highway. As of July 2021, Costco in China has announced its plans to open 7 stores, mainly located in Shanghai, Guangdong, Suzhou 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 from Chinese citizens, according to Baidu Index.

Search frequency for “Costco” 2020/2021 Costco in China
Data Source: Baidu Index, Search frequency for “Costco” 2020/2021

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 as 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. 

the hectic crowds on Costco’s opening weekend  Costco in China

Source: The Financial Times, the hectic crowds on Costco’s opening weekend

These criticisms are not unfounded; rather, they are based on the precedent of Western retailers entering China but failing to establish themselves or expand.  In 2016, after struggling in the market, Walmart sold its Chinese e-commerce business to Amazon also withdrew after failing to compete with the domestic Alibaba. By 2018, Marks and Spencer joined the exodus of Western retailers. Even Carrefour, which had previously been China’s largest 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 before opening an offline store 

Five years before opening its doors in Shanghai, Costco in China operated through flagship stores on multiple e-commerce platforms. Tmall Global, 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, 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 (the growing middle class who are providing demand for foreign products and premium goods). 

2.    Marketing its products as premium yet affordable

Premiumization – the process of establishing a brand or product as being superior in quality, lower pricing and accessibility to rival goods – has never been more important. As China’s middle class grows and wealth is created in the market, 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 as Chanel, Hermes and Prada. 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.

Costco in China appeals to consumer demands for premium foreign goods and 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 2500RMB, but at Costco it sells for 1499RMB. In September 2019, before the Mid-Autumn festival, 5 tons of the liquor were sold at Costco. 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. 

example of the range of designer bags available to bulk buy Costco in China
Source: Yahoo News Singapore, example of the range of designer bags available to bulk buy

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 299RMB. On the first day of opening the Shanghai branch, the Costco Chief Financial Officer, Richard Galanti, revealed they had 139,000 customers sign up for 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.

4.    The Shopping Experience

Costco’s marketing strategy suits the retail needs of consumers but it also has created a culture or lifestyle that is compatible with China’s market. IKEA – the Swedish furniture giant – is a predominant example of a Western 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 a food vendor within the building and enjoy the process of shopping at Costco.

customers pushing for food at Costco in China
Source: Fortune, customers pushing for food at Costco in China

The Double-Edged Sword of the Covid-19 Pandemic 

Whilst the Covid-19 pandemic posed a severe threat to the longevity of many businesses across different industries and sectors, Costco has managed to not just survive, but to capitalize on the lock-downs. The uncertainty surrounding the disease and the unprecedented lock-down saw an increase in consumer demand of buying products in bulk, propelled by the uncertainty of how long they may need to be confined to 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 sales increased by 10% across 2020 than in the previous annum. 

The flipside to the pandemic is that many consumers shifted to online stores. However, as Costco had established itself on the e-commerce market, though physical stores may have gained less traction, it still acted as a competitive vendor on the online market for fresh produce and essential goods.

Although the pandemic put Costco’s plan to open a secondstore in Suzhou on pause, Costco’s ability to match consumer-specific demands during the pandemic suggest that a second store (and potentially many more) could materialize in China’s retail landscape.

Key Takeaways from Costco’s China market strategy

  • Costco’s business strategy of selling in bulk proved to be compatible with China’s market demands, aided by the pandemic and the frenzy of hoarding.
  • Consumers are satisfied with access to premium branded goods at more affordable prices, targeting the growing middle class successfully.
  • The membership system and experience of shopping at Costco is effective at fostering consumer loyalty and cultivating habitual shopping.
  • Cooperation with e-commerce platforms helped Costco in China to expand their influence and reputability in the Chinese market, especially after the impact of the Covid-19 outbreak.

Learn how COVID-19 changed Chinese consumer behavior

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