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COMMENTARY: Costco’s Big Debut in China – Is It a Harbinger?

Mark Melnicoe 2019-08-31 20:10 PM

In the wake of Costco’s blockbuster opening in China this week, it’s going to be interesting to see how the American warehouse retailing giant fares once the buzz dies down.

It’s no surprise that a madhouse ensued this week when Costco Wholesale Corp. (Nasdaq: COST) launched its first store in China. Any questions about Chinese consumers’ appetite for the store’s offerings were, at the very least, put on hold.

Crowds descended on the store in Shanghai’s suburban Minhang District, inundating nearby streets with three-hour traffic jams and forcing the store to close early on its first day, with thousands of shoppers inside.

Citing a media outlet run by the Shanghai government, Reuters said the store was closed after the district government grew concerned about “extremely large crowds” and feared for the safety of the public. Officials also reportedly urged residents to “consume in a rational manner,” ignoring how crowds in China often act when they all want the same thing.

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(Image: Weibo)

Customers were described on the social media platform Weibo as, shall we say, very enthusiastic. They fought and clawed their way to the meat counter to procure Costco’s rotisserie chickens and other food items. They scooped up cases of drinks, tissues and diapers.

The store ended up apologizing for the tussling crowds and vowed to limit numbers to 2,000 shoppers at a time.

In a statement posted on WeChat, the Chinese social media platform, store officials said they would text members on their smartphones when the store was nearing capacity or if there were long wait times. 

The Craze May Not Last

While Day 1 clearly marked a rousing success, nothing is guaranteed. China is known for chaotic store openings as its burgeoning consumer class loves to try new things, especially if they are Western. And Costco is venturing into what may be the world’s most dynamic retail landscape, where e-commerce plays an outsized role and practically every store offers customers a cashless way to pay via Alipay or WeChat Pay. 

A graveyard of initially successful foreign retailers dots the landscape. Among major foreign retailers that have gone under in China in recent years are Best Buy Co. Inc. (NYSE: BBY), South Korea’s Lotte and the UK’s Tesco. France-based hypermarket Carrefour, a longtime presence in China, now is faltering and in June agreed to sell 80 percent of its China operations.

Even Amazon.com Inc. (Nasdaq: AMZN) couldn’t win any significant market share in China against the likes of Alibaba Group Holding Ltd. (NYSE: BABA), JD.com Inc. (Nasdaq: JD) and Pinduoduo Ltd. (Nasdaq: PDD), and soon pulled back from the market.

I remember when Abercrombie & Fitch Co. (NYSE: ANF) opened its first China store on Shanghai’s affluent West Nanjing Road on an April Saturday in 2014. Thousands of people lined up on the avenue’s wide sidewalk and waited hours to get inside. There are now 10 A&F stores in China, but the company is taking a measured approach, seeking to grow its digital business by selling on Alibaba’s TMall.

Costco started with an online strategy and has been selling its vitamins and 2-pound jars of nuts online in China for nearly four years. But Tuesday marked the firm’s first brick and mortar store in China.

Western Products, Membership Model Draw Chinese Shoppers

Given the price of U.S.- and other Western-made products in China, consumers’ determination is understandable. City Shop and City Super, high-end grocery store chains in Shanghai, sell imported foods at prices that often are multiples of domestic competitors. They are consistently full of the city’s most affluent grocery shoppers.

Local media said the Costco store in Shanghai, unlike other supermarkets which mainly sell fresh food and daily necessities, also offered products such as handbags from luxury brands Prada (HK: 1913) and Chanel as well as high-end foreign beauty products, National Public Radio reported.

This is a godsend for Chinese luxury shoppers, who for years have traveled to Hong Kong, Europe and the United States to buy these kinds of goods, which generally have been priced much higher at home.

Costco is jumping into China just as the trade war is heating up, and one thing to watch is how it holds up with tariffs rising on many American imports. Richard Zhang, Costco’s senior vice-president for Asia, said he was concerned about tariffs, with about half of Costco products coming from overseas, according to AFP. 

He acknowledged that the trade war could complicate things, and he said a number of fresh foods from the United States are, for now, being replaced with imports from Australia.

Like in the United States, Chinese customers must pay an annual membership fee to shop at Costco. The price is 299 yuan - about $42.

Xinhua, the national news agency, suggested the cost was worth it. "Prices of general merchandise in Costco are 30 to 60 percent lower than market prices and the food sold there is 10 to 20 percent cheaper," it noted.

One of Costco’s prime competitors in China figures to be Walmart Inc. (NYSE: WMT), which not only has an array of regular stores but also 26 Sam’s Club warehouse outlets, which also charge a membership fee.

Zhang suggested that may actually help Costco. "Chinese consumers are ready to pay for a membership card that grants them an exclusive privilege to buy at a warehouse store,” he told AFP, noting that “it's not a new concept in the country."

If Tuesday’s opening in Shanghai is any indication, Zhang definitely is onto something.