The closer one gets to social interaction, the further one moves from the membership model under Costco's paradigm. This is not necessarily a bad thing, but the overlap between social and consumption scenarios remains limited. Source: Retail Boss Insider (ID: lslb168), Author: Sun Yuan. This article is reproduced with permission; for reprint, please contact the source. Core Guide:

  • Why hasn't China's retail industry produced a Costco?
  • What is the development status of paid membership in China's retail industry?
  • What opportunities remain for Chinese merchants in the face of Costco? Costco is coming, around May, and will open its first physical store in Shanghai. Moreover, this global second-largest retailer, known for its membership model, has in just a few years, with a business model that is "understandable but not imitable," awakened all the enthusiasm for paid membership in China's retail industry. However, in recent years, after the "localization" of the membership model, it has drifted further and further from the original Costco model. Despite developing a large number of "apprentices," none has yet achieved Costco's level. At the same time, we also see that Sam's Club, which is closest to the Costco model and entered the market earlier, has accelerated its pace of layout in the Chinese market since 2016. The landing of Costco's first domestic store undoubtedly signals that there is indeed great potential for a Costco-style membership chain in the Chinese market. But we cannot help but ask: Why, after all these years, have we not been able to produce a localized Costco? What is the reason for this "transformation" of the membership model in the Chinese market? 01 Costco's Chinese "Apprentices" The core of the Costco model lies in two points: one is the paid membership system we mentioned above, and the other is product strength; the two are mutually reinforcing. The premise of paid membership is high cost-performance, rich categories, and exclusive product supply capabilities; and ensuring high cost-performance supply, bargaining power upstream in the supply chain, and channel control comes from the sales volume contributed by the locked-in massive paid user base. This is a chicken-and-egg problem. The foundation of the cost-forward model requires billions in capital investment and extremely accurate product selection capabilities. But after encountering the Chinese market, everything changed. The two core elements of Costco's product strength and membership system were inherited separately. Product strength goes without saying; in recent years, the retail industry has seen the rise of direct sourcing from origins, buyer systems, private brands, etc., all attempting to create differentiated product capabilities. In the upstream supply chain layout, there is no shortage of strong players like Yonghui and Hema. Moreover, with the long-term education of membership systems and service payments in China's cultural and entertainment industries, food delivery, etc., the popularity and consumption threshold of paid membership have been continuously raised. Almost every chain business format has elements of membership, but none has achieved a re-creation of Costco. Not to mention recreating Costco; after entering the domestic market, the scope and measurement standards of these two elements have undergone different forms of transformation. For example, product strength: Costco focuses on large-pack standard products, with fresh produce accounting for less than 20% of the ratio. Under the relatively transparent pricing system of standard products, it has a clear comparative advantage in cost-performance over other competitors, especially attractive to planned consumption groups with periodic purchases. But domestic retail enterprises tend to differentiate through fresh produce in the supply chain, to attract traffic and ensure high-frequency purchase stickiness. However, when it comes to long-cycle paid membership, a question mark arises. The Yonghui and Hema we mentioned above are both like this. Returning to the membership system itself, there are even more subtle differences. The purpose and method of paid membership in retail are simple: by providing users with reduced consumption costs or increased services, thereby locking in users, increasing per capita consumption per unit time, and incidentally earning some membership fee income. But due to the lack of core product strength, most merchants cannot make consumers pay in advance for services they don't know how many times they will use (except for short-term, low-cost memberships with basically no threshold). On this baseline, the closer the consumer, the higher the frequency category, the greater the persuasiveness of paid membership. This probably explains why community fresh produce chains can become a hot track. And why hair salons and gyms almost "harass" customers to recharge memberships. Digressing, Xiaomi, which once loudly benchmarked against Costco, currently has a very weak presence in its membership system compared to its ecosystem products. In order to form strong relationships with users using factors other than product strength, social e-commerce under the banner of membership has emerged, using interpersonal and interest relationships among consumers to lock in users. "Save money on self-purchase, earn money by sharing," the slogans are all the same. Let's not mention horizontal alliance membership systems like Alibaba's "88 Super Membership" for now; in the retail industry's paid membership itself, local players who stand out are indeed few. 02 Not Making Another Costco Fundamentally, despite the macroeconomic backdrop of the rise of the middle class, Costco, whose core business focuses on Europe, America, and Australia, has significant differences from China in terms of consumer habits, retail channels, etc. Here we should cite the examples of Yonghui and Hema, which have strong product strength. Although they meet comprehensive household consumption needs and have competitive fresh produce, why did Hema only trial the most basic paid membership benefits at the end of last year, while Yonghui hasn't done it at all? Simply put, they don't dare. For Chinese consumers, who have extremely diverse shopping channels since new retail, paying and frequently visiting a Yonghui or Hema three kilometers away for bulk shopping is indeed unnecessary under current circumstances. Home delivery, community group buying, and e-commerce channels have occupied too much attention for planned consumption. In contrast, Costco, in European and American countries, especially the United States, the geographical composition of communities determines that driving by car to shop is a necessary need. For the United States, which has a high level of per capita car ownership and road networks, and relatively weak community retail and e-commerce channels, it takes into account both convenience and cost-performance, plus additional services like gas stations and medical care, which is simply perfect. Differences in consumption habits cannot be ignored. Even Sam's Club, which entered the market 22 years ago, built forward warehouses last year and cooperated with JD Daojia. Costco's entry into China will likely not remain unchanged either. The cost-performance of consumption is far more than price and product; channel convenience, and even details like shopping environment and product display, can sometimes play a decisive role. 03 Membership in China Is it possible to implement a paid membership model in China? The answer is definitely yes; otherwise, why would Costco enter China and Sam's Club accelerate its layout in the Chinese market? The question is, when these "outsiders" that have already formed a closed loop of product strength and membership suddenly enter, and can make appropriate compromises and adjustments based on market conditions, how should local players play? The easiest direction to break through is new channels. New channels first mean infinitely shortening the distance to consumers, which is the high-frequency hitting low-frequency that retail practitioners are most familiar with. Differences in community scenarios lead to richer immediate consumption needs for Chinese families. A higher-density paid membership system formed by community chain formats is a retail format more in line with local characteristics. Second, it is the sinking channel of differentiated markets. Sam's Club has already begun layout in second- and third-tier cities, but it will still face competition from regional chain retail enterprises. Standardized product selection and procurement constitute the advantage of "outsiders," but also lack flexibility. In addition, social e-commerce is clearly superior to physical stores in user stickiness and expansion speed. By aggregating consumers through online channels to form bulk orders and obtain better prices, such as Pinduoduo's model, and the subsequent derivative of community group buying. But the pre-sale system is completely different from Costco's cost-forward model. Its advantage lies in that within a unit time, the larger the purchase base for the same product, the more transparent and controllable the production price and cost calculation. By setting a price base in advance, corresponding cost control can be carried out, avoiding the risk of losses from product selection errors. The closer to social interaction, the further from the membership model under Costco's paradigm. This is not necessarily a bad thing, but the overlap between social and consumption scenarios is still limited. Simply binding users through social relationships or interest relationships, while ignoring product strength itself, makes everything meaningless. If it can achieve strong enough quality control, can Pinduoduo also become a paid membership e-commerce? -END-