Before its first physical store in China has even opened, Costco has already begun competing at the supply chain level. Quietly launching its B2B business and starting warehouse operations, the arrival of this retail giant is a real threat to the already fiercely competitive FMCG B2B market in China.
Core Guide:
- Warren Buffett and Charlie Munger are fans, and Lei Jun is deeply influenced by its business philosophy. What makes it so exceptional?
- Why is Costco launching B2B before opening stores, and who is threatened by its "invasion"?
- Is Costco's early B2B entry into China a real threat or a false alarm?
Recently, New Distribution learned that Costco, the second-largest retailer in the U.S. and seventh-largest globally, has opened its first physical store in Minhang, Shanghai, and will officially open in spring/summer 2019.
"Troops and horses move before provisions." Notably, Costco's first store in China has not yet officially opened, but its B2B business targeting traditional mom-and-pop shops, small and medium retailers, and restaurant users has already quietly launched with warehouse operations. For the already turbulent and unstable retail market in China, the wolf may indeed be coming!
1 Who Exactly is Costco? As the second-largest retailer in the U.S. and seventh-largest globally, Costco, founded in 1976, is a legend in the global retail industry. Since its inception, it has never done commercial advertising and has no PR team, yet it operates over 750 stores across seven countries, with annual revenue exceeding $110 billion. Although founded 20 years after competitor Walmart, its per-store sales surpass Walmart, making it a formidable rival.
(Data source: Yahoo Finance; market cap as of 2006 and Dec 31, 2016)
The rise of e-commerce has had a huge impact on traditional retail. Sears, the third-largest U.S. retailer, saw its market cap shrink by 96% in 10 years, while Macy's stock fell 55%. In stark contrast, e-commerce giant Amazon grew rapidly, with its market cap increasing nearly 20 times in 10 years.
While traditional retail stores are closing and transforming, Costco has grown like a tortoise, with revenue increasing 4%-6% annually, and its market cap grew 1.7 times in 10 years—truly commendable. Analyzing the reasons for Costco's stable growth, two points stand out:
1. Membership System: Members are the foundation of all Costco's business logic. Whether using membership fees to support operations or leveraging large purchase volumes to reduce costs, a substantial membership base is required. This is a long process that accumulates members and builds the brand. A large and highly loyal membership base is Costco's most solid moat. Analysis of the company's financial data over the past 10 years shows that membership fees are the main source of profit, accounting for about 3/4 of net income.
(Unit: USD millions; Source: Costco financial reports)
2. Low Prices, High Quality: The Price Grinder Costco's low prices and high quality are mainly reflected in two aspects: First, the gross margin on all items must not exceed 14%. If it exceeds this number, it must be reported to the CEO and approved by the board of directors before implementation. Second, in supplier selection, if a product is found cheaper elsewhere, it will never appear on Costco's shelves again. This also makes it one of the highest-priced supermarkets in the U.S. in terms of overall pricing.
Additionally, a very low SKU count is the foundation of Costco's low-price, high-quality strategy. Costco has only about 3,700 active SKUs, one-tenth of Walmart's. This means that in each subcategory, there are only 1-2 choices, and only products with "hit" potential are allowed on shelves. At the same time, the filtered SKUs reduce consumer choice costs and enhance the user experience.
2 Costco's Exploration of B2B Business Setting aside its achievements in the retail market, Costco is not a novice in B2B. On the contrary, Costco has established a dedicated physical format for B-end business—the Costco Business Center.
As early as 1992, Costco began testing B2B in the U.S. and opened its first business center. Over the following years, Costco established 14 business centers in the U.S. and officially entered Canada in March last year, marking the global expansion of its B2B business.
Unlike Costco's traditional retail format serving C-end consumers, the Costco Business Center targets traditional small and medium merchants, including grocery stores, convenience stores, restaurants, and corporate clients. This development path is basically consistent with the B-end business expansion of retailers like RT-Mart, Meiyijia, and Every Day. In terms of products, the Costco Business Center offers a wider range of categories than regular stores, with specialty items tailored for B-end customers that are not found in regular stores.
Unlike Costco's overseas B2B operations through Business Centers, in China it is highly likely to develop B2B through a "front store, back warehouse" model. The early launch of B2B in China, besides the fact that its own stores are not yet completed, is mainly due to the following reasons according to New Distribution:
1. Mature B2B Market Environment in China, with Precedents like RT-Mart, Wumart, and Meiyijia From cases of traditional retailers like RT-Mart, Wumart, and Meiyijia expanding target customers and developing B2B, we find that it is feasible for retail companies to expand business lines through B2B. Previously, Xu Lei of RT-Mart publicly shared data in an interview: In the first half of 2018, revenue reached 2.5 billion yuan, and it is expected to reach 15 billion yuan in sales one and a half years after launch, which also proves the development potential of the B-end market in China.
2. Testing Localization: Verifying Product Structure and Business Model in China It is understood that regarding the specific items and product structure of Costco's B2B business, the person in charge avoided answering. We can speculate that launching B2B before stores are built helps Costco understand the Chinese retail market in advance. The most direct manifestation is product structure: B2B sales data can directly provide the most objective reference for Costco's future store product structure.
Costco's achievements in the North American market are obvious, but this does not mean its marketing strategy and product structure will necessarily work in China, especially given the intense competition from Walmart, RT-Mart, regional supermarkets, and e-commerce. Moreover, OEM products account for a high proportion of Costco's product structure. Will the foreign monk really be better at chanting sutras? There are still many unknown factors. By launching products through B2B first, Costco can to some extent verify its product structure, preventing potential "acclimatization" issues after its retail stores officially operate.
3 Is It a False Alarm or the Wolf Coming? As the second-largest retailer in the U.S., Costco's entry into China cannot be taken lightly by local supermarkets, convenience stores, or the emerging FMCG B2B sector. In this regard, Wang Jun, a special new retail expert for New Distribution, commented: Undoubtedly, Costco's business model centered on paid membership has a huge impact on the global retail industry. Whether it's Xiaomi's default 5% profit setting or the paid membership attempts of many retail chains, the domestic market is learning from Costco in its own way.
While everyone was waiting to see how Costco would present a classic retail show in China, unexpectedly, its B2B business has already quietly begun.
The Costco Business Center in the U.S. is somewhat like a large wholesale-retail store in China. When it comes to China, it has at least three options to enter the B2B field:
- Use Costco stores as a "front store, back warehouse" model, which is very similar to RT-Mart's e路发. The advantage is a natural front warehouse and shared supply chain; the disadvantage is heavy reliance on Costco's store opening speed, with limited impact on the overall B2B market in China.
- Introduce the Costco Business Center to China as well, colliding with our unique wholesale market format. Of course, Costco's supply chain is excellent, and categories are differentiated with large packaging. Similarly, its development speed depends on offline store development.
- Learn from China's advanced internet experience, launch its own B2B platform, recruit city partners in each city, join cloud warehouses, and introduce supply chain finance and big data analysis...
So personally, I think it is highly likely that Costco is building its core supply chain system while opening up to the market at an appropriate time, i.e., a self-operated direct supply model.
Products would come from introducing foreign products, domestic selection, and production customization. Category structure analysis is definitely Costco's strength. Whether to market this core supply chain capability depends on their strategic positioning.
This approach is very similar to FamilyMart's supply chain service provider: Dingshi. Recent moves by Dingshi, under Master Kong, have made small shops in East China very happy to have products as good as FamilyMart's: no need to join, just one click. This is both a revolution against itself and a strong confidence in its own brand.
Now, the domestic FMCG B2B has entered the second half, where a group of very strong players are hidden. They will soon emerge. They are regional kings with strong control over offline channels—chain retail stores. They are down-to-earth, never burn money, have deep industry experience for over a decade, and have strong regional influence. They are arming themselves with advanced internet tools, but they have been slow to expand beyond their regions, yet have a strong desire to go national.
Despite these inherent advantages, they also struggle with the inability to fully share supply chain procurement, and the trade-off between payment terms and prices.
Their names alone radiate brand brilliance:
RT-Mart's B2B platform for chain supermarkets: e路发 Meiyijia's B2B platform for chain convenience stores: Caihua Trading Furong Xingsheng's B2B platform for chain convenience stores: Mabang Every Day's B2B platform for chain convenience stores: Bangbianli China FamilyMart's supply chain: Dingshi Warehouse ...
Now, it seems likely that Costco Business Center will be added to this list.
I have always believed that B2B platforms are inevitable. In the future, every small shop owner will open their phone every day to order goods; this is a certainty. But at the same time, when a modern chain store opens next door, the small shop owner will again helplessly think: Should I keep this shop open?
Costco has entered China and taken the lead in B2B. What do you think?
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