Membership stores and discount stores have become two mainstream formats in retail transformation in recent years. The hot track naturally attracts new developments: ALDI recently opened its largest store in China in Jinshan, Shanghai, while Fudi, a warehouse club with internet celebrity appeal, announced its expansion from Beijing to Shanghai and a nationwide layout.
The membership store model has already become a new growth point in China's new retail market. Not only established players like Costco and Sam's Club, but also cross-industry entrants such as M Membership Store (backed by Sun Art Retail), East Buy, and Lai Yifen have successively entered the competition.
At the crossroads where foreign and local brands are quietly competing, we need to consider: What is the core of the membership store model? Does Fudi's nationwide expansion signify a second takeoff for the membership store model? Which players with what characteristics can achieve true victory in this wave of membership stores?
The Core of the Membership Store Model
In recent years, besides the hard discount model, the hottest trend in retail has been the membership store model, represented by Sam's Club and Costco, each with annual sales exceeding $200 billion. Why does this model stand out? Why can it maintain sustained and stable growth and profitability? The author attempts to dissect the core of this model.
Figure: Costco and Sam's Club
First, the essence of the membership store model is to continuously meet as many needs as possible of a specific target consumer group through specific products and services.
Figure: The Essence of the Membership Store Model
The first "specific" refers to the differentiation of products and services. It requires enterprises to have strong product selection capabilities, even product creation capabilities, that is, the R&D capability for private label products (PB). Only with this capability can retailers provide consumers with "high quality and low price" products, thereby ensuring member repurchase rates.
At the same time, in terms of service, it can strive for excellence, innovate, and continuously provide customers with an ultimate shopping experience.
The second "specific" refers to the selection of target consumer groups. "Of all the water in the world, take only one dipperful"—by using paid membership to lock in a limited target consumer group rather than unlimited openness.
With the target group defined, it becomes easier to gain insights into their needs and satisfy them, and then use consumer preferences to create a better shopping experience, further ensuring service levels.
Second, the core elements of the membership store model are products and services.
Unlike the generalized needs of the general public, the needs of "specific" target consumer groups are more concrete. Products and services are the two key points that directly face target consumers and provide them with deep experiences.
In terms of products, the membership store model requires retailers to consider various factors based on target consumers, including category, appearance, taste, price, and packaging (scenario).
Choosing which categories to meet consumer needs in a certain scenario, presenting products in a way that consumers can accept, and using appropriate packaging forms—these meticulous details pose a significant challenge for many retailers.
Figure: The Full Process of Product Services
In terms of services, as one of the core competitive advantages of the membership model, meticulous design throughout the entire process is also key to increasing membership fees and renewal rates.
Pre-purchase membership benefit design: How to make consumers believe and be willing to pay for membership identity efficiently? Additionally, effective reach of daily product or store marketing activities, including how to make consumers think of you first when they have needs.
Consumers have multiple channels for shopping, including online and offline. Online, how to make it easier for consumers to find the products they want, or use large model capabilities to make precise recommendations based on user profiles, reducing randomness in the shopping process.
Offline, it is more about scenario experience, invitations for tasting and trials, and unobtrusive sales guidance, all worth careful design.
Post-purchase mainly involves two parts: in-store services and after-sales services. The membership store model requires retailers to consider how to plan their logistics system, whether to build their own or outsource, and whether delivery time is half an hour or one hour.
Additionally, the rise of e-commerce is largely due to the "7-day no-reason return" policy that ensures consumers are worry-free after purchase. For membership stores with offline physical store advantages, whether they can provide the same level of service and whether consumers truly perceive it are considerations.
Finally, the necessary conditions for the success of the membership store model.
The author believes there are mainly three: business planning, demand insight and effective response, and sustained operational investment.
Figure: Necessary Conditions for Success of the Membership Store Model
Business planning mainly refers to site selection. Because the membership store model is primarily offline with online as a supplement, site selection largely determines whether the store can succeed and be profitable. Effective site selection brings natural traffic; the funnel opening determines both the upper limit of the target consumer group size and the absolute number of effective conversions.
For new players in the membership store model, in addition to customer flow, they need to pay special attention to vehicle access routes and parking convenience. The failure of Carrefour's Yanggao South Road membership store was largely due to insufficient consideration of these aspects.
Demand insight and effective response. Professional matters require professional people, preferably employees who directly face consumers at the frontline. Traditional retail enterprises lack such dedicated market research personnel and rarely send people to the frontline for research; product selection and creation often rely on second-hand or even multi-hand information.
Therefore, the membership store model requires retailers to build a professional consumer demand insight team that can discover members' needs earlier than the members themselves. At the same time, they need to respond effectively to needs, that is, have appropriate products or services to meet discovered needs as early as possible. This requires organizational support.
Sustained operational investment. The membership store model focuses more on word-of-mouth marketing, using product strength and service strength to bring consumers a high-quality experience, thereby forming continuous repurchase and recommendations.
"Rome was not built in a day," and the same goes for a good reputation. It requires retailers to make sustained operational investment, including in talent, store expansion, and supply chain. They must treat this model as a five-year or ten-year business; the first two to three years are more about building momentum, and only after three to five years of effort can they achieve explosive growth.
In the current economic environment, any new player needs significant courage to achieve this.
Sam's Club and Costco: Different Paths, Same Destination
As representatives of the membership store model, Sam's Club and Costco have taken two different paths.
First, the Sam's model, especially Sam's China, expands business through a "big store + dark store" starfish model.
According to official sources, Sam's China has opened nearly 50 big stores and 500 dark stores, with annual revenue exceeding 80 billion yuan, and online sales accounting for 50%. The average operating area of big stores is over 20,000 square meters, while dark stores average under 500 square meters.
Figure: Sam's "Starfish" Model
The former provides consumers with a wide and comprehensive product selection, as well as a rich offline experience with tastings and trials; the latter provides consumers with a small but refined product selection, but with efficient hourly delivery service, allowing consumers to complete their shopping journey on their phones.
The former can achieve an average order value of 1,000 yuan; the latter's average order value is also much higher than platforms like Pupu Supermarket and Dingdong Maicai, reaching 200 yuan per order. Quality, price, and experience—the "impossible triangle" of retail—has been broken through in the Sam's model.
The reason behind this is Sam's deep understanding of consumption scenarios. In-store shopping is more about planned shopping; "browsing and eating" is the key focus in the store. For such consumers, Sam's offers over 4,000 SKUs, focusing on "regular bulk shopping."
Online consumption is more about meeting immediate needs; consumers want goods delivered to their homes without leaving. For such consumers, Sam's offers a carefully selected 1,000 SKUs, focusing more on "daily convenient shopping."
Dark stores act like the tentacles of a starfish, expanding the service radius of Sam's stores at a much lower cost than big stores, and broadening the service scenarios of big stores. Leveraging the momentum of big stores and high online order values, Sam's has carved a path in the dark store model that was previously considered unviable by the industry.
It is estimated that Sam's dark stores achieve a sales per square meter exceeding 100,000 yuan, far higher than any existing retail enterprise in China.
Figure: Dark Store Cost Estimation
Now let's look at the Costco model. Borrowing Apple's advertising slogan, the Costco model is "more than big."
First, the store is big, and product packaging is big. The large store not only provides consumers with ample shopping space but also leaves room for mechanical operations such as stocking, replenishment, and picking and packing. Large packaging reduces the allocation of packaging and loss costs, making unit costs highly competitive.
In addition to the "bigness" of the store and packaging, Costco's unique "3T" business philosophy—Taste, Touch, Take—allows consumers to have more understanding of products and reduces the risk of after-sales returns.
Furthermore, it has a rich variety of categories and services, from gold jewelry to luxury watches and bags, from glasses and cosmetics to wiper blades and tires, including hearing centers and self-service gas stations. To some extent, the Costco model is more like a "coral reef" model, where each store is an ecosystem meeting multiple needs of members.
Figure: Costco's "Coral Reef" Model
Finally, the business logic behind "bigness." In addition to the sense of space mentioned earlier, there are three points:
First, "bigness" can lead to price concessions, allowing consumers to enjoy "high quality and low price" benefits.
Second, "bigness" can increase the average transaction value, maximizing the reduction in operating cost ratio per order.
Third, "bigness" meets the needs of family shopping, making it easier for members to develop repurchase stickiness, and through continuous high-frequency interaction, it can subtly form consumer mindset.
Additionally, what is astonishing about the Costco model is its extremely low gross margin and operating expense ratio. Costco achieves a net profit of over 2% with a gross margin of less than 14%, making its operational capability unrivaled among global retail enterprises.
To maximize the possibility of members buying products at extremely low prices, Costco chooses to build its own properties, which keeps overall construction costs controllable. It can simplify facilities according to actual store needs, ensuring the lowest construction cost.
Costco expands stores in this way, albeit slowly—each project takes an average of two to three years—but it results in extremely low annualized site costs.
Another significant expense in management costs is employee compensation. Costco understands human nature well, using above-industry-average salaries to maximize human potential, and its actual per capita sales contribution is much higher than peers.
As for marketing expenses, Costco hardly advertises; high-quality, low-price products and one-stop services are the most effective "advertisements" for members.
Can the Fudi Model "Expand Territory"?
The top two players in the warehouse club track seem to have taken two different development paths, but in reality, they converge: both are unmatched by most peers in the two core elements of products and services.
Like domestic players such as Jiajiayue membership stores and Yonghui warehouse membership stores, most are just "enlarged versions" of original supermarkets, without substantial operational changes in these two core elements, so the results are predictable.
However, China's Fudi membership store seems to have found a "forest path." The author believes there are mainly three reasons.
First, effective positioning.
The brand targets young consumers who "love beauty, seek novelty, and pursue fashion," with the core business philosophy of "fresh, healthy, high quality," and its vision is to lead future urban dietary life.
Figure: Fudi Warehouse Club
Unlike traditional retail supermarkets' "bright red, yellow, blue" decoration styles, Fudi uses a fresh and bright pistachio green as the main tone, and through ingenious store space design and decoration style, creates a relaxed and pleasant consumption atmosphere, effectively triggering enthusiastic attention and check-in trends among young people. It quickly stood out in the membership store competition with its "internet celebrity persona" marketing approach.
Second, gross margin control.
Once traffic comes, effective reception is meaningful. Fudi chooses to attract consumers to check in and purchase with extremely low product gross margins. Of course, the impulse consumption brought by the "internet celebrity" effect will not last; only high-quality, low-price products are the reason for consumers to continue purchasing.
As a new local entrant in membership stores, Fudi is the first in the industry to promise a comprehensive gross margin "not higher than 10%." Low prices bring positive feedback; increased product sales enhance upstream bargaining power, potentially leading to even lower prices. The low-cost strategy also reflects Fudi's overall operating expense control capability.
Finally, a stable supply chain system.
Unlike most retail enterprises, Fudi relies on the mature supply chain system of "Caixian Guomei" (a fresh food retailer), which includes its own upstream farms, fisheries, and pastures. It can directly enjoy resource synergy effects within the group in product procurement, logistics, and distribution, reducing costs and ensuring product quality.
For processed products, Fudi deeply controls every link from raw materials to product development, production, procurement, and logistics, making overall product delivery quality reliable and stable.
From the opening of its first store in May 2021 in Chaoyang, Beijing (southeast Fourth Ring Road) to now, Fudi has only opened 4 warehouse clubs and 2 fudi+ community stores, with an extremely restrained expansion pace.
Image source: Fudi Membership Store Official Weibo
The reason behind this is likely that the model has not been fully proven, and profitability is not optimistic. Therefore, for Fudi, the biggest challenge is how to fully prove the model and expand beyond Beijing to replicate its successful business model on a larger scale.
Influenced by Sam's cloud warehouse (dark store) model, according to Li Xue, Vice President of Fudi Membership Store, fudi has conducted site selection nationwide. Considering the series of difficulties that may be faced in external expansion, such as supply chain and logistics warehousing, it will also make dark stores a key format for market expansion. The development and innovation of dark stores will be an important strategy for fudi in the future.
The author believes that the success of Sam's dark store "starfish model" is based on the success of its big stores, as mentioned earlier, dark stores are more like tentacles to expand service radius. If one only thinks that the dark store model is cost-controllable and can better expand store coverage, it will repeat the old path of the dark store model, and success will be far away.
Challenges Facing the Domestic Membership Store Model
Whether it is the Sam's model or the Costco model, the author believes both are worth deep study by domestic retail enterprises. Of course, the following aspects also need to be considered:
First, market positioning and differentiation.
Membership stores need clear market positioning and differentiated products and services to attract consumers. If retailers cannot clearly define their market positioning, or if their products and services cannot be distinguished from existing membership stores, lacking core competitiveness, it will be difficult to succeed.
Second, awareness and education of membership systems.
Consumer awareness and acceptance of membership systems need to be gradually cultivated, especially in market environments where membership systems are relatively new. Although more and more people are beginning to accept the concept of membership and are willing to pay the corresponding annual fee, a considerable number of consumers still prefer traditional shopping methods. Therefore, effective design of membership benefits will be a good starting point.
Third, supply chain and logistics challenges.
The membership store model requires a strong supply chain and logistics system to support it, ensuring that high-quality products can be provided at lower costs. This is a challenge for many local retailers, especially in the initial investment phase. The membership store model requires efficient supply chain management to reduce costs and provide competitive prices. Achieving this requires establishing long-term cooperative relationships with suppliers and effectively managing inventory and logistics. This is a challenge for retailers without sufficient scale advantages.
Fourth, capital investment.
Membership stores typically require larger store areas and higher initial capital investment, which not all retailers can afford. Additionally, long-term investment is needed to maintain operations and service quality. Successful membership stores require significant upfront investment, including building large warehouses, optimizing supply chains, and developing private labels. This is a huge expense for many retailers, especially those with tight capital chains.
Fifth, brand building and consumer trust.
Sam's Club and Costco enjoy good reputations globally, which helps them build trust in the Chinese market. New retailers may need to spend more time and resources to build brand awareness and trust. With the rise of e-commerce and the development of other retail formats (such as convenience stores and discount stores), market competition is becoming increasingly fierce. For retailers trying to enter the membership field, they must not only face competition from existing membership retailers but also respond to challenges from other retail formats.
In general, the membership model faces significant challenges, but there is no doubt that it will become an important or even major format in the future retail supermarket industry. If retail enterprises can fully consider and prepare in the above aspects, enter the game early, and continue to invest in operations, they will surely carve out their own space.