Click to read the original article for details. Source: AI Finance and Economics (ID: aicjnews) Author: Shao Lanjie, Wan Ji Editor: Chen Fang US membership warehouse Costco will open its first China store in Shanghai's Minhang district on August 27. On June 7, German discount supermarket ALDI opened two stores in Shanghai. Additionally, Japan's largest discount store Don Quijote is reported to be opening stores in China, signaling a resurgence of foreign retail. Over 20 years ago, a wave of foreign retailers entered China, but many failed and exited, losing in balancing localization with their own characteristics. Now this challenge is before the newcomers. At 8 PM on a weekday, music filled the Jing'an District Sports Center in Shanghai, where three teams were dancing different styles of square dance. Nearby, the German supermarket ALDI, which had opened a few days earlier, was equally lively, with 30 to 40 people shopping in its store of less than 500 square meters. Although many are unfamiliar with ALDI, it has long been famous in China's retail industry. Founded in 1913 as a grocery store, this German discount supermarket later made a name for itself in European, American, and Australian markets with its private-label products and low prices. When Chinese retailers go abroad for inspections, ALDI and Costco are the most frequently visited places. Now both foreign retailers have entered China. On June 13, US membership warehouse Costco announced that its first China store in Shanghai's Minhang district would open on August 27. Eight days earlier, ALDI had just entered China, opening two stores simultaneously in Jing'an and Minhang districts. Among them, ALDI's Jing'an store is located on Jiangning Road, where surrounding second-hand housing prices range from 70,000 to 130,000 yuan per square meter. Upon entering, customers are greeted by the fruit and vegetable section, with fresh food, groceries, and dine-in areas further inside. Contrary to outside speculation, not all products are imported; domestic products account for more than expected. There are many products tailored to the Chinese market, such as domestic preserved eggs, salted duck eggs, flavored chili sauce, bamboo chopsticks, pickled chicken feet, and steamed buns in the hot cabinet at the checkout. Even imported products have been adjusted to suit Chinese tastes. To align with China's new retail wave, ALDI has also added two self-checkout methods: one involves scanning a QR code with a machine, similar to Hema; the other uses WeChat to scan a QR code, register as an ALDI member, and supports delivery within 3 kilometers. Clearly, ALDI has made thorough preparations to enter China. Two years before opening physical stores, ALDI joined Tmall in March 2017, gaining 360,000 followers, to observe the Chinese market up close and understand Chinese consumer habits in preparation for opening stores. ALDI attracts two types of people: foreigners or those with overseas experience, and nearby residents. The former are familiar with the brand, while the latter are curious to try something new. When AI Finance and Economics visited, most of the 30 customers were nearby residents, with only two foreigners. Geographically, ALDI's Minhang store, which opened at the same time, is in a less favorable location, near the outer ring road, in the Gumei Life Shopping Plaza. The plaza also houses a Century Lianhua supermarket that has been operating for years. To compete for foot traffic, ALDI will inevitably face a prolonged battle. The upcoming Costco is 19 kilometers from ALDI's Minhang store, farther from the city center. Unlike ALDI's small-store model, Costco spans a massive 20,000 square meters. From the outside, Costco looks like a huge factory, with surrounding lawns and roads still under construction. This was once a Foxconn factory, which has since moved to Suzhou, leaving only a small office staff. Before entering China, Costco also tested the waters online. In October 2014, Costco opened a Tmall flagship store with initially only 100 SKUs; now it has 1.45 million followers. When AI Finance and Economics arrived at the Costco store at 10 PM, the warehouse area was still brightly lit, with overtime workers coming and going. An insider said that most of the overtime workers were Costco suppliers, making final preparations for the store's opening, often working until 1 or 2 AM. The source said Costco places great importance on China, investing billions in this store. Although Costco has not yet opened, the response has been positive. AI Finance and Economics learned that in recent months, many people have come to apply for Costco membership cards priced at 299 yuan per year, sometimes queuing into the evening. Some even take taxis from the city center just to take photos of the store before leaving. In addition to ALDI and Costco, Japan's largest discount store Don Quijote is also reported to be opening stores in China. According to Hong Kong media, Don Quijote's first discount store in China will open in Tsim Sha Tsui, Hong Kong, in July this year. More foreign supermarkets are on their way to China, and foreign retail is poised for a comeback. Tmall revealed that global top 20 supermarkets, including UK's Sainsbury's, Spain's Dia, Netherlands' Albert Heijn, Italy's Coop, iper, and Eurospin, have formed exclusive strategic alliances with Tmall. This is not the first time foreign retail has entered China in force. Decades ago, a wave of foreign capital flooded into China, but that was not a pleasant memory, as many companies ultimately exited in failure. Twenty-four years ago, when China's retail market first opened, it was a shining new frontier, and retail brands from around the world rushed in. On August 8, 1997, when Trust-Mart opened its Guangzhou Tianhe store, the streets were empty as people crowded into the 55,000-square-meter hypermarket like at a temple fair. For its first store on the mainland, the Taiwanese investors, Chengda Group and Hongren Group, went all out, chartering a Boeing 777 to bring guests, and the store's daily sales exceeded 5 million yuan on opening day. Three months later, Dutch warehouse membership store Makro continued the frenzy in Beijing. On November 8, 1997, when Makro's Yangqiao store opened in Beijing, it achieved daily sales of 5 million yuan that month, with first-year sales exceeding 800 million yuan—a figure that would be impressive even today, showing how hot it was back then. Unfortunately, Makro later wavered between membership and hypermarket models, rendering membership cards meaningless, and gradually declined. By September 2007, when Makro's Sidaokou store opened, it had fully transformed into a hypermarket. Three months later, Makro was sold, with 49% of its shares purchased by South Korea's Lotte Mart. Image/Visual China One in the south, one in the north, but both ended the same way. Trust-Mart, unable to solve supply chain and capital chain problems, eventually fell into Walmart's hands. In February 2007, Walmart acquired 35% of Trust-Mart for $500 million; a second acquisition followed, totaling about $1 billion, making it the largest retail acquisition at the time. The failures of Makro and Trust-Mart did not deter other foreign retailers from entering China. Lotte Mart, backed by South Korea's Lotte Group, after acquiring Makro, bought 66 stores of Jiangsu Times Supermarket for HK$4.87 billion the following year. By the end of 2009, Lotte Mart had 100 stores in China. Lotte Mart did not know that its fate would ultimately mirror Makro's. Lotte Mart had planned to have 300 stores in China by 2018, but reality was harsh: due to poor performance, Lotte Mart sold all 93 of its China stores in 2018. Coincidentally, one of the buyers was Wumart, which had also bid for Times Supermarket. South Korea's other "brother in adversity," E-Mart, had already exited earlier, selling to CP Lotus in September 2017. Before withdrawing, this supermarket, which had been in China for 20 years, had only 5 stores left in Shanghai, a sad sight. Among foreign retail brands entering China, TESCO made the most significant mark, with high investment and long-term plans, but it did not last. In 2004, TESCO acquired 50% of Taiwan's Ting Hsin Group's Hymall supermarket chain and entered mainland China under the name "TESCO Hymall," increasing its stake to 90% two years later and taking full control in 2009. TESCO was unconcerned about its late entry by a decade and paid no attention to competitors' battles. It maintained its authentic British style, proceeding step by step: opening stores, building logistics centers, preparing supply chains, and planning how to achieve 100 billion yuan in revenue. Ultimately, TESCO failed and could not catch up from behind. In 2014, all 134 stores and 19 shopping centers were taken over by China Resources, and TESCO exited China in defeat. Among all foreign retail brands, Carrefour and Walmart can be considered the survivors, but they have not been without challenges, experiencing varying degrees of "elimination." In 2004, Carrefour partnered with Shoulian Group to introduce Champion, a European community fresh food supermarket. The first store opened in Beijing's Jinsong, with nearly 3,000 square meters of selling space, 90% of which was food, with fresh food accounting for over 50%. Two years later, all eight Champion stores closed due to poor performance. Four years later, Carrefour introduced the express supermarket, with the first store in Beijing's Donghuashi, covering about 4,700 square meters, with 70-80% of products being fresh and grocery items, but it also quietly failed. Image/Visual China During its 24 years in China, Carrefour has also undergone multiple rounds of store closures and adjustments. Its old rival Walmart has also been closing stores frequently recently. In 2009, Walmart launched Huixuan, a small-format store located near communities with prices lower than hypermarkets, claiming it would open 1,000 stores in five years. However, after just three years, Huixuan disappeared. In 2018, Walmart reopened Huixuan, but this time it was a smart supermarket, not the same as before. Looking back, from 1995 to now, no fewer than 20 foreign retail brands have tried to make a mark in China, but the vast majority failed, with the longest-lasting surviving 20 years and the shortest only a year and a half. In this promising market, foreign retail brands have mixed feelings of love and hate. The most recent to disappear was discount supermarket Dia. Compared to the sensation other brands created upon entering China, Dia was virtually invisible. It entered Beijing in 2003, but most consumers did not even know it was a foreign brand. After a decade of struggle, it retreated to Shanghai, and in April 2018, Dia was taken over by Suning. At that time, ALDI was secretly preparing its stores and supply chain in China. ALDI calls its first two Shanghai stores "pilot stores," specially tailored for China, with clear differences from its German stores. Over the past 20-plus years, foreign retailers have been plagued by one question: how to balance their own characteristics with localization—a life-or-death question. When Makro first opened, its industrial style, tall shelves, bulk goods, membership-only access, and refusal to admit children under 1.2 meters were unheard of for consumers at the time, but these were the essence of a membership warehouse club. "Our positioning is to serve large professional customers. No matter how we explained it, individual consumers felt neglected, leading to many complaints," said Yang Xiaohong, then deputy general manager of Makro, helplessly. This eventually led to Makro's "transformation." From product structure to store layout, changes quietly occurred, and Makro moved from the blue ocean of warehouse membership to the hypermarket arena surrounded by competitors, retreating without a fight. It can only be said that Makro entered China at the wrong time—too early, before Chinese consumers had developed the habit of membership shopping. Costco, which also uses the membership concept, did not enter China until more than 20 years later. Lotte Mart, which took over Makro, learned the lesson but overcorrected. A former Lotte Mart Beijing employee told AI Finance and Economics that Chinese market managers and top leaders were all Korean, and decisions were made by headquarters, often lagging behind the market. In 2012, Lotte Mart proposed the principle of "thorough localization and use of local talent," but it had little effect. Although supermarket operations were run by Chinese staff, store development remained in Korean hands, and in conflicts, Koreans had the final say. For a long time, TESCO Hymall's executive team had only two Chinese members, responsible for government relations and human resources, while key operational positions were all held by Britons. In the early days, TESCO Hymall stores copied the British model, located far from city centers, requiring customers to drive long distances, resulting in a poor experience, and imported goods in the stores were somewhat expensive. Image/Visual China Unsurprisingly, TESCO failed to win over the market and eventually exited China. Of course, TESCO's withdrawal was also closely related to its headquarters' poor performance. In fiscal 2014, TESCO recorded its largest loss in 96 years—£5.74 billion. A month before being taken over by China Resources, TESCO sold its US business, and the following year sold its Korean business. Its UK headquarters was also embroiled in a financial fraud scandal, unable to attend to the distant Chinese market. Trust-Mart went to the other extreme: over-localization through rampant franchising. Of the more than 100 stores Walmart acquired, only about 30 were approved foreign-invested stores; the other 70-plus were franchise stores with various domestic backgrounds. The rapid franchising led to chaotic property rights, management失控, and ultimately problems in the supply chain and capital chain. In 2004, knowing it could not regain its former glory, Trust-Mart secretly sought a buyer, while its Taiwanese brother RT-Mart had already cashed out. Although it initially asked for $2 billion, Walmart eventually acquired Trust-Mart for half that amount. Timing, location, and harmony are all essential for foreign retailers to take root in China. Champion's appearance in Beijing in 2004 was an "anomaly." At that time, consumers still preferred buying fruits and vegetables at farmers' markets and vegetable markets. Fifty meters from Champion's first store was a Nongguangli vegetable market. In comparison, Champion had a small area and limited variety, and its focus on safety and traceability was not attractive enough to compete with the vegetable market for customers. In 2005, it lost over 10 million yuan, and even after renovation, it showed no improvement. Today, community fresh food supermarkets of 2,000-3,000 square meters are following the same path as Champion, but times have changed; now it's a trend, but fifteen years ago, they were pioneers. Dia was similar, focusing on low prices, but for over a decade, its private-label discount supermarket did not become a consumer choice. Of course, Dia also had many operational problems; its private-label products, which accounted for over 50% in European and American markets, were only 20% in China, eventually dropping to 10%, completely losing its distinctive feature. Moreover, after 2005, the rise of e-commerce pushed foreign retailers into competition in another dimension, which has been the biggest "localization" feature of China's retail industry in the past decade. Unfortunately, no foreign retailer has made an effective response. With so many foreign retail pioneers having failed, outsiders are curious whether ALDI and Costco, which are aggressively entering the Chinese market, can gain a foothold. Such doubts have existed since they joined Tmall. Wan Mingzhi, general manager of Zhongbai Group, publicly stated when ALDI's Tmall store launched: If ALDI copies its European market positioning and supply chain, and neglects marketing, it will be difficult for ALDI to gain a foothold in China. Additionally, some industry insiders have expressed concerns about ALDI's localization in product selection, supply chain, and services. Currently, ALDI's suppliers are mostly local, and its product selection fits Chinese consumer needs. This makes ALDI's positioning in the Chinese market seem different. ALDI, known as a discount store, has become a fresh food supermarket similar to Hema in China, or even a "halo" German imported supermarket, rather than a discount store. This goes against its popular characteristics abroad. In terms of price, the most critical product competitiveness, ALDI does not have a significant advantage. For example, during the new store opening period, ALDI offered limited-time discounts on some products. A box of 4 Zespri SunGold kiwifruit was priced at 33 yuan, averaging 8.25 yuan per fruit, which is more expensive than fruit chain stores. For imported products, ALDI also does not differentiate much. For instance, a popular Korean mask brand Mediheal's 10-pack mask was priced at 125 yuan at ALDI, or 12.5 yuan per sheet, while on Tmall's Juhuasuan, it was 7.6 yuan per sheet. Many people come to ALDI stores not to shop. AI Finance and Economics observed a woman having her child take a photo in front of an ALDI sign to post on social media. Some overseas returnees living in Shanghai check in at ALDI on social networks, reminiscing about their study abroad days. In Germany, ALDI's private-label system is very mature. Private label means skipping brands and intermediate agents; the supermarket directly sends designs to factories, which produce and transport goods to the supermarket's warehouses or stores. Therefore, compared to market prices, ALDI's private-label products are much cheaper. When US retail giant Walmart entered the German market, it encountered obstacles from ALDI. Reports say ALDI's prices are about 22% lower than Walmart's, preventing Walmart from expanding rapidly in Germany. In fact, in Walmart's home market, the US, ALDI also plans to expand by adding 100 stores annually. Low prices are ALDI and Costco's biggest bargaining chip for entering China. Outsiders had high hopes that these two foreign retailers would bring high-quality, low-priced goods to China, allowing Chinese consumers to enjoy the same consumption treatment as foreign consumers. However, judging from ALDI's stores, at least in terms of price and supply system, ALDI has not yet formed a complete private-label system. The market environment is that many Chinese companies have carved out a path through private labels, such as Taobao Xuanxuan, NetEase Yanxuan, Xiaomi Youpin, and Miniso, as well as fresh food supermarkets with direct sourcing from origins. All are competitors to ALDI. ALDI has also not done sufficient consumer education. When most Chinese consumers walk into ALDI expecting to buy imported goods, they find it is not the case; there are many localized products, and prices are not cheap. In today's consumption environment, can consumers continue to buy? Store count and location are another obstacle. ALDI's positioning in China is similar to community fresh food stores. In the low-margin discount retail industry, profitability requires scale. But the two ALDI stores in Shanghai are nearly 20 kilometers apart, and their reach is mainly limited to nearby residents, with limited brand awareness and service scope. Whether ALDI headquarters is willing to invest enough money in the Chinese market remains to be seen. ALDI and Costco share a common point: their store locations are not in prime locations but in residential areas, surrounded by many foreigners. From the location choice, both ALDI and Costco want to start with familiar customer groups and then expand their market share in China. But the picky and fast-developing Chinese market may not develop in the direction ALDI and Costco expect. The Chinese market differs from the European and American markets that ALDI and Costco are familiar with. Due to relatively low labor costs in China, Chinese consumers' channels for buying fresh and discounted goods are not limited to discount stores; a large proportion is online. European and American consumers have the habit of driving to the supermarket once a week, but in China, choices are abundant, and logistics can support fast delivery of fresh goods. On the other hand, with the maturity of Chinese retail enterprises, the entry of internet giants, and the decline of the hypermarket era, the way the Chinese retail market operates is very different from when Walmart entered over a decade ago. Especially in the past year or two, new fresh food supermarkets like Hema and Super Species have become common, and traditional supermarkets have undergone a baptism in this wave of new species, strengthening their competitiveness. For ALDI and Costco to gain a foothold in China without repeating the mistakes of their predecessors will not be an easy task.