On June 14, the China Chain Store & Franchise Association released the 2022 China Chain Top 100 list. After the list was published, the most attention and discussion in the industry was Costco, which appeared on the list for the first time. The list showed that in 2022, Costco had 2 stores in China, ranking 98th, with total revenue of 3 billion yuan, average sales per store of 1.5 billion yuan, and daily sales per store exceeding 4 million yuan.
Costco was founded in 1983 in Seattle, Washington, USA, and is the world's second-largest retailer after Walmart. Currently, it has 849 stores and over 300,000 employees, spread across 9 countries and regions. On May 23, 2022, Costco ranked 11th in the Fortune 500.
For mainland China, Costco has not been there for long; it only opened its first store in Minhang District, Shanghai in 2019. As of now, there are a total of 4 stores officially operating in mainland China. However, although Costco has few stores in mainland China, each new store opening has triggered a phenomenal consumption boom.
Like previous store openings, the Ningbo store, which opened on June 20, had already attracted over 60,000 members before its official opening, with membership fees of about 12 million yuan (at a discounted price of 199 yuan). Moreover, the Ningbo store implemented a reservation system for the first 5 days, limiting daily visitors to 20,000.
Currently, Costco's membership renewal rate in mainland China is 60%, lower than its global average of 90%, but this does not seem to affect its confidence in the Chinese market. It is understood that Costco plans to open 4 new stores in mainland China this year and will build an 8-story China headquarters in 2025.
It is clear that accelerating expansion in the Chinese market will be one of Costco's key decisions in the future. So, what has caused Costco, which has been in mainland China for less than four years, to develop so rapidly, and what does this mean for the entire industry?
Has the Spring of Warehouse Membership Stores Arrived?
Warehouse membership stores are not new in China. As early as the 1990s, with the entry of foreign warehouse membership stores like Metro and Sam's Club, this format had already "caught fire" once in China, but later, due to intense market competition and poor layout strategies by many brands, the format gradually entered a "dormant period."
Then, in 2019, with Costco opening its first store in mainland China and creating a phenomenal "explosion," the warehouse membership store format stirred waves again and returned to the spotlight. According to incomplete statistics, at least 11 companies have entered the warehouse membership store sector nationwide, with over 150 stores. This shows that after about 10 years of dormancy, warehouse membership stores have ushered in their second wave of "boom" in China.
The first wave of warehouse membership stores in China rose in the 1990s and gradually faded around the first decade of this century.
In 1995, Metro cooperated with Shanghai Jinjiang Group to formally enter China, becoming the first joint venture approved by the Chinese government to establish chain supermarkets in China. Later, in 1996, Sam's Club opened its first store in Shenzhen. In the same year, Makro, which entered China, set a record of 4 million yuan in daily sales during its pre-opening in Guangzhou.
Also in 1996, a Chinese man named Liu Wuyi obtained the right to use the trademark "PriceSmart" of an American company through franchising; in September of that year, he successfully registered PriceSmart Membership Shopping Group in Beijing. Four months later, PriceSmart opened its first membership supermarket at Xueqing Road, Haidian District, Beijing, namely PriceSmart Store No. 1.
Subsequently, relying on its mid-to-high-end positioning and good reputation, "Puma" quickly established a foothold in Beijing. At this time, foreign warehouse membership supermarkets that had tasted success in the Chinese market also increased their layout in this format. In 1997, Makro opened its first Beijing store in Yangqiao, and later opened a total of 6 stores in Beijing and 2 stores in Tianjin.
Of course, Metro, Sam's Club, and local Puma were not to be outdone, all joining the army vying for "developed" markets, but it was clear that the Chinese market at that time could not accommodate so many "competitors."
Subsequently, entering the new century, the warehouse membership store format did not enter the explosive period they expected in China, but instead faced declining performance and continuous store closures, very similar to the development difficulties of traditional supermarkets in recent years.
First, local Puma closed a large number of stores in 2004, and then in 2005, it went bankrupt directly due to a broken capital chain. Secondly, after 10 years in the Chinese market, Makro, which only retained 6 stores in the Beijing-Tianjin area, was eventually acquired by South Korea's Lotte due to poor management. Meanwhile, Metro and Sam's Club, which survived, entered a lukewarm state.
Since then, warehouse membership stores entered an "ice age" in the Chinese market, which was not broken until 2019 when Costco expanded into mainland China.
Of course, the reason Costco can become popular in China is not only due to its own unique advantages but also related to China's economic development in recent years. According to national statistics, China's per capita GDP crossed the $10,000 threshold in 2019. Clearly, this laid a strong economic foundation for the second rise of warehouse membership stores.
Since Costco stirred the "spring water" of China's warehouse membership store track in 2019, local players such as Hema, Fudi, Beijing Hualian, Yonghui, and Carrefour China have all entered this track. At the end of April this year, RT-Mart opened its first "M Members Store" in Yangzhou. This shows that with the continued downturn of traditional supermarkets, many retail companies are treating warehouse membership stores as their "second growth curve."
In addition, according to iiMedia Consulting data, the warehouse membership supermarket industry grew 12.3% year-on-year in 2021, with a market size of 30.43 billion yuan; in 2022, the market size reached about 33.5 billion yuan, and it is expected to approach 40 billion yuan by 2025. It is clear that with the continuous expansion of the market scale, the "second spring" of warehouse membership stores in China is already on its way.
What is the Core Competitiveness?
In the retail industry, whether it is a format or a company, it must have its own core competitiveness to remain invincible in fierce market competition. So, what is the core competitiveness of warehouse membership stores as a format?
The author believes that from the perspective of the entire format, it is mainly "differentiation"; from the perspective of a company, it is the differentiation of "experience" and "products" reflected behind "differentiation."
Warehouse membership stores, as a format different from traditional hypermarkets, should not only differ in whether there is a membership fee. If the difference is only whether there is a membership fee, or after paying the membership fee, consumers feel that apart from being able to "fleece" some wool, there is not much difference from traditional supermarkets, then the final result can only be a flash in the pan. This may also be the reason why some membership stores like Carrefour China disappeared from the public eye shortly after opening.
Therefore, for the entire warehouse membership store format, to attract more consumers, it must present features different from traditional hypermarkets, not just change the signboard and charge membership fees.
For specific companies, to win in fierce market competition, they should focus on consumers' "sense of experience" and the store's "product strength."
Taking Costco as an example, in terms of product SKUs, Costco does not follow the "more is better" approach like Walmart, but adopts a "strict selection" model: high quality, low SKU. For example, Costco has only 4 types of toothpaste, while other domestic membership stores have at least 20 to 60 types, which actually brings a burden of choice to consumers.
Clearly, behind Costco's "strict selection" is a service from the consumer's perspective, which also invisibly enhances consumers' shopping experience at Costco.
In addition, Costco also offers some welfare experiences beyond shopping, including car tire repair, car refueling, water delivery, physical examinations, vision checks, and hearing tests. Moreover, compared with the 7-day return period of most supermarkets or specialty stores, Costco accepts returns without asking for reasons and without time limits; as long as you are not satisfied, you can return or exchange at any time, even for eaten food, worn clothes, or used appliances. As far as the current situation is concerned, in China, apart from Pangdonglai, no other store can match this "sense of experience."
In terms of "product strength," Costco stores in each region or country display products in a certain proportion, not all being a "collection of American goods." Generally, local products account for about 65%, and imported products about 35%.
Moreover, Costco has an unwritten rule: once the gross profit margin of a product exceeds 14%, it must be approved by the CEO and the board of directors. If we look at the financial reports, Costco's product gross profit margin is basically around 10%.
In fact, Costco positions itself as a "trustee" for users, that is, to carefully select cost-effective products for consumers. It does not earn the price difference by selling goods but earns membership service fees. Therefore, compared with other companies, Costco's biggest advantage in product strength is "high quality and low price."
In addition, Costco's private brand Kirkland Signature is also a major weapon. The author learned that Kirkland is very popular among consumers, and its annual sales can account for 20% of Costco's total; currently, this brand accounts for about 10% of products in China.
It can be said that for domestic local warehouse membership stores that want to become bigger and stronger and form their own brand influence, Costco is worth learning from in many aspects. Of course, learning is to become a better self, not to become someone else, so in learning, one must not lose one's own identity.
Each Leading Its Own Way, or One Leading Alone?
Currently, domestic warehouse membership stores are mainly divided into three types: the first is foreign-funded membership stores with rich experience, represented by Sam's Club and Costco; the second is membership stores transformed from traditional supermarket models, such as Yonghui and Jiajiayue; the third is internet new retail membership stores, such as Hema.
At present, these three types of membership stores each have their own strengths and advantages.
Foreign-funded membership stores, represented by Sam's Club and Costco, have more strength and experience in supply chain and membership operations due to years of deep cultivation in the industry.
On the supply chain side, taking private brands as an example, to create high-quality products, Sam's Club deeply participates in every link from product selection to development and production, meeting different user needs through differentiated products. At the same time, the scale of 4 million paid members allows Sam's Club to get more real demand feedback and improve in the supply chain.
Costco focuses on "low gross profit." Due to its strict SKU selection, Costco has greater bargaining power with suppliers, keeping product gross profit margins within 14%. The low gross profit and pursuit of quality have led to a growing membership base, with its profit mainly coming from membership fees and fees such as barcode fees and entry fees from supermarket procurement.
Membership stores transformed from traditional supermarkets, represented by Yonghui, although not as good as Sam's Club and Costco in supply chain and digitalization, have unique advantages in reputation and brand influence accumulated among consumers over years of development.
Unlike most membership stores on the market, Yonghui's warehouse membership stores do not charge membership fees. At the opening, they proposed "even one item is at wholesale price," focusing on cost-effectiveness to attract livelihood consumers back to hypermarkets, with an average gross profit margin of only 10%. However, it is worth mentioning that apart from lower prices, Yonghui's membership stores are not much different from its supermarkets.
Internet new retail membership stores, represented by Hema X Membership Store, have developed relatively faster because they are born from internet companies and do not have the inherent burdens of traditional supermarkets.
As of 2022, Hema has built 5 hub centers, 8 supply chain operation centers, and over 500 direct sourcing bases nationwide. In addition, in terms of private brand construction, Hema is also at the forefront compared with other local brands, with private brands accounting for 40%.
Based on the above, the author believes that in the future, foreign-funded membership stores will have relatively more advantages in domestic development due to their strong supply chain advantages and rich membership operation experience, but as local enterprises accumulate experience and optimize models in this format, they will also occupy a certain market share.
Therefore, in the future Chinese market, for the warehouse membership store format, the trend of local and foreign enterprises "each leading its own way" is more likely.