---
title: "Warehouse Club Stores in the Second Half: Competing for Customers, Products, and Locations"
description: "Costco's success in China has inspired local players like Hema, Yonghui, and FUDI to enter the warehouse club market, intensifying competition. Over the past year, brands have employed various tactics to secure suppliers and members, leading to disputes. However, the revolution is not yet complete; local players face the common challenge of differentiating themselves and creating a Chinese-style Costco model. Costco, which has maintained steady growth for over 30 years, delivered strong results in 2022 despite the sluggish offline retail industry."
author: "全天候科技"
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published: "2022-10-02"
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# Warehouse Club Stores in the Second Half: Competing for Customers, Products, and Locations

> Costco's success in China has inspired local players like Hema, Yonghui, and FUDI to enter the warehouse club market, intensifying competition. Over the past year, brands have employed various tactics to secure suppliers and members, leading to disputes. However, the revolution is not yet complete; local players face the common challenge of differentiating themselves and creating a Chinese-style Costco model. Costco, which has maintained steady growth for over 30 years, delivered strong results in 2022 despite the sluggish offline retail industry.

In the warehouse club model, Costco has set a good example in the Chinese market, with local players such as Hema, Yonghui, and FUDI following suit, intensifying competition. Over the past year, major brands have employed various tactics to compete for suppliers and members, leading to disputes. However, "the revolution is not yet complete," and for local warehouse club players, how to break through the fierce competition and forge a Chinese-style "Costco" model has become a common challenge. Costco, which has maintained steady growth for over 30 years, still delivered a decent performance in 2022 despite the sluggish offline retail industry. On September 22, after the US stock market closed, Costco announced its fourth-quarter and full-year fiscal 2022 results. For the full fiscal year 2022, the company's total revenue was $226.954 billion, a year-over-year increase of 15.8%; net sales were $222.730 billion, up 16.0%; membership fees were $4.224 billion, up 9.0%; net profit was $5.844 billion, up 16.7%. The success of Costco's two stores in China has also inspired Chinese retail companies to enter the warehouse club sector, including traditional supermarket chains like Yonghui, Metro, and RT-Mart, as well as new retail forces like Hema. According to incomplete media statistics, from 2021 to March this year, more than 100 warehouse club stores were opened in China. At the same time, the rapid saturation of the industry has intensified competition among brands. **In the past year, major brands have used various tactics to compete for suppliers and members, leading to disputes. Industry insiders believe that competition will continue to intensify in the future.** But "the revolution is not yet complete," and for local warehouse club players, how to break through the fierce competition and forge a Chinese-style "Costco" model has become a common challenge.

**01**
#### **Costco: A Master of Numbers**
Over the past 30 years (1992-2022), Costco's revenue has grown 15-fold, maintaining a compound growth rate of about 9.5%. Membership fees have grown 14-fold, and net profit has grown 23-fold. Even with the offline retail downturn and the wave of store closures by retail giants like Walmart and Carrefour in recent years, Costco's growth has not been affected. In August 2019, Costco opened its first store in China in Shanghai, triggering a frenzy of shoppers, causing traffic jams, and forcing the store to suspend operations after just half a day. The next day, even with limited foot traffic, the enthusiasm remained high. The same scene occurred when Costco opened its second store in Suzhou. The frenzy at Costco's first Shanghai store (Image source: China News Service) Not only are store sales impressive, but on social media, products like 32.9 yuan bagels, 37.9 yuan roast chicken, 10.5 yuan hot dog sets, and 65.9 yuan 18-inch pizzas are also going viral. Consumers flock to the stores. A Hema executive revealed: "On weekends, a single Costco store can sell up to 10 million yuan during peak hours." And each new customer may mean 299 yuan in membership fees for Costco. Costco's success has also made the "warehouse club store" a hot new retail format in China, becoming a model for many retail giants to study and imitate. From Costco's profit model, the core lies in its membership system, and the key to its profitability is membership fees, not the net profit from selling goods. For example, in fiscal 2022, net profit was $5.844 billion. Membership fees are pure income, at $4.224 billion; while net sales of $222.730 billion only generated $1.62 billion in net profit. This reliance on membership fees as the main profit support also determines the company's underlying business logic: it needs to make consumers willing to pay for membership and willing to renew. **The key to retaining members is providing value to them. To this end, Costco has mastered the art of gross margin and expense ratio.** On one hand, Costco must ensure that product prices are low enough. Costco's gross margin has remained around 13% for years, with the gross margin for product sales even lower, at only 11%. The company also has a rule: if a product's gross margin exceeds 14%, it requires the chairman's approval. Other retailers' gross margins are typically around 20%-30%. This is directly reflected in product prices, making Costco more attractive. For example, a Magnum ice cream bar is priced at around 10 yuan in ordinary supermarkets, but Costco sells it for only 6.25 yuan. High quality at low prices. "Wide categories, narrow products" is Costco's core selection model. In its stores, SKU count is controlled at around 4,000, compared to about 20,000 in large supermarkets. Under each category, Costco offers only one or two products, limiting consumer choice but significantly increasing sales volume per product. To impress members with a limited selection, Costco's product selection ability is tested: it analyzes member preferences to select the best products, reducing choice difficulty. With over 40 years of experience in warehouse clubs and global supplier resources, Costco is adept at this. This low-price, narrow-product strategy increases sales volume per product, enhancing the company's bargaining power with upstream suppliers. Additionally, nearly one-third of Costco's products are private label. Extreme pricing also stimulates members' shopping desire, raising the average transaction value. According to a Perfect Price survey, Costco's average transaction value is $136, 1.68 times that of Sam's Club, 2.47 times Walmart, and 2.52 times Whole Foods. In fact, to attract members, Costco also offers many rebate activities, such as a 2% rebate on sales for members. As of the end of 2021, Costco had 112 million members worldwide, and the membership renewal rate has remained around 90% for years. **In Costco's business model, besides product selection and price control, two other capabilities are crucial: operational efficiency and cost control.** In terms of efficiency, Costco's sales per square foot leads the industry, at $17,985 per square meter in 2021, compared to $5,838 for Walmart and $4,310 for Target. Additionally, Costco has a shorter inventory cycle, reducing inventory pressure. It has remained stable at around 30-32 days for the past 20 years, compared to 42 days for Walmart and 58 days for Target. In cost control, Costco's expense ratio has remained below 10% for years. Because store locations are mostly in suburban areas of large cities, it saves on rent; and the decoration is simple, with the warehouse and front end integrated. One data point shows that the average cost to open a store is only $7.6 million and can be completed in 100 days. In stores, Costco does not have sales assistants, reducing labor costs. Moreover, almost all products are delivered on original pallets, reducing handling, management costs, and losses. Overall, its expense ratio is 8%-10% lower than the average of other retail giants. Although Costco's gross margin on product sales is only 11%, it can basically cover the expense ratio of around 10%. It is through this extreme control of selling prices and costs that Costco has continued to rise, leaving many retail giants in the dust.

**02**
#### **Saving Offline Retail?**
While Costco has been on a roll, the entire offline retail sector has been suffering from the impact of e-commerce. In the past five years, Walmart has closed more than 100 stores in China; Yonghui Superstores has closed nearly 400 stores in three years; Carrefour closed more than 20 stores last year... According to Yingshangwang data, in the first half of this year, the number of new stores opened by 16 major supermarket companies was the lowest in three years. Additionally, Wind data shows that among 35 A-share listed supermarket and department store companies, only 14 saw performance growth in the first half, and 11 had net losses. However, the warehouse club track has shown significant potential. According to iiMedia Research data, in 2021, the warehouse supermarket market grew faster, with a year-on-year growth rate of 12.3%, and it is expected to achieve double-digit growth in 2022. Warehouse club stores have also become a new format that many retail giants are rushing to enter. **According to incomplete statistics, from 2021 to now, more than 10 retail companies have entered the warehouse club market, with over 100 new stores opened in one year.** (Image source: Yilan Business) Sam's Club, under Walmart, is undoubtedly a leading player alongside Costco. In fact, Sam's Club has been in China for many years, but its expansion has been slow over the past 20 years. It was only in the last two years that it accelerated its store openings. Sam's Club, like Costco, targets middle-class families: those living in first- and second-tier cities, with cars to transport goods, and high consumption needs. Its product selection also caters to this group, such as popular tomahawk steaks and camping and paddleboard products, which have middle-class consumption characteristics. Sam's Club believes there are 70 million such people in China, with huge potential. A retail industry insider revealed that Sam's Club's average annual sales per store are conservatively estimated at over 500 million yuan, more than five times that of a hypermarket. A supply chain insider for membership stores said: "Sam's Club's headquarters store in Shenzhen has annual sales of nearly 3 billion yuan, averaging at least 10 million yuan per day." According to Walmart official data, as of the end of November 2021, Sam's Club had over 4 million members, with membership fee income reaching 1.04 billion yuan and a renewal rate of over 80%. In contrast, among local players, Hema, Yonghui, and FUDI have each taken three different paths. On October 1, 2020, Hema's first X Membership Store opened in Shanghai. Just two months after opening, Hema announced that the store had become profitable. In June last year, X Membership Stores opened second and third stores in Beijing and Shanghai simultaneously. Hema CEO Hou Yi once said that by the end of 2021, Hema would open 10 new X Membership Stores. In terms of product selection, Hema told All-Weather Tech: "X Membership Store and Hema Fresh use the same underlying supply chain, and the product selection team will adapt different products for different formats." Hema X Membership Store needs to provide value to members and enhance their identification with the retail brand, so product selection must reflect cost-effectiveness. To this end, Hema is also strengthening its global supply chain. For example, for beef, Costco relies on high-quality suppliers from Australia and the United States, ensuring quality at low prices. When Hema X Membership Store first started, due to an incomplete supply chain, its beef prices were twice as high. Later, Hema X Membership Store imported whole cattle and processed them domestically, cooperating with suppliers from Russia and Canada, making its prices and quality competitive with Costco and Sam's Club. As a local player, Hema X Membership Store has also made many localization improvements, such as Chinese food products, partnering with many time-honored brands to launch products suitable for Chinese consumers, with old duck soup being a representative example. Additionally, Hema X Membership Store is increasing the proportion of private label sales, having announced a plan in 2020 to reach 50% of sales from private label products within five years. As of now, Hema's private label brand "Hema MAX" accounts for nearly 30%. In terms of revenue, a Hema executive revealed: "Under normal circumstances, Hema X Membership Store's average daily turnover is about 1.2 to 1.5 million yuan, and during promotions, weekends, or holidays, single-store sales can reach 3 to 4 million yuan." Yonghui began experimenting with warehouse stores in May 2021 and quickly expanded, opening 53 stores by the end of 2021. Judging from the first half of this year, Yonghui's warehouse stores performed well. At a recent performance briefing, Yonghui Superstores Chairman Zhang Xuansong said: "Yonghui Superstores warehouse membership stores saw sales growth of over 20% in the first half, significantly stronger than the company's overall growth." Unlike X Membership Store, Costco, and Sam's Club, which require membership for entry, Yonghui is experimenting with warehouse stores without membership fees. This makes Yonghui's warehouse stores fundamentally different from membership stores; the former still targets the general consumer, and its core operation is not much different from a hypermarket, relying on the price difference from quick sales. The basis for its rapid expansion is the widely distributed Yonghui Superstores, upgrading existing stores to warehouse stores, saving the cost of opening new stores, which allows Yonghui's warehouse stores to spread quickly. In this form, Yonghui's warehouse stores are not located in suburbs like Costco but mostly in urban areas, and the store areas are not large. Among the many warehouse club players, FUDI, rooted in the Beijing market, can be considered an outlier. It does not have the backing of a powerful retail giant like X Membership Store, Yonghui Warehouse Store, or Sam's Club. Its founding team is "Beijing Yaodi Agriculture," which operates over a dozen "Caixian Guomei" community fresh supermarkets in Beijing. On this basis, FUDI's product selection has a clear "fresh" label, with an average of 4,000 SKUs per store, including over 500 SKUs for vegetables and fruits alone, earning it the nickname "fresh" membership store. According to media reports, by the end of 2022, FUDI plans to open 2-3 new stores in Beijing, bringing the total to 5. By the end of 2023, FUDI expects to open 8-15 membership stores in Beijing.

**03**
#### **Local-Style Explosion and Iteration**
In China, warehouse club stores are a new format, but in just two years, competition in the track has entered a white-hot stage. However, behind the rapid expansion, local players still lack experience in setting up warehouse club stores. **Studying successful warehouse club cases, it is not difficult to find that the four capabilities of product selection, price control, operational efficiency, and cost control are "standard equipment." These four capabilities form a complete closed loop, and none can be missing.** **But at the current stage, domestic players more or less have "lame" problems.** Regarding supply chain issues, Hema said: "Compared with many peers, Hema has obvious advantages in fresh categories and localized supply chains. But there are also shortcomings, such as in some standard products like home appliances and clothing." Next, Hema X Membership Store said it will continue to strengthen global procurement capabilities, continuously expand categories, and provide members with better cost-effectiveness. As for how to operate warehouse club stores, some retail companies have also stepped into misunderstandings. Previously, Yonghui Superstores' Shijiazhuang Huaituo Plaza store announced closure and clearance, with clearance promotions from July 29 to August 7, according to in-store signage. It is reported that this store was one of Yonghui's experimental stores upgraded to a warehouse supermarket in July last year. The reason for its closure, according to media reports, was that the store compromised on product selection to make up for the profit gap caused by lower gross margins. On one hand, many "unknown brands" without a consumer base appeared in the product selection; on the other hand, the streamlined SKUs failed to hit consumer preferences, leading to customer loss. Unlike traditional warehouse club stores' careful calculation of expense ratios, FUDI has heavier costs. Its first store is an independent building located on the East Third Ring Road in Beijing, with construction and decoration costs exceeding 100 million yuan, and its second store in Zhongliang Xiangyun Town invested 80 million yuan. Li Xue, vice president of Beijing Yaodi Agriculture, once said: "I always believe that FUDI is a brand-new commercial form, integrating warehouse stores and boutique supermarkets." This means that FUDI's operating costs, including rent and decoration, are not low. Moreover, in terms of products, FUDI does not compress costs by reducing SKUs or simplifying packaging; instead, it pre-packages all products. When FUDI claims a comprehensive gross margin of less than 10% and currently has 100,000 members, how this entrepreneurial warehouse club store will maintain profitability is unknown to the outside world. As players transform warehouse club stores, the industry is also seeing new trends. For example, moving toward "city centers." Chen Zhiyu, deputy CEO of Metro China, told the media that around 2000, China's hypermarkets expanded rapidly, with many opening in city centers with leases of 15-20 years. In recent years, as leases expire and rents rise, this has become unbearable for hypermarkets and supermarkets with declining sales, leading many to close. The closed properties still need to attract new tenants. From a cost perspective, although rents in city centers are higher than in suburbs, the cost of building a new membership store versus renovating an old site is completely different. In the short term, upgrading on the original site puts less pressure on cash flow. Therefore, Chen Zhiyu believes that in the future, membership stores will compete more for city center locations. For example, Metro currently has 22 membership stores nationwide, most of which were upgraded from existing hypermarkets, with many located in city centers. In fact, Sam's Club's new stores in China are also moving closer to city centers. Zhu Xiaojing, CEO of Walmart China, once said that Sam's Club is trying to build new stores in the central areas of first- and second-tier cities, or convert some eligible Walmart hypermarkets into Sam's Club city center stores. In August this year, China's first urban Sam's Club store opened in Baoshan District, Shanghai. Compared to traditional warehouse club stores, membership stores in city centers are smaller, but property and rent costs are higher, which also places higher demands on product display and operational capabilities. Moreover, the number of urban business districts is limited, and competition among brands is intensifying. An analyst calculated for All-Weather Tech: based on city capacity, for a city like Beijing with a population of over 20 million, when classifying typical target groups by middle-class income, married groups, and family consumption, the actual number of people is not that impressive. For a supermarket like Costco, 200,000-300,000 members can only support one store. Chinese cities can probably accommodate about 60-80 stores. This may mean that in a city like Beijing, opening about 5 warehouse club stores is already saturated. This has also led to rapid white-hot competition in the industry. In October last year, Carrefour and Hema accused Sam's Club of forcing suppliers to choose one or the other. Although Sam's Club denied this, the incident itself is a manifestation of intensified competition. Moreover, competition for members among membership stores is also intensifying. After all, "membership" is exclusive; a consumer who has already spent 299 yuan to become a Costco member is less likely to spend another 260 yuan on a Sam's Club card or 258 yuan on a Hema X Membership Store card. In January this year, a Hema X Membership Store in Suzhou put up a sign saying, "Friends holding Sam's Club or Costco membership cards are also welcome to experience our store." (Image from Xiaohongshu blogger "Qi Miao") It even launched a "buy expensive, get compensated" activity: if the same product is cheaper at Sam's Club or Costco, X Membership Store will refund the difference within 7 days. (Image from Xiaohongshu blogger "Qi Miao") The Qianzhan Industry Research Institute believes: "The battle for territory among brands will become more intense as entrants rush in. Who can break through first and run a Chinese-style warehouse club model? The market will wait and see." Source: All-Weather Tech (ID: iawtmt) Author: Hu Miao


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