Costco, a Fortune 500 retail enterprise, the supermarket where gross margins exceeding 14% require the chairman's signature, the supermarket that is a formidable rival to Walmart's Sam's Club in the U.S., the supermarket with unconditional returns, and the supermarket that doesn't aim to profit from product markups, is finally coming to China, landing in Shanghai! Costco China (Kai Shi Ke) officially confirmed: The first store in mainland China will be located at 235 Zhujian Road, Minhang District, Shanghai, and will open in summer 2019. The exact opening date has not yet been announced. According to retail industry insiders, the store's overall construction is nearly complete, supplier negotiations are already underway, and it may open as early as May this year. Image source: Shanghai Pudong Kangqiao Group WeChat public account In May 2018, Costco (China) Investment Co., Ltd. formally signed an investment agreement with Shanghai Pudong Kangqiao (Group) Co., Ltd. Costco will establish its China regional investment headquarters in Pudong Kangqiao and, together with partner Xinghe Holdings Group, build a membership club retail flagship store. COSTCO's first entry into mainland China aims to expand its business in China by first establishing a Costco warehouse-style retail store in Shanghai. COSTCO's partner, Xinghe Holdings Group, witnessed the signing ceremony. Image source: Shanghai Pudong Kangqiao Group WeChat public account 1 Who is Costco? Costco was born more than 20 years after Walmart. In 1983, when Walmart was already the world's largest retail enterprise, the first Costco store had just opened. In 2014, Costco became the third-largest retailer in the U.S., and in 2015, it became the world's second-largest retailer, making it a strong rival to Walmart. According to public data from the Fortune Global 500, in the list released on the evening of July 19, 2018, Costco ranked 36th globally with revenue of $129.025 billion, and net profit of $2.679 billion, ranking second in the retail industry. Only Walmart, Costco, and Kroger made it into the top 50. So what is the core competitiveness of such a powerful retail enterprise? As of the time of writing (April 24), Costco's market value was $108 billion, with a stock price as high as $245.58. 2 Unique Business Model With such a powerful retail enterprise, what is unique about its operations? After careful research, "Retail Circle" found that it cannot be described as "unique" but rather "quirky":

  1. It focuses on warehouse-style membership, charging membership fees that contribute about 67% of profits;
  2. Traditional supermarkets pursue "maximizing" gross margins. Costco, on the other hand, pursues "minimizing" and "rationalizing" gross margins. Any single product's pricing that exceeds a 14% gross margin requires CEO approval and then board approval;
  3. Their financial reports show only a 7% gross margin, which is unimaginable for many traditional retail enterprises. Traditional supermarkets' comprehensive fee rates (including "back-end margins" such as slotting fees and barcode fees from suppliers) typically range from 10% to 20%;
  4. Unconditional returns: as long as you have a membership card and meet the return conditions, returns are unconditional. This is one of the reasons many industry insiders and netizens are pessimistic about Costco's entry into China. Costco might not go bankrupt due to poor operations, but rather be "returned to bankruptcy" by Chinese "damas" (middle-aged women);
  5. Curated SKUs: it does not pride itself on a rich product assortment but rather on reasonable control of SKUs, maintaining an ultra-low SKU count in the industry. This low SKU count directly leads to higher inventory turnover and the most reasonable inventory levels. 80 Million Members, Contributing 67% of Profits Costco's memberships are divided into non-executive and executive memberships. In the U.S. and Canada, the annual fee for non-executive members is $55/year, and for executive members it is $110/year. Compared to non-executive members, executive members also enjoy a 2% rebate on annual sales and other benefits. For traditional supermarkets, profits are generally directly related to product purchase prices, selling prices, and sales volume. Costco, however, focuses on only one number: the number of members. Membership fees are the fixed annual intermediary service fee Costco charges each customer. Costco's annual membership fees almost equal its entire annual net profit. It has over 80 million members worldwide! And they pay annually! In the past quarter, Costco's revenue was $28.2 billion, with total company net profit of $968 million, of which membership fee income was $644 million, contributing 67%. Operating a Supermarket with the Goal of "Earning Less on Product Markups" All retail formats—whether shopping malls, supermarkets, convenience stores, or specialty stores—from international giants like Walmart, Carrefour, and Metro, to 7-Eleven across East Asia, to Hongqi Chain with stores all over Sichuan, are all pursuing continuous growth in gross margin. Only Costco is constantly thinking about how to earn a little less. This year's gross margin is 10%; can it be 9.5% next year, and further reduced to 9% the year after? As long as it can cover operating expenses and taxes, the lower the gross margin, the better. In all Costco stores globally, there is a mysterious number: 14. This means that the gross margin on any product after pricing must not exceed 14%. If the gross margin exceeds 14%, the chairman's signature is required. With a gross margin close to single digits, after deducting expenses and taxes, net profit is almost zero. Clearly, Costco "does not make money from selling things at all." Ultra-Low SKU, Not Priding Itself on Product Variety Costco's SKU (stock keeping unit) count is frighteningly low, at less than 4,000—around 3,700 SKUs. This means that for each small product category, there are only one or two choices at Costco. Costco selects products it believes have "blockbuster" potential to put on shelves. A direct positive effect of low SKUs is that Costco's inventory turnover period is only 29.5 days, lower than Walmart's 42 days and Target's 58 days. The compression of the inventory cycle brings improved capital turnover efficiency and a certain degree of reduction in operating costs. The "Haidilao" of Retail: A Test for Chinese Damas It is often said that Haidilao's service is addictive, but if you experience Costco's service, it will definitely overturn your worldview. We have seen countless cases of companies going bankrupt due to returns, such as Kolin, which sold LCD TVs in the U.S. market; the high return rate of one product was one of the reasons for its bankruptcy. Costco's return policy, however, is quite crazy. Costco stipulates that except for some electronic products such as computers, digital cameras, and projectors, which must be returned or exchanged within 90 days of purchase, other products have no return deadline. In other words, after purchase, customers can return or exchange items at any time without a reason, and they do not need to provide a receipt. Regarding Costco's unreasonable returns, there have been viral social media posts, such as people successfully returning rotten peaches, wilted potted plants, chocolate boxes with only one piece left, and clothes bought years ago. No matter what your reason, whether you have a receipt, or how much time has passed, as long as there is a purchase record on your Costco membership card, you can successfully return items. Some netizens joked that at Costco, you can enjoy free samples that fill you up, you can keep exchanging shoes so you don't have to buy new ones for years, and you can get free replacements for Michelin tires after driving 1,000 kilometers. As long as you have a Costco membership card, you can support yourself. Through this "excessive" service, you will find that, in the end, Costco's return rate is actually very low. 3 Video: COSTCO (COSTCO's marketing strategy of encouraging customer returns) 4 COSTCO's Prospects in China: Worries and Joys "Retail Circle" believes that as the world's second-largest retail enterprise, COSTCO, entering China more than 20 years later than international giants like Walmart, Carrefour, and Metro, will inevitably bring a new impact to China's retail industry. Is it a blessing or a curse? Is it the right time, place, and people?
  6. Shanghai, as one of the cities with the most complete retail formats and the strongest consumption power in China, has already seen years of operation by international giants such as Metro and Walmart's Sam's Club, accumulating a considerable consumer base. As a national model for cross-border imports and free trade, cross-border imported goods have become daily consumer products for consumers. For Costco's entry, it only needs to maintain good consumer relations and provide consumers with a better shopping experience and a richer product selection.
  7. In the year of new retail competition, from traditional premium supermarkets like China Resources Vanguard's OLE, blt, and Greenland's G-SUPER, to new retail premium supermarkets like Hema Fresh, JD 7-FRESH, Suning's Su Xiansheng, and Yonghui's Super Species, along with competitors like Metro and Sam's Club, Costco may face more competitive pressure. How to turn operational differentiation into consumer acceptance and satisfaction may be one of the challenges it faces.
  8. Will the consumer-favorite retail + dining + fresh food model appear at COSTCO? Source: Retail Circle (ID: retailmaster) Tips will be paid 400-2000 yuan once adopted. China FMCG + Internet Professional New Media Dedicated to FMCG manufacturers' transformation and upgrading and channel digital solutions