Costco Wholesale Corp. is set to open its first bricks-and-mortar warehouse in China this August.

A business based on membership strategy

After setting up an online store on Alibaba’s Tmall five years ago, the U.S wholesaling giant is to open its first physical warehouse in Shanghai’s Minhang district on the 27^thof August.

Costco’s model in North America has been based on families buying bargain products in bulk, transporting them in their cars and then storing them at home. Its business success is based on building a loyal shopper base through its paid membership program with low price items. Costco pledges refunds even after the goods are consumed. The firm’s membership strategy has been largely successful in most markets, with 88% renewal rate globally.  

Costco China will offer two types of memberships – one for families and the other for corporation, both with an annual price of US$43. Customers have been able to apply for memberships since April.

Our view

Costco will have strong competition from Walmart China’s Sam’s Club, also a membership-only retail club chain.

Sam’s Club has the advantage of entering the China market 20 years earlier and cumulated a wealth of knowledge and experience of the market. During that 20 years, Sam’s Club has gradually shifted its target to high end and upscale market and focuses more on quality premium products than low price. The retailer has been accelerating store expansion the last two years and plan to have 40 stores by end of 2020.

Expansion into China has many benefits for Costco, alleviating over reliance on North America being one of them. The question is whether Costco will change its strategy in China.

Costco currently runs a total of 770 warehouses worldwide, including 12 each in Taiwan and South Korea and 26 in Japan.

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Costco has announced that it will open its first store in New Zealand.

Auckland's Westgate chosen for first store

The new 14,000 sq m membership club store will be located at Westgate on the north western edge of Auckland. It will provide a new retail destination for the city, with 800 parking spaces and include groceries, electronics, homewares, plus fuel, a tyre centre, an optometrist and a hearing aid service. Construction of the store will start once all regulatory consents are obtained.

New Zealand and Australia business will be closely linked

Over the past 10 years, Coscto has steadily built its network in Australia, with 11 shops trading to date. Although not having had significant impact on the total market, Costco has given shoppers more choice and proven incredibly popular, with some of the stores proving to be the busiest Costco's in the world. The move into New Zealand is another significant step for the retailer and will bring a new dynamic to the competitive landscape. It is expected that the New Zealand branch will work closely with its Australian arm to aid efficiencies and share learnings.

Costco saw its third quarter net sales increase 7.4% to $34.0bn, with comparable club sales up 5.6%. We look at the drivers behind its continued strong performance and the outlook at it gets set to open its first club in China.

Ecommerce sales up 20.0%

The momentum in Costco’s sales performance was supported by its fast-growing ecommerce business, with comp sales up 19.5%. This excludes its grocery ecommerce delivery business via Instacart, with sales for this reflected in its core club operations. During the quarter it completed the roll-out of six regional grocery distribution centres for its two-day grocery shipping programme. This operation was initially run out of its Business Centres but has been relocated to dedicated space within its existing distribution centres. The retailer is also in the process of rolling-out pickup lockers, for smaller non-food items, to 100 additional clubs. Costco will expand its ecommerce model to Japan this summer and Australia later in the year.

Source: IGD Research

Aiming to mitigate impact of tariffs

Despite its solid performance in the quarter, the prospect of higher, additional tariffs on products sourced from China is creating some uncertainty. These could impact product pricing and margins. Where possible, it is bringing in products early, it is working with suppliers to reduce costs and is looking at alternative country sourcing. One of the key factors for Costco is the risk attached to the ongoing discussions and the potential for the product list to be expanded to include electronics and clothing.

Getting ready to open first club in China

The most notable event in the final quarter for Costco will be the opening of its first physical club in China. This is due to open in Shanghai in August. The retailer first entered the market in 2014 through a partnership with Alibaba, selling private brand products into the market. Two years ago, it built on this partnership by launching a flagship store on Alibaba’s Tmall shopping site. While Costco is likely to take a methodical approach to the Chinese market, expanding at a relatively slow pace, it holds significant long-term potential for the business.

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