Will Costco Fail and Leave China in 36 Months?

Updated: Sep 18, 2019


If you haven’t already heard of or seen the first Costco store-open frenzy in Shanghai three weeks ago, here’s a quick update: COSTCO OPENS FIRST STORE IN CHINA, FRENZIED CROWDS FORCE IT TO CLOSE EARLY.

People visit the first Costco outlet in China, on the stores opening day in Shanghai on August 27, 2019. HECTOR RETAMAL/AFP/GETTY IMAGES

The news caught many by surprise and has been all over professional and social media worldwide. Great publicity and nice problem to have for Costco?


There are plenty of articles discussing what has made the Costco brand successful in the US and Canada, but will it work in China longer term?


Among most applauding tone, some retail expert in China stands out by predicting Costco’s demise in 36 months dubbed “Costco’s Life & Death in China Trilogy”. Here’s the breakdown:


Year 1: Costco is full of confidence in China with quick store expansion.

Year 2: “Shoot, why do I keep losing money? “

Year 3: To avoid further loss that drags its share price down, the Costco board decides to evacuate China.


The following 3 challenges are the reasons behind above prediction.


Challenge #1: Corporate Arrogance

What does it mean? Look at the makeup of the core senior leadership team of Costco China, the C Suite, where are the locals? Does local management team have the authority to make paramount decisions or they have to wait for the US HQ?


Speaking of successes, in its native US, Costco still has a much stronger competitor - Walmart, while Amazon is almost invincible. But look at what happened to Amazon in China? It was defeated even by Pinduoduo (The incredible rise of Pinduoduo, China’s newest force in e-commerce), let alone prominent Chinese eCommerce giants like Alibaba and JD.com. Amazon has been in the Chinese marketplace for many years, it’s not an overstatement to say Amazon is one of the pioneers of Chinese eCommerce, but why can’t they pull off their act? The main reason: “we have been so successful in the US, therefore we copy what we’ve done to China.” This approach leads to “death do us apart”.


How Chinese start-ups work these days is a wake-up call: an idea in the morning, start to execute in the afternoon. In week 2, they already completed first-round evaluation and are in iteration mode. Those big corporations with their HQs in the US, on the other hand, are too slow to move.


Challenge #2: Ecological Niche

An ecological niche is the role and position a species has in its environment; how it meets its needs for food and shelter, how it survives, and how it reproduces. For example, Australian Koalas can only survive in Australia. The time and space it takes for Costco to be successful in the US can hardly be replicated in China.


Costco’s historical success factors are nothing new and have been studied by Chinese competitors thoroughly, upside down, inside out. Only 40% of Costco's US revenue comes from packaged food, beverages and cleaning products; 18% of the revenue comes from gas stations, store restaurants and medical services etc. growth areas. Gas stations alone, will PetroChina or Sinopec be in alliance?


Out of Costco’s 700+ stores worldwide, over 500 are in the US, therefore they can play the “economy by scale” card very well. To achieve greater profits, Costco has its own chicken farms in the US and over 25% of the brands sold in stores are self-owned. Take Costco's other geographical regions for example: only 25 stores in Japan and 13 stores in Korea, self-produced goods are out of the question.


One of the biggest drivers for Costco’s first day overcrowding in Shanghai is due to hugely discounted Maotai (the most popular liquor in China) and the sale of Birkin bags. This one-time stint has nothing to do with “strong supply chain”. Unless Costco has over 500 stores in China and accounts for 10% of Maotai sales, they have no place to negotiate with Maotai on price. Birkin bags? Hermes is not thrilled about a middle man selling to Costco.


Moutai liquor is sold out at Costco’s store in Shanghai. Photo source: South China Morning Post

So, will Costco have opportunities to open 500 stores in China? Chances are slim. Carrefour, the well-known French hypermarket brand, during its peak performance, had over 300 stores in China, Walmart had over 400, and then they both started slipping. Costco has never won Walmart in the US, and just entered the Chinese market 20 years after Walmart first did, there’s no sign of it beating Walmart. In recent years, the Chinese retail industry has been through huge transformation. Chinese retailers are burning billions of dollars “tested and learned” about almost every possibility and each potential “ecological niche” through various location “radius strategies”, from 3 km, 1 km, 300 metres to 30 metres.


The US is a very low-density country, except several big cities. Delivery services the Chinese consumers are now used to, such as 30-minute fresh food delivery, have no distribution efficiency in the US and make no business sense. Driving to Costco or Walmart to shop once every week is an economical choice for a lot of American families. However, in China, even the 2nd or 3rd tier cities are high-density which pose more complexities for businesses. Even if Costco’s old "suburban hypermarkets" style survives in China, it will only be a small supplement to the market, not a big glorious win.


Challenge #3: “Classical Retail” vs. “New Retail”

Costco has remained a “classical retail” and all its Kong-Fu is offline. The “new retail” in China, however, has a lot more lethal weapons: data mining, AI, machine learning, mobile payments, AR, VR, offline and online integration, etc. A recent McKinsey paper shows that China is among the most digitally advanced nations in the world and has joined these ranks with startling speed.


In closing, we cannot use old thinking to solve for a new future. China is a magical place with great new opportunities. Time will tell whether Costco will survive or thrive there. It will be very interesting to see what kind of innovative solutions Costco comes up to counter the challenges and how the brand evolves in China. Wearing my design thinker’s (human-centered approach to problem solving) hat, I am dying to find out, first, deep down (in "thick description"), why people lined up at the Costco store in Shanghai, who they are and what they are looking for.

About Jennifer He

You can find me here on LinkedIn.


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