In Aug 2019, the first Costco Wholesale store was opened in China, which was located in Shanghai(a major city in China). The picture on was shoot on its opening day. The store was suspended later that day due to the overwhelming workload. Starting from the next day of that following week, Costco had to limit the number of shoppers who got in the store. To further discuss this topic, I break it into two parts: Should Costco enter the Chinese market? How should Costco enter the Chinese market?
As we can see on the picture, the size of the Chinese retail market is growing continually. Due to the economic development, the percentage of middle-class households in China increases from 4% in 2000 to 68% in 2012. And the rate is still growing. To match this surging demand, the supply of the market increases as well. People have more buying power and more diverse goods selections. They tend to spend money wisely on goods with better quality and more competitive prices, which creates a need for players like Costco.
Costco's competitive advantages are based on the foundation of its strategy:" to provide members with quality goods and services at the lowest possible prices." Costco is a cost-oriented company. Every action of the company is aiming to reduce the cost, including combine storage and retail together, and location picking strategy. The gross profit margin can be relatively low comparing to other retail firms. Costco's gross profit margin in 2020 was at 13.2% while Walmart was at 28.4%. That's why we can provide the lowest possible prices for our customers.Another advantage is Costco's strong supply chain. Compared to making profitable but unstable deals with other buyers, suppliers tend to work with Costco. Even though the profit margin seems low, Costco marks it up with buying large quantities and stable orders. Costco has a very strict selection of goods to ensure their quality. A wholesale store normally only holds around 3700 different kinds of units in the store, which boosts the efficiency of inventory management. In another word, save the operation expenses.
"It (the Shanghai store) is beyond good. ...Another store in China is roughly about a year and a half away. We'll continue to see what we want to do next , but overall the Shanghai location has exceeded our expectations," said Costco CFO Richard Galanti.
Costco has had other location in Asia where might be at 120,000 members after a year or two. But for the Shanghai location, this number was more than twice that. In some aspects, the result proved the potential momentum of China's retail market. Chinese people love Costco's product. It was no doubt that entering the Chinese market was the right decision. However, this sentence was said in Dec 2019. It has been more than a year now and there is still only one store location on Costco China's webpage. I'd say the expansion speed is a bit slow. Then the question comes to how to expanse in China.
In addition to open new locations, I suggest creating our own online retail channel. Since the online shopping trend is inevitably becoming the mainstream. And the pandemic even pushes this trend to move faster. In order to grab more market share, we should move things online. Even though Costco collaborates with Alibaba to build the online shopping channel, the price is not properly controlled. As a result, the same goods sell online are more expensive than those in the store. We lost one of the most important advantages against other competitors. Opening up center storage may seem unnecessary when we only have one wholesale store in China. However, Costco can use it as a shipping center to serve customers all over China. Instead of teaming up with online shopping platforms, we can team up with mailing companies to increase our capability of distribution.
Comments