In Markets

Costco opens first store in China

Costco China

The U.S. retail giant Costco is diving into the thorny area of food retail in China with its first store opening, but analysts warn it faces a tough ride as it looks to succeed where a series of international retailers have failed.

SEE ALSO : China Duty Free Group launches store in Hong Kong

The move also comes at a challenging time as Beijing and Washington are engaged in a tense trade war that has seen them swap punitive tariffs on hundreds of billions of dollars worth of goods.

China has proved a brutal battleground for overseas food retailers in recent years, with many failing to understand consumer habits and tastes and facing strong competition from local companies.

In June, the French supermarket giant Carrefour agreed to sell 80 per cent of its China business to domestic giant Suning after repeated losses.

German wholesaler Metro is also in the process of selling its operations to a local bidder while British grocery giant Tesco pulled out of the Chinese market in 2014.

“The Chinese market is very complicated and requires retailers to innovate and localise,” said Jason Yu, general manager of Kantar Worldpanel China.

But Costco thinks it can avoid the malaise that has plagued others with its “no-frills approach” and bulk-buy strategy.

The retailer opens its doors on 27 Aug, five years after making its first online foray into China.

Richard Zhang, Costco’s senior vice-president for Asia, told AFP the firm had a “conservative” goal of signing up at least 100,000 members for the new store, which is in a suburban district of Shanghai with a two million-strong population.

And Zhang said it had taken time to make sure that consumers in China knew their brand and the market was mature enough.

Costco will be targeting China’s affluent growing middle class, who know the brand from travelling abroad.

However, analysts warned that local competitors are stealing ground with popular home-grown retailers such as Alibaba’s bricks-and-mortar Hema stores that integrate online and offline shopping. Alibaba is the owner of the South China Morning Post.

“Local retailers are reaching out to customers via all distribution channels while foreign retailers are not so flexible to adapt to new situations. The old way of a large and all-inclusive hypermarket does not work in China,” said Yu.

Chih-yuan Wang, retail research director at Mintel China Reports, warned that many foreign retailers adapted too slowly and “still had not caught up with China’s rapid e-commerce craze where customers go shopping on mobile phones.”

“The cost of [later] building a home delivery service is very high and may affect Costco’s basic strategy to provide the lowest available prices,” he said.

Costco’s big rival, membership-based warehouse Sam’s Club from Walmart, has over two decades of history in China and is still on the expansion trail with plans to reach 40 stores by the end of next year.

But Zhang said the fact that Chinese consumers are already familiar with a membership supermarket model could work to Costco’s advantage.

“Chinese consumers are ready to pay for a membership card that grants them an exclusive privilege to buy at a warehouse store, it is not a new concept in the country. A mature market saves us the effort of educating customers,” said Zhang.

While he is upbeat, Zhang says he has concerns over the impact of a bruising US-China trade war and tariffs, with about 50 per cent of their products coming from overseas.

“In order to keep our prices low, we have replaced some US importers of fresh produce with Australian importers,” Zhang said.

The trade war escalated as Donald Trump increased existing and planned tariffs on a total of US$550 billion in Chinese goods in response to new levies announced earlier that day by Beijing on US$75 billion of US imports.

By the end of the year the dispute will affect nearly all imports and exports between the two countries.

But ahead of Costco’s official opening local residents were forming long queues to sign up for membership cards.

SEE ALSO : Taiwan’s Test Rite Group to close stores in China

“I will definitely become among the first batch of Costco members,” said civil servant Julia Zhu, who says she used to ship in Costco goods from overseas markets.

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