The U.S. member warehouse chain Costco was forced to shut its first store in China early on its opening day on August 27, after large crowds flocked through the door and caused traffic jams in the Shanghai neighborhood.

Videos posted on Chinese social media showed thousands of people crowding the aisles of the store in Shanghai’s Minhang district, while signs outside warned incoming shoppers that they might have to wait for three hours to find a car park.

One nearby school sent out an advisory to parents warning them about the traffic conditions. “Please expect the student dismissal this afternoon to be severely delayed due to the grand opening of Costco Supermarket,” said the message.

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Costco announced last month that it would open its first store in China. It first entered the country in 2014 through opening an online store on Alibaba Groups’ Tmall online marketplace. Its busy first day came as other big-name Western retailers such as AmazonTesco and Carrefour, are retreating from China having struggled to win market share in the face of strong competition from domestic rivals.—-edited from Reuters

China is undoubtedly a top consumer market for any retailers. With the opportunities come with challenges after Costco’s open day. When the magic is gone, the tough battle begins.

A Tough Battle In A Big-big Arena

The US retailer took the chance diving into the thorny market of food and consumer goods in China, where many have gone before but failed miserably.

The frenzy at the opening of its first giant store in Shanghai has made international news. The huge crowds forced staff to close doors early out of safety concerns. 

China has become the world’s largest e-commerce market. Sales of consumer goods grew by 8.4 per cent to 19.5 trillion yuan (AU$4.04 trillion) in the first six months of this year, but online sales jumped by a whopping 17.8 per cent, accounting for nearly 25 per cent of the total.

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Bricks-and-mortar stores run by foreign operators have been in decline. Carrefour and Walmart continued to lose ground in the segment of fast-moving consumer goods in China.

The French retailing group’s 210 hypermarkets suffered a 0.3 percentage point contraction in market share to 2.8 per cent in the first quarter from a year earlier. Germany’s Metro is offloading a majority stake in its Chinese hypermarkets business altogether.

However, Costco’s strategy, based on its business model in North America, is different. It sells no-frills products in bulk to members only, who have to pay an annual fee. It offers a generous return policy, such as a 90-day refund for electronic products, and even longer periods for non-perishables.

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There is also a free cancellation of membership with a full refund. It remains to be seen whether Chinese customers can be educated not to abuse such a policy; otherwise Costco is in for a shock.

The company has low margins as it provides steep discounts, at least for now, on luxury items from Hermes handbags to Kweichow Moutai liquor. It has a modest goal of signing up 100,000 members for the new store.

But slow expansion also means lagging its main rival, Sam’s Club from Walmart, which is expected to run 40 stores by the end of next year and has a partnership with JD.com, JD Daojia and WeChat.

Local retailers are famously nimble, having combined both online and physical shops to lock in customers. Costco will face an uphill battle that’s only for the very brave.—Edited from South China Morning Post

When the Magic is Gone

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Seven days after its grand open in Shanghai, China, Costco has been hit by a wave of membership withdrawals as consumers were disappointed that the huge discounts on items ranging from Kweichow Moutai liquor to Hermes’ Birkin bags had ended.

Dozens of shoppers who had paid 299 yuan (US$41.73) to obtain a membership card were seen queuing up to cancel it and get a refund day by day.

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Costco said it had registered more than 100,000 members in Shanghai. The company could not be reached for comment on its membership status in Shanghai on Wednesday. The outlet in Minhang, about 30km from the city centre, is open to members only, who can withdraw their membership and get their registration fee back within 90 days.

A man surnamed Zhou, who was among the first-day shoppers, said that his goal was not to buy the items for himself, but to resell them on online e-commerce platforms for a profit. During the first opening day, South Korean luxury brand MCM’s leather backpack was sold at 4,399 yuan, about 1,100 yuan lower than on e-commerce platform Tmall.

Two security guards said the euphoria of the first few days had ebbed, but the store still attracted thousands of shoppers daily.

“I registered to gain access to the store and have a look,” said Li Yan, a 40-year-old shopper. “But based on the present retail prices, I don’t think it’s worth a more than one hour of bus and metro ride to buy items here.”

Low-price strategy is often used by mainland retailers to woo customers during the opening few days of operations. It often turns out to be a temporary phenomenon after the discounted items are sold out.

“Chinese people are enthusiastic when it comes to hunting for bargains,” said Zhou Qinggang, chief executive of Chongming Kaixin Farm, which produces and markets agricultural products. “It is not unusual that they rush to buy goods when a store debuts while never coming back afterwards.”

The latest data by market research firm Kantar Worldpanel showed that foreign retailers were losing market share in mainland China amid the rising penetration of e-commerce. As a classic case study, French retailer Carrefour announced plans to sell an 80 per cent stake in its China operations to mainland electronics retailer and e-commerce giant Suning. —edited from Daniel Ren, South China Morning Post

As we stated the comments of Costco China through President Karen Wang’s LinkedIn account: the American warehouse store chain does not fit in Chinese families (in major cities) , simply because Chinese families are smaller than the ones in the US and here in AU,Costco’s low profit + membership fee business model need urgent, localized modification not to prosper, but at least to survive in China. 

The sudden cool down of Costco Shanghai outlet again reveals the great difference between US/AU consumers and their Chinese counterparts. They are just very different. As Chinese families are smaller and shops daily, Costco need to come up with products/services bundles, incentives, etc that created based on proper market research and paid surveys.Without localize solutions, Costco’s open day glory will be just another historic event in China’s relentless retail history.

Edited by Joreal Qian