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August 26, 2019

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Costco bets on bulk-buy strategy

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

China has proved a brutal battleground for overseas food retailers in recent years, with many failing to understand consumer habits and tastes as well as local competitors building a stronger presence.

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

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

“The Chinese market is very complicated and requires retailers to innovate and localize,” 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 will throw open its doors tomorrow, five years after making its first online foray into China through Alibaba’s cross-border e-commerce platform Tmall Global.

Richard Zhang, Costco’s senior vice president for Asia, said they had a “conservative” goal to sign up at least 100,000 new members for the new store, which is in a suburban district of Shanghai with a 2 million-strong population.

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

However, analysts warned that local competitors are stealing ground with popular homegrown retailers such as Alibaba’s bricks-and-mortar Hema stores integrating online and offline shopping.

“Local retailers are reaching out to customers via all distribution channels while foreign retailers are not so flexible to adapt to new situations,” said Yu.

“The old way of a large and all-inclusive hypermarket doesn’t work in China.”

Chih-yuan Wang, retail research director at Mintel China Reports, warned that many foreign retailers adapted too slowly and “still didn’t catch 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’s not a new concept in the country,” said Zhang.

“A mature market saves us efforts in educating customers.”


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