Costco, as a world-renowned membership-based warehousing retailer, has long suppressed Sam’s Club in the North American market, and has achieved great success with its efficient operation model and ultimate low price strategy. However, when it entered the Chinese market, it faced the dilemma of acclimatization, with slow store expansion and sales and membership renewal rates much lower than Sam’s.
Crush Sam! How does Costco do it?
As the third largest retailer in the world after Walmart and Amazon, Costco dominates the world with “membership-based warehousing and retail” as its core model, and in the North American market and even the global competitive landscape, Costco has long suppressed Sam’s. Costco’s annual sales in a single store are twice that of Sam’s, and membership fee revenue accounts for 70% of total revenue.
In fiscal year 2024, Costco delivered a brilliant report card: revenue of $254.4 billion, net profit of $7.4 billion, and net profit increased by 17% year-on-year; ROE was 31%. The total asset turnover rate is 3.7 times/year. Among them, the most critical is the inventory turnover rate, which will reach 12.6 times per year in 2024 and continues to rise, which means that the operational efficiency of the market opener is still improving.
By the end of 2024, Costco has 890 stores worldwide. Among them, 29 new stores will be added in 2024, and the growth rate of new stores will remain at 3%; The total operating flat reached 130.9 million square feet, an increase of 4.6 million square feet over the previous year. The global average square footage in 2024 was US$1,907/square foot (excluding membership fees), an increase of 1.3% year-on-year.
Costco’s single-store floor efficiency, membership renewal rate (global average of over 90%), and supply chain efficiency are all unrivaled in the industry. By selecting about 4,000 SKUs (this number is only about 1/7 of that of ordinary supermarkets), Costco conducts large-scale purchases and takes the extremely low price to the extreme, with an average markup rate of only 11%, which is in sharp contrast to the 25%-50% markup rate of traditional retailers.
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Compared with Costco, by the end of 2024, Sam’s has also exceeded 800 stores worldwide. However, both performance, growth rate and overall floor efficiency are significantly lower than Costco’s, according to Sam’s Club’s financial report in 2024, its annual revenue was $90.24 billion, a year-on-year increase of 4.7%; operating profit was $2.4 billion, up 2.7% year-on-year. And China is the biggest driver of Sam’s global growth
The two core pillars of Costco’s business model – membership profits and low-priced product drainage – complement each other. Its private label, Kirkland Signature, has made a name for itself in the market due to its cost-effectiveness, with sales exceeding $40 billion in 2023, accounting for 30% of total sales.
In addition, Costco is also well versed in consumer psychology and has created an original “treasure hunt retail psychology” strategy, which stimulates consumers’ impulsive shopping desire by frequently changing product display positions, canceling aisle signs, and designing maze-like store layouts.
For example, the $4.99 signature roast chicken sells 137 million units a year, and consumers often involuntarily incur a large amount of extra spending on their way through the store.
Chinese market: Sam’s localization crushing and Costco’s “acclimatization”
In 1996, Sam’s Club took the lead in entering the Chinese market, starting a 28-year journey of localization. Up to now, Sam’s has 55 stores in China, with an estimated number of more than 9 million members, and sales will exceed the 100 billion yuan mark in 2024, and in recent years, it has opened new stores at an average rate of no less than 5 per year, which is a standout achievement in the highly competitive Chinese retail market.
Sam’s success is first of all due to its precise market positioning in China. It targets Chinese middle-class families, and in the early stage of entering the market, through a large number of marketing and consumer education activities, it gradually cultivates consumers’ awareness of paid membership, and successfully establishes the consumption mentality of paid members in the minds of consumers.
In 2021, Sam’s membership grew from 2 million to 4 million in just nine months, an impressive growth rate that fully demonstrates its strong market appeal and brand influence.
In terms of product strategy, Sam’s keenly captures the trend of miniaturization of Chinese families and actively adjusts product packaging specifications. The launch of small-portion packaged products such as 450g steak not only meets the consumer needs of small families, but also effectively avoids the problem of food waste caused by large packaging.
At the same time, Sam’s has invested heavily in the development of prefabricated dishes, fresh food and other categories. Taking roast chicken as an example, using Tyson chicken as raw material, with delicious taste and high cost performance, the repurchase rate of these products exceeds 50%, which greatly enhances consumers’ brand loyalty.
In terms of supply chain construction, Sam’s has established a complete regional procurement network. In-depth cooperation with Yunnan flower base, Shandong vegetable base, etc., through direct docking of production areas, not only ensures the freshness and quality of fresh products, but also greatly improves the commodity turnover rate, which is 30% faster than the industry average. This in-depth control of the supply chain effectively reduces procurement costs and enhances its market competitiveness.
In the creation of omnichannel experiences, Sam also spares no effort. Its online sales account for 40%, and the 1-hour delivery service covers 20 cities, allowing consumers to enjoy a convenient shopping experience without leaving home.
By embedding recipe recommendations and member-only activities in the app, Sam’s has successfully built a closed loop of “in-store + home” consumption, providing consumers with a full range of diverse shopping options.
Compared with Sam’s smooth sailing in the Chinese market, Costco’s development road is full of ups and downs. In 2019, Costco officially entered China, and when the first store opened in Shanghai, it triggered a rush to buy thousands of people, but this popularity did not last long, and the pace of subsequent expansion was significantly slow.
As of 2024, Costco has only 7 stores in China, including 2 in Shanghai (Minhang, Pudong), one each in Suzhou, Nanjing, Ningbo, Hangzhou, and Shenzhen, mainly covering the affluent Yangtze River Delta and the Greater Bay Area. In 2024, Costco’s sales in China are expected to reach more than 7 billion, with an average store of 1 billion, only half of the average of Sam’s Club stores of about 2 billion, and Costco’s Chinese membership renewal rate is as low as 60%, far from the global average of 90%.
At the commodity strategy level, Costco’s large-packaged products have encountered serious acclimatization in the Chinese market. With the increasing miniaturization of China’s household structure, with an average household population of only 2.62 people, large-packaged goods such as 1.8 liters of olive oil and whole boxes of frozen food that are popular in the North American market have become an “indigestible” burden in the eyes of Chinese consumers. Consumers generally reported that “buying once and eating for half a year” and “taking up a lot of refrigerator space”.
In addition, Costco relies too much on imported goods and lacks “influencer items” with local characteristics. Although the Nanjing store has tried to introduce local specialty products such as duck blood vermicelli soup, it has not yet formed a systematic and large-scale regional commodity matrix, which is difficult to meet the diverse taste needs of Chinese consumers.
In terms of operating model, Costco’s suburban location strategy is also difficult to work in the Chinese market. Most of its stores are located in the suburbs of Minhang, Shanghai, Xiaoshan, Hangzhou, etc., and mainly rely on self-driving customers. However, the shopping habits of consumers in China’s first- and second-tier cities tend to be high-frequency shopping in the community, and Costco’s location method makes it difficult to reach a large number of potential consumers.
On the other hand, Sam’s has actively tried the “city center store” model, such as the Waigaoqiao store in Shanghai, and built a large parking lot, which effectively alleviates the problem of traffic congestion and is more in line with the shopping habits of Chinese consumers.
When it comes to digital construction, Costco lags significantly behind Sam’s. There are only more than 400 types of online SKUs, and the delivery threshold is as high as 299 yuan and additional shipping fees are required, which is in stark contrast to Sam’s high-quality service of “delivery from 99 yuan and delivery in 1 hour”.
At the same time, Costco is very weak in private domain operations, lacking independent apps and effective community interaction mechanisms, making it difficult to establish close connections with consumers.
In terms of membership system, Costco also faces a huge value gap. Its value-added services such as gas stations and tourism services, which have been successful in the North American market, are difficult to implement due to Chinese policy restrictions. Sam’s continues to enhance member stickiness through special activities such as Moutai snap-up and parent-child experience.
In addition, Costco’s rigid card refund mechanism has also been criticized, and consumers need to go to the store to process and deduct the preferential amount, which is seriously out of touch with the consumer demand of Chinese consumers to pursue “online and convenient”, resulting in a high complaint rate.
Costco’s Breakthrough Road: A “Chinese-style Evolution”
From “global standards” to “regional adaptation”
If Costco wants to counterattack in the Chinese market, its first priority is to make a comprehensive adjustment to its product strategy. In terms of product layering, diversified packaging options should be launched in parallel with “family size + single packaging”.
For home users, some large packaged goods are reserved to meet their bulk purchase needs; For single people and small families, develop more small packages of daily consumer goods such as grains, oils, and condiments. At the same time, we actively cooperate with well-known local brands to dig deep into local specialties and develop products with regional characteristics, such as Wuxi sauce pork ribs, Hangzhou Longjing crisps, Sichuan hot pot bases, etc., to create a unique product matrix with Chinese characteristics to meet the taste preferences of consumers in different regions.
In terms of supply chain localization, Costco needs to increase investment. By investing in local farms, establishing long-term strategic partnerships with high-quality suppliers, and even conducting mergers and acquisitions, we can achieve localized supply of fresh products, shorten supply chain links, and reduce dependence on imported goods. For example, direct procurement bases can be established in the main fruit producing areas, and cold chain logistics centers can be laid out in major vegetable growing provinces to ensure that fresh goods can be delivered to consumers at the fastest speed and lowest cost.
Reconstruct the “warehousing + instant retail” dual engine
In order to make up for the disadvantage of insufficient coverage of suburban stores, Costco should actively lay out front-end warehouses, carry out in-depth cooperation with local life service platforms such as Meituan and JD Daojia, expand online sales channels, and achieve fast delivery. At the same time, it will increase investment in the field of digitalization and build an AI-driven intelligent product selection system.
By analyzing big data such as consumers’ purchase history and browsing history, it accurately predicts consumer demand and optimizes product selection and inventory management. Use social media platforms such as Douyin and Xiaohongshu to carry out content marketing activities and produce high-quality content such as food tutorials and good product recommendations to attract the attention of young consumer groups. Create special IPs such as “Costco Kitchen” to increase the frequency of interaction with consumers through live cooking, food sharing, etc., and enhance the affinity and attractiveness of the brand.
Membership value reshaping
Costco needs to completely reinvent its membership system. The hierarchical membership system adds high-end membership levels such as “Platinum Card” to provide members with exclusive benefits such as free delivery, priority purchase, and exclusive discounts. Carry out cross-border cooperation with Ctrip, Didi and other enterprises to establish a points exchange ecology and enrich the rights and interests system of members.
In terms of service experience, simplify the card refund process, support online full refunds, and improve consumer satisfaction. In addition, the introduction of high-end value-added services such as health management, education consulting, and art training elevates the value of members from simple price discounts to lifestyle services, enhancing members’ sense of belonging and loyalty, and making members feel that becoming a Costco member is not only about getting shopping discounts, but also a symbol of a high-quality lifestyle.
Localization is not a compromise, but a battle for survival
Costco’s dilemma in the Chinese market is essentially a fierce collision between global business standards and the needs of China’s local market. The “efficiency first” logic that has been successful in the North American market must give way to the concept of “experience first” in China, a land full of unique consumer culture. If the localization process cannot be accelerated, Costco is likely to repeat the mistake of Amazon losing China.
Sam’s successful experience profoundly shows that in the retail industry, commodity trading is only the foundation, and more importantly, it is to shape a lifestyle that meets the needs of local consumers. The final outcome of this competitive battle in China’s retail market will depend on who can more accurately grasp the consumption psychology and living needs of Chinese consumers, and who can truly enter the “stomach” and “heart” of consumers.
For Costco, localization is not a compromise on the original business model, but a critical battle for the survival of the company. Only by actively embracing change and accelerating “Chinese-style evolution” can we find our own development path in the vast world of the Chinese market and achieve a gorgeous turn from predicament to breakthrough.
