Will Costco Launch in Shanghai Change Brick-and-Mortar Retailing in China?

The world’s second largest retailer, Costco Wholesale Corp launched its first brick-and-mortar store on August 27 in Shanghai, China’s economic and financial center. It caused a huge traffic jam in the low-traffic suburban area nearby. The store was also once shut off temporarily due to the over popularity of the customers on its opening day. 

It has been a week since Costco’ opening day. For the past few days, though the local traffic jam issue was resolved to some extent, it was still very common to see long queues of people waiting outside, as the store sticks to a policy of only 2,000 customers inside at any given time. The success of the China launch was also seen in the stock market. Within a couple of days, Costco’s market value rise by about $7 billion.

Costco Wholesale Corp

In 1983, the first Costco store opened and it made a rapid progress in more than 30 years, with the revenue of more than 900 billion dollars a year. Wal-Mart has to take a detour where it exists.

Costco is probably the only company that dares to say, “I don’t want to make money.” Companies from all over the world are pursuing gross profit, but only Costco is thinking about how to earn less! If this year, Costco’s gross profit rate is 10%, can it be reduced to 9% next year? 8% for the year after next will be better! Costco’s gross margin is so low that you can’t imagine it – less than 10% on average. If it’s higher than 14%, it’s subject to CEO’s approval. What is the concept of 10%? For example, a box of chocolates costs 10 yuan, and it only sells for 11 yuan, no more than one point!

For this reason, Costco’s founders have repeatedly rejected suggestions from Wall Street Consulting to increase profit margins. He said, “I have been in the retail business for decades. Many supermarkets like Sears, which were once brilliant, eventually lost its popularity because they had not resisted the temptation of raising prices.

So Costco doesn’t make money by selling things. How does it survive?

Usually, whether we buy online or go to the physical merchants to shop, there is free return for seven days at most. But in Costco, any goods can be returned at any time, without any reason, as long as you are not satisfied!

It once became a heated topic on social networks regarding its unreasonable return of goods, such as people who successfully returned rotten peaches, withered potted plants, half-eaten biscuits, and clothes worn for several months. For Costco, returning goods is not a bad thing. On the contrary, it believes that returns can improve product quality and optimize its supply chain. Because suppliers with high return rates are bound to be under pressure, which would force them to pay more attention to quality and innovation.

Costco Wholesale Corp

In Costco, people tend to find that the store is huge but the products are few. But it does not mean quantity or categories; it means less varieties.

Generally speaking, supermarkets like Wal-Mart and Darunfa follow the “huge and complete” pattern. They have a variety of goods and consumers might not even know how to start. But in Costco, only 2-3 brands are selected for each category. For consumers, they can find what they need at a glance, which is the gospel for those who have difficulty making shopping decisions. In addition, a small variety means that every commodity has been strictly screened to ensure the best performance-price ratio. This means that in Costco, every item could be a hot product. As Lei Jun said, “When you enter Costco, you don’t have to think or look at the price. Just close your eyes and buy!”

So what are the benefits of super-low SKU?

First of all, it ensures the high quality of goods. Secondly, it reduces the decision-making cost for consumers and makes purchases very centralized. Finally, the huge sales of the selected SKU increased Costco’s bargaining power. We can see that price, quality and turnover speed form a healthy circle, which become Costco’s core competitiveness.

Costco Wholesale Corp

In our thinking, the Internet is the synonym of efficiency. Everything on the Internet is efficient. But here in Costco, it’s a different picture.

A very important indicator in retail industry is Days sales of inventory, or stock turn. Wal-Mart’s index of stock turn is about two months, Amazon is faster, 45 days or so, and JD, with high turnover categories such as 3C and household appliances as its core, is even faster – 35 days or so. But Costco did it for less than 30 days.

One of the most fundamental data reflecting retail strength is effectiveness per square meter, Wal-Mart is 0.47, Sam’s Club is a little higher, 0.7. Costco’s effectiveness is as high as $13,000 per square meter.

Costco’s sales have more than doubled in less than 10 years because of such high efficiency. Let’s hope that Costco could bring about a retail revolution for the industry and Chinese consumers.

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