When Costco was about to make their entry into China, they were facing a major competitor in the big box retail market, Metro Cash & Carry. Metro Cash & Carry was from Germany and had been established in China for nearly two decades with locations in more than 30 Chinese cities. The annual sales exceeded $1 Billion with four regional centers in charge of merchandising, product development, logistics and customer support in each region they were based in. Suffice it to say, they weren’t going to be dislodged from their top spot anytime soon.
With such an established competitive advantage, can you imagine Costco moving into this space and competing head-on? They might as well have thrown their money away. The fact of the matter was that there was really no big box retail market share left for Costco go grab in China. In addition to Metro Cash & Carry, a number of other retailers had also already expanded into the market and built up strong footholds over the past two decades.
Looking for Untapped Markets
Costco realized it was facing strong competition in brick & mortar retail in China, so they looked for untapped areas of the market, something the other companies had missed. Through their market research, they became aware that China’s online retail market was evolving quickly and had grown from $20 Billion in 2008 to $500 billion in 2015. Costco saw the opportunity and seized it without delay. But they knew they couldn’t just go in alone and expect to win, so they looked around for a local partner with established brand and infrastructure to support their China market entry. They found Alibaba.
Forming Strategic Local Partnerships
Within a few months after forming a strategic partnership with Alibaba, Costco had launched their official virtual store on Tmall Global. Just a few days after going live on Tmall, over three tons of nuts and one ton of dried cranberries were sold. According to Costco’s own reports, they also sold $3.5 million worth of merchandise on Singles Day, which is China’s equivalent of Cyber Monday. Definitely some major successes right off the bat and Costco is still going strong in China to this day.
Lessons to Take to Heart
Costco looked at the market and analyzed their competition. Then they looked for spaces with untapped potential, areas that had been ignored by their competitors. They also made the right partnerships, always a key to success in China. By partnering with Alibaba, they were able to tap into a huge market of existing customers and use the online infrastructure that was already in place. Another major advantage was that they were able to start doing business in China without actually being physically located there. This guarantees a huge savings on operational cost and regulatory headaches.
The key to Costco’s initial success in China market entry was their ability to adapt themselves to China instead of forcing their traditional business model on the market and consumers. There are many important take-aways from Costco’s success and hopefully this story has given you ideas of your own to achieve your own transition into China.
Casey W. Xiao-Morris is China Business Consultant at Leverage China, LLC, specializing in capturing China’s market opportunities for American companies. Casey can be reached at cxmorris@LeverageChina.com