Warehouse giant Costco (
), which has operations in nine countries, including the U.S. and
Mexico, still does not have any concrete plans for China. This is
somewhat surprising considering that China is the second largest
economy in the world with a huge retail market that stands well
over $2 trillion and is growing at a robust pace. The region has
been among the most preferred international expansion options for
several retailers, apparel players and consumer electronic chains,
but Costco has shown no significant interest in the market. The
reason behind the warehouse retailer's lack of interest in China is
that foreign retailers have struggled to adapt themselves to the
Chinese market. Retail giant Wal-Mart (
), home improvement retailer Home Depot (
) and electronics chain Best Buy (
) have had a hard time selling their products to discerning Chinese
Costco's CEO believes that the company does not need to focus on
China at the moment since its operations in other Asian countries
are going very well. At the moment, there appears no lack of growth
for the company in domestic as well as international markets, which
is why it has set China aside for later. It seems that Costco does
not want to enter a market that hasn't done much good for U.S.
retailers so far.
Last year, there was a report in The Southern Metropolis Daily
(a Chinese Newspaper based in Guangzhou) that Costco is looking for
a local partner to launch e-commerce operations in China. While the
report indicated that the company is finally looking to set its
foot in China, launching only e-commerce websites might not be the
best idea. Costco's core value proposition isn't limited to its low
priced products, but also includes the shopping experience. While
the company can offer cheaper products over the Internet, it cannot
replicate the enticing store environment where shoppers have access
to several ancillary services. With absence of those services,
Costco may find it hard to make a strong first impression in the
unforgiving Chinese retail market.
Our price estimate for Costco stands at $123
, implying a premium of less than 5% to the market price.
See our complete analysis for Costco
The Chinese Retail Market Hasn't Been Fruitful For U.S.
Chinese consumers are very cautious and their buying decisions
aren't always price driven. They are more inclined towards
tailor-made products and a shopping environment that reflects local
touch. Along with prices, Chinese buyers are concerned about
authenticity and quality of products. Due to these factors, U.S.
retailers entering the region haven't been able to adapt themselves
to the local environment, which has resulted in sluggish growth.
Moreover, the Chinese retail market has a number of established
local players who have outperformed their foreign counterparts with
a better understanding of consumer behavior.
Despite offering lowest prices in the market, retail giant
Wal-Mart hasn't been able to attract customers. Chinese
shoppers are accustomed to buying their groceries at local outdoor
markets and Wal-Mart has been unable to customize its stores
accordingly. On the other hand, its local counterpart, Sun-Art, has
successfully recreated that environment with fishing tanks,
in-store noodle stands, fresh seafood displayed on table tops, etc.
One of the largest electronics retail chain in the U.S., Best Buy,
has struggled in China due to its premium prices and tough
competition from local electronics chains such as Suning and Gome.
Best Buy opened stores in China that were similar in infrastructure
to its U.S. stores, which provided a better shopping environment
than Suning and Gome. However, this did not work in Best Buy's
favor since Chinese buyers are used to shopping for electronics in
warehouse-style stores, which Suning and Gome have exploited to
good effect. Best Buy's store environment turned out alien to
Chinese buyers and its products were perceived as expensive.
The Chinese retail market has been unrelenting to even slightly
different retailing environments and Costco is a different retail
concept altogether. While the warehouse retailer can offer good
quality products at low prices, customer response to its store
format cannot be predicted, which increases the risks involved in
investing in China.
No Concrete Plans For China
In an interview last year, Costco CEO Craig Jelinek stated that
the company doesn't feel the need to enter China yet as its other
Asian business is doing very well. He believes that there are a lot
of opportunities available in countries such as Japan, Taiwan and
Korea, and expanding in China might turn out to be a risky move.
Jelinek stated that Costco does not want to stretch its business
beyond the management's control and China will be a good expansion
option even after 10-15 years.
It appears that the company doesn't feel the need to expand in
China as it has no growth problems in the U.S. or its current
international locations. We believe that once Costco runs out of
growth room in the U.S., it will consider China as the next
destination for store expansion. The company's warehouse concept
has gained significant traction in Taiwan, where consumer behavior
is somewhat similar to China. Even with a small number of stores,
Costco's brand popularity in Taiwan has grown tremendously. We
believe that a pleasing customer response in Taiwan is an
indication that Costco can be successful in China as well, if the
company decides to open its stores there.
Speculations Of E-Commerce Expansion
About a year back, there was a report in a Chinese newspaper
that Costco is planning to expand its e-commerce operations in the
country and is looking for a local partner. While the company
hasn't confirmed the news yet, we believe that Costco will look for
e-commerce expansion in the region before opening its physical
outlets. The idea behind this strategy is not to invest too much in
a market that hasn't been conducive for U.S. retailers and to
explore China's huge e-commerce space ($194 billion in 2012) before
expanding its retail footprint.
However, an online store will lack Costco's traditional store
characteristics that have played a crucial role in its success. At
Costco, shopping is not just about prices but the shopping
experience as well, which includes a "treasure hunt" experience
where shoppers walking around the isles always find something new.
Also, they have access to several ancillary services such as food
court, photo-center, pharmacy, gas station, etc.
With only online launch in China, Costco won't we able to
provide these social experiences. Even if the company alters
between its brands in order to recreate the "treasure hunt"
experience over the Internet, its ancillary services will be
absent. A deep analysis of Costco's sales in the U.S. suggests that
while average spending per customer on merchandise has grown slowly
over the past four-five years, their spending on ancillary services
has increased at a hefty pace. Hence, by not providing these
services in China from the outset, Costco's first impression on
buyers will not be too strong. This can make it difficult for the
company to elevate its brand image in the future.
Interactive Institutional Research
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