#106 CostCo Gets it Right in China
A few weeks ago, I have written on Hermes’ activities in the Chinese market. Today, I am happy to report that another company seems to join the ranks of those who are smart about their entry into the Chinese market: CostCo, the Issaquah, Washington based company. According to recent media reports, CostCo has teamed up with Chinese eCommerce giant Alibaba to sell products through their Tmall website. Why is this smart?
Well, first CostCo is going slow. They are starting with the marketing of a limited range of products from their food and health brand, Kirkland. This is not only low-risk, but it also caters to Chinese consumers’ growing appetite for foreign food products. Consumers can get used to the products and become increasingly familiar before other products and brands are introduced. This should help CostCo to get their product portfolio right for China – something that other retailers have found challenging. Most importantly, CostCo is not investing in physical infrastructure that is expensive to build, costly to maintain, and complex to manage.
Secondly, in a time when even first year business students all over the world know what the word “guanxi” means, entering the market with a well established Chinese partner is a good idea. Chinese consumers trust the Tmall brand and, by association, will trust Costco. Tmall also offers volume and instant traffic so that Costco doesn’t have to invest in promotion the same degree it would have to in order to drive consumers into stores. Not to forget that online retail is growing rapidly in China. In July, China-based consultancy iResearch had raised it’s 2014 growth forecast from previously 32.4 to 45.8 percent – totaling at an expected (and staggering) 450 billion dollars this year.
Down the road, Costco may add a few Chinese stores to its existing 19 stores in Japan, 11 in Korea, and 10 in Taiwan, but for now Costco is observing and learning. This slow and smart way of entering China will provide CostCo with an opportunity to learn about the Chinese market and its consumers without a lot of risk.
December 2, 2014 @ 4:11 pm
As already mentioned in the Blog-Post, Costco made a good decision towards the market-entry strategy. The cooperation with Alibaba to sell products through their Tmall website allows the company to make use of the expertise of Alibaba and make a safe market entry. Since the online market is massively growing in China, Costco made the first step for a successful future.
If we consider Hofstede’s framework, there are even more aspects which make this market entry a “best practise” example. China is a society with high Power Distance (80 points!). Therefore Chinese people tend to trust well established companies more than new companies. Alibaba already has a certain status and Chinese people are proud that Alibaba is Chinese. An American company which enters the Chinese market are generally mistrusted. Costco would have had a hard time entering the market on its own.
Individualism is not considered a characteristic aspect of China. China is a highly collectivistic society (20 points!). If Costco would have decided to enter the market with a lot of different types of products, maybe the entry would not have been successful. The Chinese people tend to not accept a great variety of products. They do not express individualism through buying differentiated products.
The Uncertainty Avoidance dimension is also not very high (30 points). The Blog-Post also mentioned that the online market is growing. A reason for this could be that Chinese people do not care so much for payment security or if the online shop is well known. They do not expect to get screwed when they purchase something online. This is of course a chance for Costco.
China tends to be a masculine society (66 points). This could be important for future strategic moves of Costco. If Costco decides to establish its own business without Alibaba, this could be used for Positioning (Prestige, efficient product etc.).
All in all Costco made promising first steps. The future will show if they make use of the chances or not. Even though the Hofstede’s dimensions are not representative for all people, it provides a general base for entry strategies. In my opinion Costco executed the entry very well.
December 2, 2014 @ 8:44 pm
I totally agree, that it is a good strategy to enter the market in China through a cooperation with a Chinese partner. To refer to the Hofstede five dimensions the biggest difference of the cultures in USA and China is the dimension “individualism”. For companies from the US it is absolutely necessary to take the collectivism, like it is in China, into their considerations for business. In my opinion a foreign company can only be successful, when they are able to attract the Chinese mass-market with their products.
In China everybody knows how to behave proper, communicate the right way and what products to buy. These unspoken rules determine everything, and it is very difficult for foreign companies to come up with these collectivistic values. It is even harder to meet the needs of customers out of a group oriented culture, when the companies’ home culture is focused on individualism, as it is in the US.
To get the feeling of belonging is most important and therefore it is necessary that the mass or a great number of a group is convinced from the product and buy it. This way, other members of the group feel confident to buy it too. Reaching such a big number of consumers is time and money intensive for a company. To have the local know how from a partner can be essential for the success of a market entry.
December 9, 2015 @ 7:27 pm
I also totally agree to the point that CostCo would have a really hard time entering the Chinese market on its own. I spent most of my last summer in Los Angeles and experienced shopping in such a kind of supermarket as a “super-typical American thing”. And as we all know, especially regarding Hofstede’s framework, China and the USA are fundamentally different. The top-management from CostCo therefore acted absolutely correct with their decision to entry the market slow and in cooperation with Alibaba.
Furthermore I want to add the fact that China is not a single market. Profound differences can exist from region to region, from industry to industry and among different income levels. This, again, underlines the importance of a good market research and an observation of the Chinese market before a precipitously action.
CostCo did perform well in the beginning time and clocked up about ¢6 million in revenues during the first month of its e-commerce operations. But according the news (Forbes, January 2015), however, the warehouse retailer has had some problems. After such a promising start, CostCo has to consider its stand on China. Although CostCo has started well in the market, it will have to deal with constantly changing consumer behaviors and a lot of competition, especially from local players.
This shows us that in practice nothing is absolutely predictable and despite extensively market research success cannot be guaranteed.
I personally am already curious about how it will go on in the future and what will happen next.
July 6, 2016 @ 1:32 am
We have all heard about big American companies such as Walmart in Germany, eBay, Home Depot in Japan etc. who failed when entering foreign markets. In fact, those companies often fail because they didn’t prepare themselves enough. It is very important for a company to enter the market in a systematic way in order to be able to do better performance in terms of market share, profit, foreign sales etc.). This systematic market entry helps the company understand itself first in terms of business, product, stakeholders etc., understand its target market – It is crucial to learn about the foreign market’s culture and consumer’s perceptions and behaviors to be able to fir its product to their needs and wants – chose an entry mode and implement an efficient marketing strategy. Most companies don’t focus on those steps and jump on this opportunity of entering a foreign market without even being ready and understanding themselves and the market completely. Here, we can say that CostCo has evaluated the risk before entering a new market. By understanding itself and the market, CostCo has been able to find out a good company with a good reputation in China and thus, team up with them – contrary to Walmart who I remember, has teamed up with a company with a very bad reputation in the country which drive away customers. Indeed, CotcCo has based its strategy on the use of local knowledge of the leader to test markets and assortments, but also benefit from a low cost structure to avoid errors that caused Wallmart for example to fail in China. The same policy I remember was adopted by Zara or Decathlon who chose this strategy of “three-stripe” before actually implementing them.
It is very interesting to see CostCo’s strategy here, because even if it is a big company, it has decided to start small and slow. In other words, their strategy has been “slowly but surely”. They have identified their target market and understood a part of the Chinese culture as well as its customers’ taste and have decided to offer a small range of product that they have recognized will fit with Chinese people. It is very smart what CostCo is trying to do here. By delivering only a limited range of products from their brand, CostCo wants to “educate” the Chinese consumers in order to familiarize them with the brand and thus, satisfy them and attract them for the long term with upcoming products. This strategy will allow CostCo to introduce its products and build its brand equity in the Chinese market. For example, by opting for Tmall, Costco favors the long-term strategy: impose gradually and progressively its brand to a Chinese consumer versed on e-commerce, before eventually open in a second time, physical stores.
Again, contrary to Walmart who lost a lot of money and time in infrastructure and facilities, CostCo has been more reasonable. They are aware of the difficulty of the Chinese market and maybe while assessing their resources, they have found out some weaknesses so; they have decided to move consciously. Therefore, they didn’t invest in expensive physical infrastructure. They know they are not 100% ready so they stay away from difficult and complex things to manage. Personally, I think that what made the success of Costco is their modesty and smartness. Most of the big companies such as Walmart, Home Depot etc., were having too much confidence in themselves due to their previous experience and success which clearly make them pretend they know better or enough and they are ready, but obviously they weren’t. Costco has tried to think as a startup, trying to invest a little bit, offering only few products and asking help from a well know company (their partner). This strategy help them analyze and react quickly to every change, challenge and situation. By thinking big but starting small, CostCo succeeded.
July 9, 2017 @ 9:19 pm
I can only agree with David, calling this a best practice example – but the most interesting part is how their strategy seems to align with the effects of the countries’ major differences in their cultural dimension scores:
Even though China is a highly collectivist country, the collectivism is inbound and outsiders will not be accepted – so by partnering with Alibaba, CostCo got a foot in the door and is on the best way to become an insider. Also a look at China’s power distance index validates their strategy: China scores 80 Points at the PDI and thus individuals are influenced by formal authorities and sanctions – piggybacking with Alibaba means avoiding being seen as an individual and furthermore profiting of Alibaba’s status. Even the long term orientation score approves the sequential market entry strategy, as China’s high score indicates the existence of the ability to adapt to changes and new trends, like the CostCo products.
– well done, CostCo!
July 30, 2017 @ 9:55 pm
As the blog mentioned above, Costco has already into the Chinese market. Costco is very smart because it cooperates with Alibaba and runs through their Tmall website. Alibaba is a China’s biggest Internet retail platform. As the network marketing in China’s has a massive growth, Costco uses online shopping strategy for selling their product. It makes Costco succeeded in the Chinese market.
Since early China has not yet formed a middle class, there is only a very small number of families’ users. Due to this reason, Costco used the Internet to sell their product, it is a good way to enter the Chinese market. Moreover, the cost of the rent of the area is too high, which is about 20% of the overall cost of supermarkets in China. In addition, fixed assets depreciation, labor costs each accounted for one-third, in addition to variable labor costs. China’s rental costs on the corporation are accounted for about two or three times the United States, if the increase in the rate of goods under 14%, it is estimated that the minimum membership fee to receive about 500 yuan, this threshold of the charges in China was too high. On the other hand, Costco doesn’t understand Chinese culture that much, but Costco uses Alibaba (Chinese’s retail platform), it makes Costco easier to understand Chinese culture. However, an online-first approach is a low-risk and high-return strategy, and if they can understand the domestic culture and customer shopping habits, preferences, I believe that it will help Costco to make a big move.
September 16, 2017 @ 6:13 am
When Costco entered China by partnering with Alibaba and selling on Tmall, they changed most of their business model. In the United States, Costco is known for a few things… enormous stores (with not nearly enough parking), membership fees and bulk products. Costco China, however did away with the brick and mortar concept and eliminated the expensive annual membership. Costco understood that the American way of doing business was just that, the American way. If they planned on being successful in China, they needed to adapt their business model to suit the Chinese market. Unlike some companies (IKEA comes to mind) that struggled with physical locations in China, Costco took the smart route and entered the market with an e-commerce solution on which they offered quick shipping and sold their high-quality Kirkland branded products. Their best-selling item? Kirkland mixed nuts.
How successful was Costco’s entrance into the Chinese market? According to Fortune, on Singles Day in 2014, Costco sold $3.5 million of mixed nuts. One year later, they sold $3.5 million of mixed nuts in the first hour of Singles Day (Rao, 2015). That’s a pretty amazing growth rate. It turns out that aligning themselves with a well-known and highly respected local company, foregoing costly infrastructure investments and offering superior products was a recipe for success. Other companies looking to enter the market should take note.
Rao, L. (2015). These Are The U.S. Products That Sell Well On Alibaba’s Tmall. Retrieved from http://fortune.com/2015/12/29/alibaba-tmall/
January 22, 2022 @ 8:44 am
In my opinion, it is a perfect way for Costco to find a local partner to enter the Chinese market. Facts have also proved that the way is correct. Costco has physical stores in China, and the two stores are popular. When its first physical store opened in 2019, its products were sold out in several hours. There are two reasons to be successful. First, the Chinese customers like to buy the foreign products. In addition, Costco understands what the needs of the Chinese customers are. In the real stores, there are not only the same product in American stores, but also the Chinese products, like the Moutai that is a Chinese traditional and popular liquor. From online to real stores, Costco spent five years to understand the needs of the Chinese consumers. It knows the differences of purchase cultures between the Chinese and American and changes the furnishing and kinds of sale goods. Costco’s success gives us a good example. Before entering a global and unfamiliar market, it is important to research and analyze the market. To find a local partner is a good method to save time and money because they are more familiar the market and have the sales channels, transportation channels and communities’ relationships.
January 28, 2022 @ 3:53 am
Costco made a smart decision by going into the Chinese market with a partner that Chinese people will trust. As many America businesses try to enter into the Chinese market, they ultimately fail because they companies are not prepared enough or they do not cater to their target customers in that foreign country. However, for Costco, they made a smart decision in partnering with a Chinese company because this makes is easier for them to step into their market. When comparing China and America, the cultures are drastically different so this makes it even more complicated. By creating a cooperative relationship with a well known company in that foreign country, local customers will most likely trust them because of their connection, compared to a company that has no ally.
March 18, 2022 @ 10:34 pm
Costco entering into the Chinese market was a very smart business move, especially teaming up with one of China’s trusted giant partners Alibaba to sell their products through their website, making it easier for Costco to understand the foreign culture. Partnering up with a trusted company in that foreign country will allow the local consumers to trust Costco because of the relationship made with Alibaba since Chinese consumers trust this brand. Costco did a great job on researching the cultural differences prior to entering the new market, as they prioritized catering to Chinese consumers growing appetite for foreign food products first before introducing them to new products. As there is a huge cultural barrier between the US and China, Costco did their research in terms of culture, partners, and consumer preferences, making its entry into the new market success. Many companies fail in this step when entering foreign markets, so companies that have plans to enter new foreign markets can learn from Costco’s experience to research the market and find local partners to partner up with to make the move easier.