Costco bets on global appetite for first Chinese store

Shanghai

THE US retail giant Costco is diving into the thorny area of food retail in China with its first store opening this week, but analysts warn it faces a tough ride as it looks to succeed where a series of international retailers have failed.

The move also comes at a challenging time with Beijing and Washington engaged in a tense trade war that has seen them swap punitive tariffs on hundreds of billions of dollars of two-way trade.

China has proved a brutal battleground for overseas food retailers in recent years, with many failing to understand consumer habits and tastes as well as local competitors building a stronger presence.

In June, French supermarket giant Carrefour agreed to sell 80 per cent of its China business to domestic giant Suning after repeated losses.

And German wholesaler Metro is in the process of selling its operations to a local bidder and British grocery giant Tesco pulled out of the Chinese market in 2014.

"The Chinese market is very complicated and requires retailers to innovate and localise," said Jason Yu, general manager of Kantar Worldpanel China.

But Costco thinks it can avoid the malaise that has plagued others with its "no-frills approach" and bulk-buy strategy.

The retailer will throw open its doors on Tuesday, five years after making its first online foray into China through Alibaba's cross-border e-commerce platform Tmall Global.

Richard Zhang, Costco's senior vice-president for Asia, told AFP they had a "conservative" goal to sign up at least 100,000 new members for the new store, which is in a suburban district of Shanghai with a two million-strong population.

And Mr Zhang said they had taken time to make sure that consumers in China knew their brand and the market was mature enough. Costco will be targeting China's affluent growing middle class, who know the brand from international travels.

However, analysts warned that local competitors are stealing ground with popular homegrown retailers such as Alibaba's bricks-and-mortar Hema stores integrating online and offline shopping.

Chih-yuan Wang, retail research director at Mintel China Reports, warned that many foreign retailers adapted too slowly and "still didn't catch up with China's rapid ecommerce craze where customers go shopping on mobile phones".

"The cost of (later) building a home delivery service is very high and may affect Costco's basic strategy to provide the lowest available prices," he said.

Costco's big rival, membership-based warehouse Sam's Club from Walmart, has over two decades of history in China and is still on the expansion trail with plans to reach 40 stores by the end of next year.

But Mr Zhang said the fact that Chinese consumers are already familiar with a membership supermarket model could work to Costco's advantage. "Chinese consumers are ready to pay for a membership card that grants them an exclusive privilege to buy at a warehouse store, it's not a new concept in the country," said Mr Zhang. "A mature market saves us efforts in educating customers."

While he is upbeat, Mr Zhang says he has concerns over the impact of a bruising US-China trade war and tariffs, with about 50 per cent of their products from overseas.

"In order to keep our prices low, we've replaced some US importers of fresh produce with Australian importers," Mr Zhang said. AFP