Is the community economy the future of retail in China?
Updated 22:58, 28-Sep-2019
Yao Nian

The U.S. warehouse club Costco made a stellar debut in the Chinese mainland a month ago. It opened its first store in Shanghai on a weekday, but it proved to be so popular that it had to close early after thousands flooded into the store, with traffic in the vicinity coming to a standstill.

Costco has created quite a commotion in China's retail sector, where online retail is growing and brick and mortar has been experiencing a hard time. Yet international rivals such as Carrefour SA, Metro AG, Sam's Club and Walmart have failed to gain traction in the country. So why is Costco a hit?

Why Costco is a hit

Costco has two trump cards: High-quality low-priced goods and exclusive value of membership rights. Prices of general goods in Costco are consistently 30 to 60 percent lower than market prices, and the food sold there is 10 to 20 percent cheaper.

It has two hard-and-fast rules to maintain goods at a low price permanently – the gross profit margin of all goods must not exceed 14 percent, and goods found to have been sold at a cheaper price elsewhere will never appear on its shelves again.

As Costco limits its stock keeping unit (SKU) at 3,000 to 4,000, suppliers must bid for the limited shelf space to get their products sold in the store, which in turn drives down the goods price. Thus, the retailer guarantees high quality of goods as well as low prices.

The retail giant also runs on a "subscription business model," where customers have to buy a membership in order to get an exclusive privilege to buy at a warehouse store. For example, membership at the Shanghai store costs about 42 U.S. dollars annually.

Membership makes up for the cost, as the warehouse store offers its members bulk items at reduced prices. Members consider the price-cutting service well worth the membership fees, given Costco's renewal rates worldwide are at 87 percent.

The membership warehouse makes the majority of its profit by selling the right to shop. In fiscal 2018, Costco's net profit reached 3.13 billion U.S. dollars, while revenue from memberships stood at 3.14 billion dollars.

Community economy in China

China's retail industry is entering into an era of community economy, where retailers promote customers' loyalty through memberships to optimize the effect of word-of-mouth marketing and obtain economic and social benefits.

The membership operation becomes a top priority of retailers. And a rising middle class in China that loves a good bargain is an ideal target for retailers. How do retailers attract and retain members?

It looks as though Costco has figured out how to lead the way: The paid membership, through which members can gain much larger benefits than the membership fee. Retailers need to have a members-only customer base.

Costco's successful debut in the Chinese mainland proves there remains great potential in offline retail, but the wholesale club still needs to adapt to China's dynamic retail landscape where online retail is in a full swing.

In 2018, the total retail sales of consumer goods in China rose to 5.4 trillion U.S. dollars, with online retail sales accounting for 23.6 percent. The total number is expected to exceed 5.6 trillion U.S. dollars in 2020, and the proportion of online retail sales will also grow.

Retailing through a single channel presents difficulties in adapting to the development trends of the industry. The integration of online and offline retail as well as community operation is the future of the industry in China.