Sea cucumbers are helping Costco clean up in China

Shoppers lined up for hours and crawled inside before the gates were fully lifted. They wrestled for Birkin bags and rotisserie chickens. Traffic was paralyzed on the surrounding roads, with vehicles clogging up the streets to get into the parking lot. The Shanghai store, unable to handle the rush, closed early and apologized to customers on social media.

The company said in March that its Chinese store was one of the best performers globally. While the average Costco counts 68,000 households as members, the Shanghai store had nearly five times that amount, Costco said at the time. The retailer is doing so well, in fact, that it plans to open at least three more stores in the country over the next couple of years.

Costco has good reason to expand in China, where a growing middle class is flocking to higher quality products and premium brands. Retail sales in China are expected to grow to more than $6 trillion by 2024, up 16% from 2019, according to estimates published by eMarketer in June. The research firm predicted China could overtake the United States as the world’s largest retail market this year.

Costco's first China store was so popular it shut down traffic. But can it keep the buzz going?

But Costco also faces risks. The pandemic has put a damper on consumer spending as unemployment rises and people grow more budget conscious. For the first seven months of the year, retail sales in China fell nearly 10% from a year earlier, government statistics showed, and eMarketer is expecting a 4% decline for the year.

Competition from well-established players is also stiff.

Sam’s Club, a US warehouse chain owned by Walmart (WMT), has been operating in China for more than two decades and is accelerating its expansion in Shanghai, Zhejiang and Jiangsu provinces — the same regions Costco is eying for expansion.

Some US firms that do business in China are also wary as tensions between the two countries escalate and Washington threatens to ban the use of Chinese tech by American companies.

Still, Costco is optimistic about its chances.

“We have been successful in other countries, and believe our business will work well in China,” Costco’s chief financial officer Richard Galanti told CNN Business via email.

“We typically open 2-3 locations in a country, and see how they operate over the first couple of years,” he added. “We are off to a good start with our first opening last year.”

Table Of Contents

1 Hot items for ‘foodaholics’
2 Crowd control
3 Expansion is on the horizon, but there are challenges

Hot items for ‘foodaholics’

Like in the United States, Costco has lured customers with big discounts and jumbo-sized products. Rotisserie chicken, boxes of croissants, muffins and Tiramisu cakes are all big hits.

It's only $4.99. But Costco's rotisserie chicken comes at a huge price

“To get a rotisserie chicken, one has to wait at least half an hour,” a Weibo user wrote last December on the Chinese social media platform. “The three places at Costco you need to line up: cakes, pizzas and rotisserie chicken. But foodaholics think it’s so worth it!”

Xinmin Evening News, a government-owned newspaper in Shanghai, described the scramble for the chicken last August like this: “Everyone who snatched a rotisserie chicken is a winner at life!”

People try to get a roast chicken at the first Costco outlet in China on opening day last August.

Products unique to Chinese customers are enormously popular, too.

On a call with investors in December, Galanti highlighted one top seller: sea cucumbers, which are considered to be a prized delicacy in China. In traditional Chinese medicine, the animal is said to have healing properties and can treat joint pain and arthritis.

The cucumbers are usually sold dried and packaged, and can be eaten after being soaked in hot water for hours. A pack of 10 sold for 549.90 yuan ($80) at the Costco Shanghai store, though the retailer told CNN Business this week that it has stopped carrying the cucumbers right now. It intends to bring them back in October for the Mid-Autumn Festival, a major holiday in Asia when revelers admire what’s believed to be the fullest moon of the year.

Edible sea cucumbers, like these at a seafood store in Hong Kong, are considered to be a prized delicacy in China.

The store also sparked a buying frenzy last September when it launched Moutai Flying Fairy, the flagship brand of baijiu sold by Chinese liquor maker Kweichow Moutai. Baijiu is a drink distilled from sorghum and rice that is immensely popular in China.

Shoppers scrambled to pay 1,499 yuan ($217) for a half liter bottle of the spirit, its standard retail price. The cost of the liquor is typically much more elsewhere because of hoarding and speculation.

Crowd control

The popularity of some of its products also created an unexpected problem for Costco during the pandemic: the need to fend off crowds.

The company, for example, suspended the sale of rotisserie chicken in February citing anti-virus considerations.

“This is to prevent customers from flocking together and lining up,” the store said in a May statement. Costco has yet to start selling them again.

Crowds were massive at Costco's opening in Shanghai last year.

The store paused sales of croissants in late February, too, for similar reasons, Xinmin Evening News reported. Costco started selling croissants again in June.

The huge crowds during the pandemic also raised concerns among government authorities. In late February, Shanghai regulators visited Costco for an inspection and warned the store to control its foot traffic. They told the store that fewer than 1,000 people could be inside at any given time, according to a government statement.

Galanti admitted Costco felt “a little bit” of an impact from those limitations.

But overall, “Covid did not impact our business in China in a meaningful way,” he told CNN Business.

Expansion is on the horizon, but there are challenges

After the success of the Shanghai store, Costco is already working on plans to branch out in China. Galanti said the company wants to open another store in Shanghai and two more in the nearby cities of Suzhou and Hangzhou. The Shanghai and Suzhou stores are expected to open next year.

Retail analysts say Costco has several factors working in its favor as it grows in China.

“Costco is appealing to China’s middle class consumers, because they have a strong demand for high-quality products at competitive prices,” said Michelle Huang, a Shanghai-based consumer food analyst at Rabobank. She added that Costco’s in-house brands, such as Kirkland Signature, are trusted by customers because of their quality.

And the price of the membership program is attractive to middle-class households. Costco’s annual membership program, which accounts for the bulk of its profit, is cheaper in China — it costs 299 yuan ($42) per year compared to $60 in the United States. Costco is a warehouse club, which requires consumers to pay an annual fee to shop in its stores.

How Kirkland Signature powers Costco's success

Costco is also good at adapting to local customers in China, said Charles Chan, senior Asia retail analyst at IGD, a UK-based research firm focused on the food and grocery industry.

Before the brick-and-mortar store opened in Shanghai, Costco sold goods for five years on Alibaba’s e-commerce website, Tmall. The online sales helped Costco gain a better understanding of the Chinese market, Chan said.

But as Costco expands, it could face more direct competition from long-established rivals.

Sam’s Club, for example, recently announced plans to open a flagship store in Shanghai next year. The US chain already has 26 stores in China and could have as many as 45 by the end of 2022.

Sam's Club already has 26 stores in China, including this one Nantong. The company could have as many as 45 in the country by the end of 2022.

The battle over physical stores is only part of the equation, too. Chan noted the need for Costco to beef up its presence online.

Sam’s Club parent Walmart has an alliance with JD.com. The Chinese company’s delivery network helps Sam’s Club fulfill online orders quickly in the markets its stores are in, Chan said. In Shanghai, for example, Sam’s Club promises one-hour delivery to local customers who order online.

Costco has yet to offer such delivery services through its Shanghai store. And while it still offers online sales and delivery through Tmall, the product selection is limited compared to what is available in the brick-and-mortar store.

Chan said he would not be surprised if Costco spends more time bolstering its presence on WeChat, the Chinese super-app where Costco offers product recommendations and promotions. The company also has its own Costco China app. (WeChat, notably, has been threatened with a US ban that some worry could make it harder for American companies to do business in China.)

“Adding new features such as home delivery would enable the retailer to be more aligned with its competitors,” Chan said, adding that it would help Costco retain existing members and find new ones.

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