By selling directly to Chinese consumers on Alibaba’s platform, a move announced last week by the American retailer Costco Wholesale, it aims to employ local knowledge and a low-cost structure to avoid missteps that caused even Walmart, the world’s largest retailer, to stumble in China.
Many global retailers opening in China have struggled to find product mixes and store designs that appeal to local customers. In addition to Walmart, others like Best Buy and eBay have fallen short of expectations in one of the fastest-growing consumer markets.
Costco’s virtual storefront on the Alibaba site Tmall is designed to help the company study consumer shopping habits with no brick-and-mortar costs and fewer risks, signaling a new approach to expanding in China.
“This shows Costco has learned from the mistakes made by companies like Walmart and also those who were forced to exit the market, like Home Depot,” said Anjee Solanki, national director of retail services at Colliers International, a commercial real estate company.
Walmart’s China sales in the second quarter of this year grew 1.1 percent, but same-store sales, a key figure of revenue from stores open at least a year, fell 1.6 percent. David Cheesewright, who heads the international division at Walmart, acknowledged at its recent investor conference that China remained tough even after 17 years. “We are still very much focused on building our foundations,” he said.
Early steps at times have been shaky. Walmart stuck with its big-box format even though Chinese consumers prefer neighborhood stores. Its stores in China, including Sam’s Club warehouses, offered few high-margin goods from its own brand until as recently as last year.
Even Walmart’s “Everyday Low Prices” slogan backfired. Chinese consumers equate inexpensive with unsafe and value quality as much as bargain prices, retail consultants said.
Supply-chain problems came to a head in January when Walmart recalled its popular “Five Spice” donkey meat after tests found traces of fox meat. The recall followed episodes involving tainted milk and recycled “gutter oil” sold as cooking oil.
Despite the difficulties, Walmart has become China’s third-largest retailer, behind the Sun Art Retail Group and China Resources Enterprise, a state-owned company, according to the consulting firm Kantar Retail.
Walmart has made adjustments, too. In December, it announced plans to increase sales of house-branded products to 20 percent of the total within a decade. It has also built its own distribution centers to manage product quality.
“We’ve done a lot of work on building trust,” said Mr. Cheesewright, the Walmart international chief.
Costco’s decision to work with Alibaba is intended to bring local credibility. In July, iResearch, a Chinese market research company, forecast that the Chinese online retail market would generate sales this year of 2.76 trillion renminbi, or about $450 billion, up 46 percent from 2013.
Virtual storefronts are a growing business on Tmall, which has a 50 percent share in China and is one of the world’s fastest-growing business-to-consumer marketplaces. Tmall lists more than 100,000 brands, about 2,000 of them foreign-made.
“Digital storefronts are a powerful tool to help shape what a retailer might want to do with a physical store,” said Marcie Merriman, executive director of retail strategy and customer engagement at the consulting and accounting firm EY.
Costco is opening in China with Kirkland, a well-regarded brand that includes products like men’s shirts and laundry detergent, aimed at quality-conscious Chinese consumers.
Even so, price competition probably will be fierce with Yihaodian, a website in which Walmart is majority owner. As part of an introductory “Shopping Spree” on Tmall, Costco offered four packs of Sensodyne toothpaste at 145 renminbi, or $23.68, compared with 109 renminbi on Yihaodian.
The Alibaba connection is not without risk. Costco’s plan to rely on Tmall warehouses to reduce logistics costs and shorten delivery times may risk creating logistics problems similar to those Walmart has faced.
“Letting Alibaba handle a lot of their supply chain is a good short-term solution,” said Ms. Solanki, the Colliers retail services director. But product safety, she added, “is a big issue with supply chains in China, and that has to be managed well.”
Rob Howard, chief executive of the delivery company Grand Junction, based in San Francisco, said the Alibaba partnership could put Costco in a system that often favors local players.
“It’s more of a cobbled-together, relationship-driven infrastructure,” he said. “It’s hard for an external person to tap into that effectively, and Alibaba has that all nailed.”
By NANDITA BOSE October 21, 2014 in The New York Times