Costco seeks China path that avoids Wal-Mart's potholes

Thu Oct 16, 2014 5:34pm EDT
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By Nandita Bose

CHICAGO (Reuters) - By selling directly to Chinese consumers on Alibaba's platform, a move announced Tuesday, Costco Wholesale Corp. (COST.O: Quote) aims to employ local knowledge and a low-cost structure to avoid missteps that caused even the world's largest retailer, Wal-Mart Stores Inc. (WMT.N: Quote), to stumble.

Many global retailers opening in China have struggled to find product mixes and store designs favored by local customers. Besides Wal-Mart, Best Buy (BBY.N: Quote), eBay (EBAY.O: Quote) and others have fallen short of expectations in one of the fastest-growing consumer markets.

Costco's virtual storefront on Alibaba Group Holding's (BABA.N: Quote) Tmall is designed to help the warehouse store operator 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 Wal-Mart and also those who were forced to exit the market like Home Depot (HD.N: Quote)," said Anjee Solanki, national director of retail services at Colliers International.

Wal-Mart's China sales in the second quarter grew 1.1 percent, but same-store sales, a key figure, declined 1.6 percent. David Cheesewright, head of Wal-Mart's international division, acknowledged at the company's investor conference Wednesday that China remains tough even after 17 years. "We are still very much focused on building our foundations," he said.

Early steps at times have been shaky. Wal-Mart stuck with its big-box format even though Chinese consumers prefer neighborhood stores. And its stores in China, including Sam's Club warehouses, offered few high margin private-label goods until as recently as last year.

Even Wal-Mart'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 Wal-Mart recalled its popular "Five Spice" donkey meat after tests showed traces of fox meat. The recall followed episodes involving tainted milk and recycled "gutter oil" sold as cooking oil in the market.   Continued...

Shoppers leave Costco in Fairfax, Virginia, January 7, 2010.   REUTERS/Larry Downing