American retail giant Costco will collaborate with Alibaba’s online store, Tmall, in order to enter the enormous Chinese market. The company will establish a virtual storefront before proceeding with a traditional bricks-and-mortar shop, in a move which signals a new approach for American firms looking to expand into China. This approach is widely considered to be less risky, and will offer Costco the chance to study consumer habits before committing to further investment.
Costco is the latest American retail chain to attempt entry into the Chinese market, with previous attempts such as those of Wal-Mart and Best Buy failing to meet expectations. Costco has learned from their mistakes, and by teaming up with a Chinese company, hopes to mitigate Chinese consumer fears regarding making purchases from an unknown business.
Tmall is Alibaba’s online marketplace, similar to Amazon.com. Tmall currently accounts for 50% of China’s online shopping, listing over 100,000 brands, many of which are foreign made. According to China-based iResearch, Alibaba’s July sales forecast is over $446 billion, up 45.8% from last year. Costco will begin by listing food and health products, including those from its in-house brand Kirkland.
This is not Costco’s first foray into an Asian market. The company currently operates dozens of physical stores across the Asia-Pacific, including 20 in Japan, six in Australia, 11 in Taiwan, and 11 in South Korea, including the world’s busiest Costco store by sales in Seoul. The company employs over 185,000 people worldwide, almost 127,000 of which are in the United States.
The realm of Internet sales is a relatively new area for Costco, with China becoming the fourth nations to have access to the service. Only 2.5% of the company’s total revenue comes from online purchases. Due to Costco’s business model, a significant amount of their profits come from membership fees, not from individual sales. Memberships won’t be required for purchases made through Tmall, and thus the company seems willing to run at a lower margin in China while it assesses the marketplace for future opportunities.
Jonathan recently graduated from the University of Sydney and is a Research Intern at the East-West Center in Washington, D.C.