Costco Goes to China Without Opening a Store - via Alibaba's Tmall

Adapt or die. When in Rome. The perfect is the enemy of the good.

If you wish to be global, you'd better be ready to throw out the rule book. Because your rules are just someone else's affronts.

Due in part to geopolitical tensions, companies operating in China have, of late, felt the cold chill of regulatory disapproval. Walmart, KFC, McDonalds and others have been confronted with a bewildering array of legal challenges that raise questions about the quality of the products they sell and the efficacy of their processes.

The attacks have affected sales because the Chinese are hyper sensitive about food safety issues in particular, given the incidents over the past few years that have raised questions about domestic suppliers. But the authorities, more subtly, may also be signalling their disapproval, which makes patronage of such enterprises a risk many prefer not to take.

Costco, one of the largest membership 'wholesalers,' sales products in bulk to members who pay an annual fee to shop there. Because the company's margins are so thin it makes most of its income from those fees. But China being China, Costco has turned its traditional model on its head: no fees and, more interestingly, no stores. Working through Alibaba, whose IPO last month was the largest in human history, Costco is demonstrating that intangibles like picking the right partner, finding a model that works best in the new market matter a lot and being prudent about up front investment can be more important than traditions, however successful they have been in other markets at other times. JL

Angel Gonzalez reports in the Seattle Times:

It’s quite different from its standard business model: An Alibaba spokeswoman said shoppers using the service won’t need a Costco membership. Costco relies on member fees for a sizable portion of its profits.
Costco Wholesale has struck a deal with a unit of Internet retail giant Alibaba Group to open an online store serving customers in mainland China, its first, long-awaited dip into that burgeoning market.
The Issaquah-based warehouse-club behemoth will market its private label Kirkland Signature products and other items through Tmall Global, an Alibaba Group platform that allows foreign retailers to sell items to customers in China without setting up a brick-and-mortar presence there.
The unorthodox arrangement underscores two ongoing trends at Costco: its slow but sure embrace of international operations, which now account for about a third of its business, and its tinkering with the promise of online growth.
At the company’s conference calls, analysts often ask when Costco, which has 10 warehouses in Taiwan, will open in mainland China. Executives respond they are focusing on first figuring out markets such as Spain and on waiting for the right opportunity.
The partnership with Tmall, which Alibaba says serves to quench Chinese shoppers’ thirst for foreign brands, could be a good beach head.
But it’s quite different from its standard business model: An Alibaba spokeswoman said shoppers using the service won’t need a Costco membership. Costco relies on member fees for a sizable portion of its profits.
Costco’s head of international operations, Jim Murphy, said in a statement that “Costco sees tremendous growth opportunities in China, especially in light of Chinese consumers’ increasing appetite for imported products.”
He added that Alibaba’s expertise in big data will help Costco find the best products for its customers there.
There’s plenty of opportunity to be had. As sales of consumer goods doubled between 2008 and 2012, China became the world’s second-largest retail market after the U.S. It is expected to surpass America before the end of the decade, according to a report by the Fung Business Intelligence Centre, a research unit of a large Hong Kong logistics and retail conglomerate.
Internet shopping has taken off as well.
China’s Internet retail market surpassed the size of the one in the U.S. in 2013 to become the world’s largest, with $295 billion in sales versus $270 billion in America, according to McKinsey. Its growth potential is seen as huge, as only 46 percent of China’s population is online, versus 87 percent of U.S. residents, the report says.
Last month Alibaba launched the largest initial public offering in U.S. history. Analysts with Bernstein Research say Alibaba’s Taobao and Tmall home pages offers a much broader shopping selection than those of Amazon or eBay, including services such as insurance, health and prepaid cellphone minutes.