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Evolution of the Warehouse Store Model in China

  • Categories:Retail Insights
  • Author: KT Wu
  • Origin:Hanshow Retail Academy
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(Summary description)

Evolution of the Warehouse Store Model in China

(Summary description)

Information

Sam's Club: Entered the Chinese market in the late 90's, and has steadily operated for over two decades.

 

 

Sam's Club is a membership warehouse store under Walmart. It was first opened in Shenzhen, China back in 1996. For the past 25 years, Sam’s Club has opened 36 stores in 23 cities in China. Over the years, Sam's Club has maintained a low-key, relatively high-end presence, and its brand image resonates with customers like a US store with solid foundations. For the last two decades, even at times when the business of offline supermarkets shrank remarkably, Sam's shop has expanded against the trend.

 

Members of the Sam’s Club are mostly middle-class Chinese families, and their shopping behavior positively correlates with high quality and true membership value. Therefore, Sam’s Club has always believed that it is not the low-priced products that retain members, but rather the low-priced products that provide genuine and high customer value.

 

Until 2020, Sam’s Club has accumulated over 1.8 M paid members, each paying 260 RMB (approximately 40 USD) annually. The retention rate is also quite high: about 70% of members renew their membership after the first year of subscription. Roughly 20% of the products are imported, and the best-selling products are mostly family-oriented, including alcohol, beef, diapers, and baby formula. Many target customers believe that the membership value stems from the fact that Sam’s Club has strict standards in selecting high quality products, so that customers can choose more conveniently within the store. Moreover, unlike other warehouse stores in China, Sam's Club has also built eyewear centers, hearing aid centers and health management centers around the concept of “big health”, and has established a network of such services within Sam’s Stores all around China.

 

Currently, Sam's Club continues to expand its business in China, with a special focus on second-tier cities. The next store will be in Guiyang, the capital of Guizhou Province, and the store in Wuxi, Jiangsu Province is already under construction (officially started in 2020 and plans to open in 2022). The store in Wuxi will be seamlessly connected to the Jingui Park Station of the local Metro Line 1 for the convenience of shoppers.

 

Costco: Recent entrance to the Chinese market, and is perceived as Sam's Club's largest foreign competitor.

 

Costco is the largest membership-based warehouse store chain in the United States. On August 27, 2019, Costco opened its first store in Mainland China, located in the Minhang District, Shanghai. Since Costco's target members are middle-class families with significant purchasing power, the business district where Costco's Minhang store operates is adjacent to high-end residential areas and seven private international schools. This store mostly adheres to its U.S. standards, with an area of 14,000 square meters and around 3,400 SKUs. Customers that frequent to the store reports that they find the affordable price to be the main factor that they choose Costco. In particular, the price of food products in the warehouse store can be 30% lower than the average market price.

 

Costco has several obvious points of differentiation, and to name a few: First, the product packaging is very large. Costco often uses oversized products, such as cups, dolls, etc., to gain exposure on social media. For example, a huge bag of potato chips is the same size as a bag of 5 kilograms of rice. A huge pack of beef is about the amount of a whole beef leg. Second, there are few categories in the store, but leave the customers with enough choices. Basically, only two or three products can be found in any category, but they are all popular products with great reputation. This explains why Costco has great sales volume even with low product variety, and this also gives Costco leverage to negotiate extremely low prices with the suppliers.

 

In the future, Costco will continue to expand in the Chinese market, and it has been confirmed that it will continue to open stores in Hangzhou and Ningbo. The total investment for the store in Hangzhou reaches 160 million U.S. dollars, with a store area of 36,000 square meters; the total investment in the Ningbo project is about 100 million U.S. dollars, and both stores are planned to open in 2023.

 

Hema X: Alibaba Group's answer to warehouse membership stores with "Chinese characteristics".

 

 

After the first store opened in Shanghai in 2019, the second and third stores were recently opened in Beijing and Shanghai on June 18, 2021. The Hema X warehouse store has been duplicating around China at a fast pace and it is expected to open ten more stores at the end of 2021. The executives at Hema have made it clear that Costco is the prototype they are striving to imitate, but Hema X must do better in terms of localization. "We hope to become the strongest membership warehouse store for Chinese people in 2-3 years," said an executive.

 

Hema X’s first store in Beijing covers an area of over 17,000 square meters, with more than 3,000 SKUs. In comparison with Hema Fresh Food and Hema Mini, which the "O2O" or  "at home consumption" are the core operational logic, Hema X Warehouse Store aims at providing a pleasant shopping experience that encourages families to visit on weekends. Therefore, Hema X provides numerous relevant services, such as car washing, short-term foster care (Alibaba Zoo), as well as childcare services.

 

Within the store, the internal furnishing and arrangements are more appealing to Chinese tastes. For example, the height of the shelves is set lower, making it easier to access the goods, unlike the large shelves used by Sam's Club and Costco. At Hema Gongfang, consumers can find local Chinese snacks that represents local tastes and culture.

 

As for selecting goods to be displayed at Hema X, there are two guiding principles. The first principle is to choose the products that Hema X members purchase the most. Both the repurchase rate and wide coverage of product types are important factors. The second principle is that Hema X warehouse stores will display products with higher quality standards than other Hema stores. The PR director at Hema has announced that the product of highest quality will be prioritized to be displayed at Hema X warehouse stores than other regular stores.

 

Lastly, to keep Hema products innovative and constantly renewing, in May 2021, Hema has announced the launch of the new product incubation center "Hema X Accelerator" in Shanghai, with the goal of incubating, accelerating or investing in 100 new brands every year.

 

Fudi, Yonghui, Hualian, and Maidelong: The other new players.

 

Fudi: To create a "boutique fresh food store"

 

 

On May 18, 2021, the "fudi" warehouse membership store was opened in Beijing. This is also the largest warehouse membership store opened by a local retail company after the Hema X member store. The company aims at integrating foreign-style retail warehouse stores with boutique fresh supermarkets to create a better shopping experience for customers.

 

The total area is about 23,000 square meters, with more than 6000 SKUs. Among them, more than 70% are fresh products, which are directly sourced from producers and sold on the same day they arrive.

 

The co-founder of fudi, Mr. Wang Xinghai, said that the business model of fudi is to move the wholesale market directly to consumers by controlling the gross profit margin within 10%, and maintaining the price of fresh products 20% cheaper than that of regular supermarkets.

 

Fudi's paid membership is exactly the same as Sam’s Club, and they will also establish O2O platforms to facilitate online ordering. The company plans to open two more stores within 2021, and twenty more stores within three years. However, unlike Costco and Sam’s Club, fudi does not pursue large packaging in the products, which represents the pursuit to become a "boutique" fresh food store.

 

Yonghui: Pilot the transformation of existing stores into "non-membership warehouse stores"

 

 

On May 1, 2021, Yonghui opened its first warehouse in Fuzhou without much publicity, and then accelerated its expansion throughout the country. As of right now, Yonghui has opened a number of warehouse stores in Fuzhou, Chongqing, Chengdu and other cities. Recently, it is reported that three stores in Henan Province will be transformed into warehouse stores.

 

Yonghui wants to strategically combine wholesale and retail businesses, which maximizes both its price and scale advantages. In doing so, Yonghui transforms its existing stores into warehouse stores, instead of building new ones to minimize the overall initial investment. These are considered as trails to test the market if the new business model works better. At present, the warehouse stores that were transformed generate a daily turnover of up to one million RMB. This surprising result pushes Yonghui to put warehouse stores on a strategic priority, and plans to transform more stores in different provinces of China.

 

Hualian: Focus on building "Membership Warehouse Stores" in less developed areas

 

 

Hualian is a national retail business that is traditionally known by Chinese customers as chain supermarkets and department stores.

 

Recently, Hualian warehouse store was first opened in Lanzhou, Gansu Province, with a total area of 6,800 square meters. It focuses on fresh and imported products. It selects top domestic and international brands that meet the needs of local families. The Hualian warehouse store is the first membership warehouse store in second-tier cities in China, and whether or not the business model works is still a question.

 

Maidelong (Metro): Establishing membership-based warehouse stores in partnership with Duodian (Dmall)

 

 

In June 2021, Maidelong (Metro) opened the first “PLUS membership warehouse stores” in Beijing and Chengdu. The stores target middle-to-high income households, featuring over 2500 selected SKUs and over 40% of the products are imported. In the past, Maidelong operates warehouse stores that does not require membership, and this is the first attempt in a “paid membership business model”.

 

To cater to the needs of families with infants or kids, the store provides temporary childcare service, cafe and restaurants, and even shopping carts that are designed for babies to face front and engage in the shopping experience!

 

Maidelong (Metro) is also partnering with Duodian (Dmall), a retail technology firm that provides digital solutions, to renew the internal system and establish digital shopping experience, as well as O2O services.

 

 

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