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Costco Wholesale Corp. is set to open its first bricks-and-mortar warehouse in China this August.

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Costco Wholesale Corp. is set to open its first bricks-and-mortar warehouse in China this August.

A business based on membership strategy

After setting up an online store on Alibaba’s Tmall five years ago, the U.S wholesaling giant is to open its first physical warehouse in Shanghai’s Minhang district on the 27th of August.

Costco’s model in North America has been based on families buying bargain products in bulk, transporting them in their cars and then storing them at home. Its business success is based on building a loyal shopper base through its paid membership program with low price items. Costco pledges refunds even after the goods are consumed. The firm’s membership strategy has been largely successful in most markets, with 88% renewal rate globally.  

Costco China will offer two types of memberships – one for families and the other for corporation, both with an annual price of US$43. Customers have been able to apply for memberships since April.

Our view

Costco will have strong competition from Walmart China’s Sam’s Club, also a membership-only retail club chain.

Sam’s Club has the advantage of entering the China market 20 years earlier and cumulated a wealth of knowledge and experience of the market. During that 20 years, Sam’s Club has gradually shifted its target to high end and upscale market and focuses more on quality premium products than low price. The retailer has been accelerating store expansion the last two years and plan to have 40 stores by end of 2020.

Expansion into China has many benefits for Costco, alleviating over reliance on North America being one of them. The question is whether Costco will change its strategy in China.

Costco currently runs a total of 770 warehouses worldwide, including 12 each in Taiwan and South Korea and 26 in Japan.


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Costco Japan has announced plans to launch an online store next year.

New online store in 2019

Costco's new ecommerce service will aim to capitalise on growing popularity of online shopping in Japan. It will be particularly relevant to those looking to purchase in bulk, taking advantage of home delivery for heavy but essential items such as water and rice.

Full details of the service such as product range and exact launch date are still being finalised. Customers using the online store will likely have to pay an annual membership fee as in physical stores, currently JPY4,752 (US$43).

Establishing stronger presence in Japan

In preparation for servicing online orders, Costco plans to expand its existing distribution network. The retailer also plans to expand its store network in the country from 26 to 50 outlets by 2030.

Costco in Asia

Costco Japan offers a differentiated shopping experience compared to many domestic Japanese retailers. Stores are quite American in style, in terms of store format, range and customer service.

In Asia, Costco operates physical stores in Japan, Taiwan and South Korea. Last month, the retailer announced plans to establish a physical presence in China, building on its existing operations on Tmall. It aims to open its first brick-and-mortar store in Shanghai’s Minhang district in 2019.


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Costco is turning to China as its next destination to establish a physical presence.

First store in China next year

Costco has been trading on Alibaba's marketplace Tmall since 2014, selling for example, branded healthcare and personal care items. The American wholesaler has now signed an agreement with Shanghai Pudong Kangqiao Group to set up its Chinese headquarters in Shanghai’s Pudong district.

Source: IGD Research

It plans to open its first physical store in the country in Minhang district next year and a second in Pudong in 2021. Costco will also look to open a membership store with Shenzhen-based real-estate firm Galaxy Holding. There has been no disclosure, however, on secured planning permits.

Of the 749 Costco warehouses worldwide, in Asia it operates 26 in Japan, 14 in South Korea and 13 in Taiwan. Costco also has ecommerce sites in Korea and Taiwan.

Our view

Costco's entry to the market follows a similar route to Aldi - trading online via Alibaba's Tmall before moving offline. Entering China online before offline is not only a cost-effective option, but it allows retailers to test demand and further understand local consumers to refine its products. Costco's presence on Tmall will remain relevant, especially as a means to connect consumers living in tier 3 and 4 cities.

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Costco Wholesale has launched a flagship store on Alibaba's Tmall as it looks to further expand the products it sells to Chinese consumers.

One step closer to opening physical stores

Costco started selling in China three years ago, on Alibaba's cross-border e-commerce channel Tmall Global. By operating on both platforms, Costco will be able to offer nearly 800 SKUs to customers in China, about 300 of which are a part of the new Tmall store.

The company is adding furniture, consumer electronics and wine to its product mix, expanding its ranges on clothing, food and health and beauty.

Costco was able to operate the store on Tmall Global without a licence to operate retail business in China, with all its products stored and shipped from  bonded warehouses. The opening of the store on Tmall shows that Costco has obtained the licence and is able to sell in China. It has always been Costco's goal to set up physical stores in the country, and this brings it one step closer.

Costco and Alibaba

Costco has had a successful run since its launch on Alibaba. In 2015, it set a Guinness World Record when it sold 7,238 tons of mixed nuts during the 11.11 Global Shopping Festival. It was also one of eight brands to offer a virtual reality shopping experience during last year’s Singles' Day shopping festival.

Join us at our Online and Digital summit in October to look into the future of ecommerce with representatives from Alibaba.

Shirley Zhu, Programme Director: Shirley Zhu leads IGD’s research programme in the South-East Asia region from our Singapore office. She has extensive research experience in the FMCG industry and has helped many multinational and local clients achieve their strategic objectives. Contact Shirley at [email protected] for further insight on the region.

We review Costco’s second quarter performance, including a new focus on EDLP pricing.

1. Sales improved despite stronger cannibalisation impact

Costco’s second quarter net sales increased by 5.7% to $29.1bn, with comparable store sales up 3%, excluding currency and fuel impacts. Net income fell by 5.7% to $515m. This represents a marginal improvement on the comp sales performance in Q1, despite a stronger impact from cannibalisation, particularly in Canada where it is opening eight new locations this year. Cannibalisation is currently running at around twice the average rate for the previous two years. In the US, the retailer continued to see deflation of around 1.0% to 1.5% in food categories.

2. Shifting its strategy towards EDLP pricing

In the US, it has also started to tweak its pricing and promotional strategy, with a revamped program for its multi-vendor mailer. It has started to reduce the number of items per mailer, and the number of days for which it runs. Partly this is due to the mailer becoming less effective in driving volumes and activating new customers to purchase some items. In response, it has been shifting investment into EDLP pricing, which has helped to grow sales and drive traffic. Although it remains early days, the retailer is pleased with the initial results of the program. This is a major change in strategy for the retailer, but one where it appears to be working closely with its suppliers to deliver value to its customers in a new way.

3. Online initiatives gaining momentum, more third-party tests to come

Costco’s ecommerce sales increased by 12% in the quarter, improving on the 8% growth recorded in the first quarter. The retailer has been investing significantly in this channel recently, improving the online experience, product availability on fast moving items and the product offer. New brands have been added in electronics, clothing and upscale beauty, with more to come over the next few months. With a focus on driving profitability and efficiencies, orders are now picked from 11 depot fulfilment centres in the US and Canada.

It is also working with Google Express and Instacart to directly fulfil orders from clubs, with the latter working in 132 clubs across 26 cities in the US. Costco will start to test with two other third-party delivery services in the next month. While there are no plans to offer in-club pickup in the short term, expect to see more innovation in terms of the products offered, and the speed with which it delivers to its customers.

4. New international markets set to launch in late May; China in its sights

Costco opened four new clubs during the quarter, with 12 opened for the year to date. A further 17 will open in the second half, most of which will be in the US and Canada. It is also expected to open its first outlets in France and Iceland in late May. In China, it continues to see good progress with its Tmall business, and expects to open its first physical club in the country in the next few years. While there are no plans to test a smaller format concept, it continues to see solid potential with its Business Center model, which could grow to 40-50 units in the US.

5. Membership fee increase set for June

The retailer will also be increasing its membership fees in the US and Canada in June. These countries account for just under 90% of all members, and around 35m households will be impacted. The last fee increase was in 2011, and renewal rates have remained strong as the retailer’s value proposition continues to resonate with shoppers. This is expected to boost the retailer's bottom line and ability to invest more in value.

Click to view our latest insight presentation, Trading with Costco, to see how it plans to win over the next five years.

Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage on Costco globally. He is also responsible for shaping IGD's research program across North America. Contact Stewart at [email protected] for further insight on the region.

Twitter: @Stewart_IGD

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