Costco warehouse stores are bringing Chinese consumers something they have been missing — brands they can trust — and that could change China more than the trade war.
As discussed in a couple of previous pieces here, the US-China trade war could change China in a couple of ways. One of them is that it would open China to foreign products and competition.
Then there’s the possibility that it would break the real estate bubble and make home-buying affordable for younger generations, which need “three wallets” to buy a home — a hurdle to family formation.
China’s economy has been suffering from low marriage rates, falling birth rates, and a shrinking labor force, which is a growing economic problem, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh—to mention but a few.
It’s also a fiscal problem, as a shrinking labor force is followed by unfavorable “dependency rates” — too few workers who will have to support too many retirees. Japan has already faced this problem, with the government having to borrow money to pay pensions.
But trade war alone won’t change China’s “tainted” capitalism, a system of “free enterprise” that has many parallels with the unconstrained and unrestrained Victorian-era English and Wild-wild West American capitalism of the mid-19th century — rather than to today’s American or European capitalism.
Tainted capitalism is promoted by China’s “get rich quickly” rising class, which at times places the lives of Chinese consumers at risk with tainted products. Like dental paste tainted with a poisonous chemical used in antifreeze products, cold syrup tainted with poisonous chemicals, substandard baby formulas, and defective home appliances.
What will change China’s tainted capitalism is the presence in the country of American companies like Costco, which promote a modern version of capitalism where the consumer rather than the producer is at the center of the economic universe; and where profit is a consequence of pursuing a business rather than the cause of being in business.
Most notably, Costco has set itself apart from other US retailers in terms of customer satisfaction. It is ranking 83 in customer satisfaction compared to 82 for Amazon and 72 for Walmart.
That’s something China desperately needs, as it makes the transition from a producer to a consumer society.
“Chinese shoppers are infamous bargain hunters,” says Ted Bauman, senior research analyst and economist at Banyan Hill Publishing. “Chinese financial habits encourage savings and discourage ostentatious spending. Costco’s bulk buying offerings appeal to that psychology. Costco’s Chinese prices are 30 to 60% lower than market prices, and food is 10 to 20% cheaper. On top of that, Costco has clearly prepared well in terms of product selection, with the judicious mix of local and imported products.”
That’s because the American giant takes the Chinese market seriously.
“Above all, Costco’s dramatic grand opening in Shanghai illustrates the importance of strategic preparation for the Chinese market,” adds Bauman. “Despite appearances, Costco isn’t exactly new to China. It’s had a marketing relationship with Chinese Internet giant Alibaba for five years. During that time, it has offered online delivery, allowing it to build up its supply chain. Its use that time to increase brand awareness and create expectations for Chinese consumers. It cleverly built up excitement around the Shanghai grand opening — a strategy that has clearly worked extremely well.”
Disclosure: I own shares of Costco