Debra Li

debra_lidan@163.com

FOUR days after U.S. President Donald Trump said he had “hereby ordered” American companies to leave China after plans for new tariffs on U.S. goods were announced, the opening of Costco Wholesale’s outlet in Shanghai, its first brick-and-mortar shop in China, drove the multinational’s stock price to a new high Tuesday after a 5 percent rally that day.

The sales at the new store were so hot that the roads leading to it were jammed for miles, and people had to wait three hours to find a parking spot. Given that the warehouse (Costco’s stores are literally warehouses) is located in Minhang District, a suburban area in the southeastern tip of Shanghai, the huge inflow of customers was quite impressive. To “provide customers with a better experience,” the shop had to close in the early afternoon on its opening day.

While the U.S. president is enraged by how the trade spat with China has played out, and from time to time has suggested irrational measures, no great American company would take him seriously. Will they give up the tremendous opportunity provided by China’s huge market? A look at Costco, one of Charlie Munger’s favorite stocks, will give them the correct answer.

Running more than 700 warehouses globally, Costco charges 299 yuan (US$41.9) for a membership in China, as compared to the US$60 threshold in other regions. Never spending on advertisements and always setting up its warehouses in suburban areas where the land is cheap, the store offers cost-efficient but good-quality merchandise in huge packages. To attract customers, the Shanghai store offered 53-percent liquor Feitian Moutai in 500ml bottles each at 1,498 yuan, one yuan lower than the official guideline price and much lower than the 2,500-3,000 yuan market prices. Other “cheap” merchandise, including Hermes bags and Rolex wristwatches, were also snapped up quickly.

A hot trending topic on Chinese social media that day was “How much could a family earn if they resold what they bought at Costco?” That eye-grabbing joke was not a real question.

Given Shanghai’s population of 24 million, if only the top 10 percent of wealthy people became Costco’s customers, that’s a huge customer base. I don’t rule out the chance that a small portion of those who queued up to snap up a bag or a bottle of liquor will resell it for profit, but I also believe that the majority of customers came to shop for themselves and their families. That begs another question of Costco’s refund policies. Some are doubtful if the company can stick to its unconditional guarantee and refund policies in China, saying many will see it as a loophole and take advantage of it. That’s also an exaggeration. The membership fee and the not-so-convenient location are thresholds to keep out low-income clients, and the middle- and upper-class city dwellers normally wouldn’t attempt refunding tricks after using a purchase.

Many of us tend to judge the world by our own experience, which is a big mistake. Individuals only count for an insignificant part of the demography. The soaring stock price of Pinduoduo, based on its huge customer base (the company is still losing money), has opened the eyes of China’s middle class in first- and second-tier cities, making them aware that there are still so many not-so-fortunate people who want to buy shoddy products at very cheap prices. Costco Shanghai is another example, which has demonstrated to us that there are some people who can actually snap up luxury goods and not feel the pang of burning a hole in their pocket.

The retail industry, no matter online or offline, (and it is mostly integrated today), is still one that offers huge opportunities in China, given the huge profit margins in sales and distribution. Most products are not so expensive upon leaving the factories’ gates. How to streamline the supply chain, keep operations efficient and optimize customers’ experience remain the keys to success.

(The author is a features editor at the Shenzhen Daily.)