It’s easy to make the argument that Costco is one of the most successful and widely celebrated retailers today. But that didn’t happen overnight or accidentally.
Costco, through the years, has taken a painstaking approach to growing its warehouse club footprint, inventory, and membership model.
Related: Costco surprises fans with return of member favorite
It’s not an easy thing for consumers to part with a chunk of money just to be able to walk into a store and shop. So there’s been a lot of pressure on Costco to make sure members feel like they’re getting great value for their money.
To that end, Costco does a lot of things right. And one key strategy through the years has been using membership fee revenue to offset costs.
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This allows Costco to accept lower profit margins on the products it sells, helping members feel like they’re getting a great deal time and time again.
Costco has also done a great job of focusing on product quality. Members who shop at Costco know they’re getting not only low prices, but also solid purchases.
Costco has also carved out a reputation as being a customer-first retailer. This is evident in its generous and flexible return policy, as well as its numerous membership benefits outside of just savings on food and essentials.
A key Costco rival is closing all stores.
Image source: Shutterstock
Costco doesn’t work for everyone
Although many consumers will sing its praises, the Costco shopping model isn’t for everyone.
For one thing, it requires a level of consistency some consumers may not be willing or eager to commit to.
Related: Costco adds strict new policy for free samples
To get your money’s worth out of a Costco membership, you need to shop at the store on a regular basis. That may not be feasible for everyone due to constraints that can range from limited storage space at home to having to trek many miles to the nearest warehouse club store.
But there’s another inherent flaw in Costco’s shopping model, and it’s that despite the potential savings over the long term, it costs more money to shop at Costco on a per-trip basis than it does at a typical supermarket.
People who buy their groceries and essentials at Costco do so in bulk to enjoy savings on a per-ounce or unit basis. But that requires a pretty significant outlay.
These days, a lot of people don’t have the extra money to spend $150 or $200 at a time at Costco, even if that results in big savings by stocking up on months’ worth of certain supplies.
Still, there are members who remain loyal to Costco year after year because they’re able to afford to shop in bulk and they appreciate the overall savings.
Plus, it’s the little perks that make shopping at Costco fun, from the free samples to the delicious food court meals at almost absurdly cheap prices.
Costco rival closing stores after epic failure
It’s not just U.S. consumers who can’t get enough of Costco. The warehouse club giant has stores in more than a dozen countries worldwide.
Costco operates seven stores in China. The most recent warehouse club opened in Shenzhen in January of 2024.
Related: Costco doesn’t want members (and non-members) to know this
On the heels of Costco’s success, in 2020, Alibaba Group Holding Ltd. launched its line of Hema X stores to mimic the Costco model. Like Costco, Hema X is a members-only store, offering a host of exclusive products as well as bulk purchasing options.
But now, the e-commerce titan is making plans to close all of its Hema X stores after the business model failed to take off.
In addition to Costco, Hema X faced stiff competition from Sam’s Club, which in recent years has expanded its footprint in China aggressively with more than 40 store locations.
At a time when China’s retail sector is struggling with weak demand, it’s easy to see why consumers would be more apt to flock to a trusted, established name in the warehouse club space than take a chance on Hema X.
The decision to shutter Hema X stores also boiled down to high operational costs.
While Alibaba is winding down operations at its physical Hema X stores, the company says it may move some of the chain’s inventory online. Still, it gives Costco a prime opportunity to expand its footprint in China even more.
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Though Costco will no doubt face competition from Sam’s Club, it’s a challenge the company is used to, so it’s unlikely to be a deterrent if Costco decides to go that route.
But given the challenges facing China’s retail industry as a whole, Costco may also decide to sit tight for a while and let things play out.
Maurie Backman owns shares of Costco.