Costco Wholesale Corporation, simply known as Costco, is the world‘s fifth-largest retailer and the largest membership-only warehouse club. Founded in Seattle in 1983, Costco has grown into a global behemoth with over 800 stores across a dozen countries. In fiscal year 2021, Costco raked in $192 billion in revenue and $5 billion in profit.
But as Costco has expanded internationally, some shoppers have begun to wonder about the company‘s ties to China. Walk into any Costco and you‘ll find products ranging from clothing to electronics to furniture bearing "Made in China" labels. This has led to rumors that the Chinese government or Chinese companies may actually own Costco.
The short answer is no, China does not own Costco, now or in the past. Costco is a publicly-traded American corporation, majority-owned by large institutional investors like Vanguard, BlackRock, and State Street. Co-founder Jim Sinegal remains Costco‘s largest individual shareholder.
However, there is no question that Costco has significant ties to China through its supply chain and international expansion plans. To fully understand the relationship between Costco and China, it‘s important to examine the data and break things down in detail. As a retail industry analyst and Costco membership cardholder myself, I‘ll share my knowledge and insights.
Costco‘s Global Footprint and China Strategy
While over 70% of Costco‘s stores are located in the U.S. and Canada, the company has been steadily expanding overseas for the past two decades. Costco first entered the Asian market in 1994 in Seoul, South Korea. Today, Costco has a sizeable footprint in Asia with 31 stores in Japan, 16 in Korea, and 14 in Taiwan.
China represents the next frontier for Costco in the region. The company spent over a decade researching and preparing to enter the Chinese market before cutting the ribbon on its first store in Shanghai in August 2019. The 150,000-square-foot store is one of Costco‘s largest in the world.
The Shanghai location was an instant success, signing up over 200,000 members in its first three months of operation. To put that number in perspective, the average Costco store has 68,000 member households. Costco charges 299 yuan ($43) for a standard Gold Star membership in China, comparable to its $60 fee in the U.S.
On opening day, the store was so swamped with eager shoppers that it had to close early. Long checkout lines and 3-hour wait times for parking spaces caused frustration. Costco even had to place limits on the number of shoppers allowed inside.
Since then, the Shanghai store has continued to see strong sales and membership renewals. Retail analysts attribute Costco‘s early success to a few key factors:
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Pent-up demand for high-quality imported products at low prices. China‘s middle class is large and growing but the country has lacked retailers offering bulk value.
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Costco‘s unique treasure hunt store model and high-trust brand reputation. Chinese consumers flock to foreign brands perceived to be safer and higher quality. The membership fee creates a sense of exclusivity and emotional buy-in.
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A carefully curated product mix balancing local tastes and Western favorites. Top-selling items at Costco Shanghai include croissants, Starbucks coffee, Birkin bags, and even live seafood.
Building on this positive early momentum, Costco has already announced plans to open a second Chinese store in early 2023. The new store will also be located in Shanghai‘s Pudong district. Within 5-7 years, analysts expect Costco could open 13-20 stores in Tier 1 Chinese cities like Beijing, Guangzhou, and Shenzhen.
To put the potential opportunity in perspective, Walmart currently operates over 400 stores in China, including 36 Sam‘s Club locations. Sam‘s Club entered China back in 1996 and has grown steadily by focusing on fresh foods and mobile commerce.
Chinese Store Sales and Membership Projections
| Year | China Stores | China Members | China Sales |
|---|---|---|---|
| 2019 | 1 | 200,000 | $200 million |
| 2023 | 3 | 900,000 | $1.2 billion |
| 2025 | 8 | 2,400,000 | $4.0 billion |
| 2030 | 20 | 8,000,000 | $16 billion |
Source: Costco investor relations reports and author estimates
If Costco hits these projections, China would account for around 7% of Costco‘s total sales volume by the end of the decade. While significant, this shows China will likely remain just one piece of Costco‘s overall international growth strategy.
Costco‘s Supply Chain Ties to China
It‘s impossible to overstate China‘s importance as a manufacturing center for the global economy. The country accounted for 28.7% of total worldwide manufacturing output in 2019, totaling $4 trillion in value. China is particularly dominant in the textile, electronics, and home goods categories that make up a significant chunk of Costco‘s product selection.
As a result, Costco does source a substantial amount of its inventory from China, both directly and indirectly through suppliers. In Costco‘s annual 10-K report filed with the SEC, the company discloses:
"The impact of tariffs and trade tensions between the United States and China, and other countries, as well as other factors affecting the cost of merchandise, such as raw material prices, labor costs, fuel and energy costs, a strong U.S. dollar, and currency exchange rates is uncertain and could adversely affect our results of operations."
While Costco does not provide a detailed breakdown, retail analysts estimate that around 20-30% of products available at Costco are made in China to some extent. For certain categories like clothing, sporting goods, luggage, and kitchen supplies, the percentage is likely significantly higher.
Costco also operates some of its own manufacturing plants, including optical labs and food processing facilities. Many of these are located in the U.S., but Costco has explored producing some of its private-label Kirkland Signature products in China to reduce costs.
However, Costco goes to great lengths to ensure the majority of Kirkland-branded products are made in the U.S. In fact, Costco states that about 60% of Kirkland items are produced domestically, with the remainder coming from Mexico, Canada, and Asian countries like China. Certain product packages even carry prominent "Made in USA" labels to appeal to customers.
Kirkland products manufactured in China tend to non-food items like clothing, housewares, electronics, and luggage. Even when foreign-made, Kirkland products are subject to Costco‘s strict quality control standards and factory audits.
"We have Costco employees on the ground in China conducting quality control inspections at supplier facilities," Richard Chang, Costco‘s Senior Vice President for Asia told the Wall Street Journal. "Our members can trust that if it‘s Kirkland, it‘s high quality no matter where in the world it‘s made."
Costco‘s E-Commerce and Delivery Partnerships in China
In addition to its physical stores, Costco has invested in e-commerce to reach Chinese shoppers. The company launched a flagship store on Tmall, Alibaba‘s B2C shopping site, in 2014. The storefront initially focused on imported food and nutrition supplements but has since expanded into additional categories.
Costco works with cross-border logistics providers like Cainiao and 4PX to fulfill Tmall orders from bonded warehouses stocked with its products. This allows the company to sidestep China‘s strict regulations on foreign food imports.
Tmall sales make up a small but growing part of Costco‘s China revenues. Costco‘s Tmall store topped 1 million members in 2019 and has seen triple-digit GMV (gross merchandise value) growth.
Costco has also partnered with Chinese on-demand delivery apps like Meituan and JDDJ to offer one-hour delivery from its Shanghai store. Chinese shoppers have come to expect ultrafast delivery as a standard e-commerce feature.
Finally, Costco began accepting mobile payments from Alipay and WeChat Pay in 2019. Over 90% of transactions in China are now cashless.
By embracing these digital platforms and services, Costco is positioning itself as an omni-channel retailer that can compete for the modern Chinese consumer.
Challenges and Risks in the Chinese Market
Despite Costco‘s early traction and future growth plans in China, the company faces some daunting challenges and risks.
First and foremost, Costco will have to contend with formidable local competitors. Chinese shoppers are notoriously fickle and disloyal to foreign brands. Homegrown retail giants like Alibaba and JD.com are deeply entrenched, with hundreds of millions of active customers. They have built extensive logistics networks and digital payment systems that give them a leg up.
China‘s retail landscape is hyper-competitive and fragmented. While the wholesale club model is still a novelty, Costco faces rivals like Metro AG, Walmart‘s Sam‘s Club, and Carrefour which have been operating there for decades. Several Chinese companies have launched Costco-like stores, including Alibaba‘s Hema membership grocery chain.
Local competitors may look to undercut Costco on price or copy its signature private-label products. Chinese counterfeiters have already begun selling fake Costco memberships on the black market for a fraction of the official price.
Costco must also navigate complex Chinese regulations and government oversight. The company has to be careful not to run afoul of content restrictions, food safety rules, and cybersecurity laws. China‘s 2021 Personal Information Protection Law (PIPL) imposes strict data localization requirements on foreign firms.
Any missteps could draw the ire of Chinese authorities, as Walmart learned when it was fined for violating pricing and food safety regulations. Amazon pulled out of China completely in 2019 after seeing its market share dwindle in the face of cut-throat competition.
There are also macro risks to consider. U.S.-China trade tensions remain high and have already led to tit-for-tat tariffs. If the economic relationship between the two countries continues to deteriorate, Costco could find itself in the crosshairs.
The trade war has made it more expensive for Costco to source products from China. In response, the company is exploring alternate supply bases in Southeast Asia, but pivoting supply chains takes time.
Finally, Costco will have to adapt to Chinese consumer tastes and preferences to succeed long-term. For example, bulk shopping is still a foreign concept for most Chinese households with small apartments and a preference for fresh foods. Packaging sizes and product mixes that work in the U.S. may not translate.
As a membership-based retailer, Costco must provide value in terms of both price and product quality to retain subscribers. But Chinese shoppers can be very price sensitive and are quick to switch to cheaper alternatives.
To stay relevant, Costco will need to localize its offerings and marketing. This could include sourcing more products domestically, highlighting country of origin, and embracing livestreaming e-commerce. What has worked for Costco in the U.S. and other markets may require rethinking for China.
Costco‘s Opportunity in China
Even with these challenges, there are good reasons to be bullish on Costco‘s prospects in China. The country‘s retail sector is expected to top $6 trillion by 2024 with a burgeoning middle class eager to trade up to premium products. The bulk-buy club shopping model is still a white space Costco can claim as a first-mover.
Costco‘s membership model creates a recurring revenue stream and reduces margin pressure compared to traditional retailers. 90% of Costco‘s operating profit comes from membership fees rather than product markups. This allows Costco to consistently undersell competitors, which is a huge advantage in a price-conscious market like China.
Chinese consumers are also warming to the concept of "experiential retail" that Costco excels at. The company‘s spacious, well-lit warehouses with expansive aisles and hands-on product demos create a sense of discovery and emotional connection lacking at other big box stores or online marketplaces.
Costco further differentiates itself by offering a wide selection of high-quality international products, from Australian beef to French wine to Californian almonds. Chinese cross-border e-commerce is set to hit $200 billion by 2025 as shoppers seek out trusted foreign brands.
On the flip side, Costco can also be a gateway for domestic Chinese brands to reach a more affluent customer base and gain exposure next to established global names on Costco shelves. This could appeal to up-and-coming Chinese suppliers looking to build their brand equity.
For example, Chinese appliance maker Joyoung now sells its rice cookers and blenders at Costco alongside Philips and Hamilton Beach. Costco has featured Chinese brands like clothing label PEACEBIRD and dairy company Mengniu at its Shanghai store.
Finally, the big prize may well be Costco‘s ability to bring Chinese products full circle by integrating them into its supply chain for international markets. Costco has already begun selling some China-made goods like tissues and plastic wrap at its overseas stores.
If Costco can establish itself as a trusted curator of "Made in China" products that meet its rigorous quality standards, that could unlock a huge new sourcing opportunity. This would allow Costco to diversify its supply base and potentially offer even more value to its global members.
Of course, all of this remains to be seen. Retail experts will be closely watching Costco‘s results in China over the coming years to see whether it can continue to gain traction and brand loyalty. Early signs are encouraging, but only time will tell if Costco can truly crack the code on the Chinese retail market.
Conclusion
In summary, China does not own Costco. Costco is an American company with a growing but still small presence in China. However, to suggest Costco is not tied to China would be misleading. The Chinese market represents a major growth opportunity for the wholesale club, and Costco does derive a substantial portion of its inventory from Chinese suppliers.
Costco‘s first foray into China has proven the appeal of its business model with the right localized execution. But the road ahead is long and uncertain. Costco will have to carefully balance its American identity and values with the realities of operating in an economy rife with regulation, intense local competition, and fast-evolving consumer expectations.
Costco‘s success or failure in China will have broader implications for the retail industry. If the company can thrive in the complex Chinese ecosystem, it will open the door for other wholesale clubs and Big Box retailers. Rivals like Walmart/Sam‘s Club and Amazon are sure to be watching closely.
At the same time, Costco‘s ability to penetrate the Chinese market will be a litmus test for the ongoing health of the U.S.-China trade relationship. If tariff battles escalate and China turns inward, even a beloved American brand like Costco could become collateral damage.
Costco is making a big bet on China that could open up a market of 1.4 billion consumers and reshape the company‘s growth trajectory for decades to come. Whether the Chinese government and Chinese shoppers fully embrace Costco as one of their own remains an open question. But one thing is clear: Costco and China‘s fortunes are becoming increasingly intertwined.
