Summary of Key Issues
Costco has recently received fines in several Chinese cities for issues such as false advertising and substandard products. Although the fines are not substantial, they touch on the core competitiveness of membership-based retailers, which is to provide reliable product selection and act as a trusted guardian for consumers. As a retail giant that relies on membership fees for its profits, these problems directly affect consumer trust. Costco is already facing challenges in China, including a low renewal rate for membership and a mismatch in its product offerings, which has led to a widening gap with its competitor Sam's Club. At the same time, Sam's Club has also become controversial due to changes in its product selection, highlighting the common dilemma faced by foreign-owned membership retailers in the Chinese market: balancing scale expansion with consumer trust.
I. A Few Small Fines Hit Costco Where It Hurts
Costco's recent fines may seem minor (totaling just over a hundred thousand yuan), but they target critical areas for membership-based retailers:
- False Advertising of “Fresh Milk”: The Shanghai branch referred to “ultrahigh-temperature pasteurized milk” as “fresh milk” and claimed it met stricter standards than those of the European Union. In fact, according to national regulations, only milk that has been pasteurized at 72-85°C can be called “fresh milk” (which requires refrigeration and has a shelf life of 7-15 days); ultrahigh-temperature pasteurized milk falls between pasteurized and ambient-temperature milk and still needs to be refrigerated but has a longer shelf life, so it cannot be considered fresh. The regulation targets not the quality of the milk itself, but the deception of consumers.
- Substandard Products: Products sold at the Suzhou store, such as Panasonic smart locks that failed to meet pressure requirements (possibly failing to lock when there is no power) and travel luggage with poor shock resistance (prone to breaking), as well as unqualified white radishes at the Shenzhen store, all demonstrate a lack of strict product selection.
For Costco members who are willing to pay 299 yuan per year, this means they trust the retailer to ensure the quality of the products. With mislabeling and substandard goods, Costco is essentially damaging its own reputation.
II. Costco's Profit Model: Relying on Membership Fees, Not Sales
Costco's profit model is straightforward:
- It maintains a gross margin on products below 14% (almost no markup), with most of its profits coming from membership fees ($1.373 billion in the 2026 fiscal quarter).
- A global renewal rate of over 90% ensures that members will continue to pay annually, sustaining the business cycle.
However, the Chinese market is an exception:
- The renewal rate in China is only 60%-62%, one of the lowest globally. Costco has only opened seven stores in seven years, all located in the Yangtze River Delta and Greater Bay Area regions, and it has not dared to increase the membership fee from 299 yuan (although it did so in the United States and Canada last year). This indicates that consumer trust in Costco has not yet been established, and the fines will only make matters worse.
III. Costco's Challenges in China: Products and Services Not Meeting Local Needs
The low renewal rate in China is mainly due to the company's products not aligning with local consumer habits:
- Mismatch in Product Range: With an average household size of 2.62 people, Costco focuses on large-packaged items (e.g., 1.8-liter bottles of olive oil and whole boxes of frozen food). Small families often find these products difficult to use up or store, leading many to cancel their memberships.
- Poor Service Experience: On the opening day of its Shenzhen Longhua store, 140,000 membership cards were issued (the highest in the world), but eight months later, there were numerous complaints about spoiled fresh goods, difficulties with refunds, and long queues for card cancellations. Consumers pay for membership to avoid such inconvenience.
In contrast, Sam's Club has over 5 million members in China, with a renewal rate of 92%, and it has expanded to 56 stores, including those in third-tier cities, achieving revenues of over 100 billion yuan in 2024. Sam's Club's advantage lies in its better understanding of the Chinese market—for example, by adjusting product packaging and adding more locally produced items, while Costco is still trying to replicate its American model.
IV. Sam's Club Also Faces Challenges: The Common Dilemma for Membership-Based Retailers
Sam's Club has also encountered problems recently, such as removing popular products like Sun Biscuits and Rice Pudding and replacing them with more common brands like Hello Kitty and Well-Long, which are available in ordinary supermarkets. Although the actions differ, the underlying issue is the same:
- Pressure from Scale and Profit: Sam's parent company, Walmart, needs to grow and increase profits, so it is reducing the number of exclusive imported products and turning to cheaper contract manufacturing. Costco, in order to attract more members in China, also has to cut costs (e.g., using ultrahigh-temperature pasteurized milk instead of pasteurized milk).
- The Cost of Member Trust: Membership fees are based on the expectation of quality selection—consumers expect a high standard of products without having to do the legwork themselves. If the shelves are filled with ordinary goods or if the advertising is misleading, the membership fee loses its value.
Foreign-owned membership retailers in China must balance cost control with maintaining consumer trust. Once this balance is disrupted, members will choose other options.
Conclusion
Costco's fines are not a trivial matter; they reveal the common challenges faced by foreign-owned membership retailers in the Chinese market: balancing profit growth with the maintenance of their core value of providing reliable product selection. For consumers, the membership fee is essentially a “trust tax.” If businesses fail to uphold this trust, members will stop paying. Whether Costco and Sam's Club can establish a solid foothold in China depends on their ability to find a balance between making money and providing value to their members.