Summary of Key Points
Costco’s expansion speed in China is much slower than that of Sam’s Club (7 stores vs 67 stores). On the surface, this appears to be a matter of expansion pace, but the underlying issue lies in the conflict between its global business model, which features low gross margins and membership fees, and the Chinese market’s emphasis on “speed, frequent services, and localized experiences.” Sam’s Club has already successfully adapted Costco’s membership model to the Chinese context by incorporating online services, pickup points, and fresh food offerings. In contrast, Costco is extremely cautious with its expansion in order to maintain its gross margin of around 11%. The key to Costco’s success in China lies not in catching up with Sam’s Club’s growth rate but in making Chinese members feel that their membership subscription is worthwhile and encouraging them to renew their subscriptions.
1. Slow Expansion Is Not Due to Laziness, but Rather Due to Model Constraints
Costco’s global model is based on a “subtraction approach”: it reduces the variety of products (with fewer than 4,000 SKUs compared to traditional supermarkets), lowers renovation costs, and eliminates unnecessary services in order to control expenses and increase turnover, relying primarily on membership fees for revenue (with product gross margins of only around 11%). This model requires that each new store generates high foot traffic and high turnover; otherwise, the costs will become unmanageable. For example, Costco chooses locations with large areas, convenient parking, and a sufficient number of households with purchasing power in the vicinity—these conditions are difficult to replicate quickly.
Sam’s Club, on the other hand, follows an “addition approach”: it continuously opens new stores, expands its online presence, and adds instant delivery services. It plans to open 10 more stores in 2025 and 13 more in 2026. Costco is not unwilling to expand quickly; however, doing so could undermine the effectiveness of its model. For instance, adding too many pickup points could increase fulfillment costs and push gross margins below the desired level.
2. Low Gross Margins: Both a Shield and a Restriction
Costco’s strategy relies on low gross margins to build customer trust and generate profits through membership fees (with global membership renewal rates approaching 90%, with membership fees accounting for more than half of its earnings). However, the Chinese market has different requirements:
- Consumers demand frequent services such as fresh food and instant delivery, which increase Costco’s inventory and labor costs. If gross margins exceed 11%, the model becomes unsustainable.
- Chinese households tend to be smaller, making large American-style packaging (e.g., 5 kilograms of beef, 24 cans of beverages) less suitable. Switching to smaller packages would increase the number of SKUs and corresponding costs.
- Sam’s Club has already made such services standard, with over 500 pickup points and a significant online presence. If Costco does not follow suit, members may feel that their subscription is not worth it, leading to lower renewal rates (with renewal rates in its Shenzhen stores at only 60%-70%, compared to Sam’s Club’s 92% for its premium membership).
3. Sam’s Club Takes the Lead in Adaptation
In the United States, Costco and Sam’s Club compete in different segments. In China, however, Sam’s Club has taken the initiative to localize Costco’s model:
- It has transformed infrequent bulk purchases into frequent daily services (e.g., fresh food, baked goods, instant delivery) that members use regularly.
- It combines online and offline offerings, using its app and pickup points to cover a wider range of needs.
- Its own private brand, Member’s Mark, is well-established among customers, who recognize both the brand and its products.
By 2026, when Costco finally launches an official store on JD.com, Sam’s Club will have had six years to establish itself in the Chinese market, giving it a significant advantage.
4. Costco’s Localization: Limited Adjustments to Preserve the Model
Costco is not unaware of the Chinese market’s needs; however, it is cautious about making major changes to its core model:
- It has opened a store on JD.com but charges a 20% premium for non-members, not to sell products directly, but to allow them to try products and potentially become members (without compromising gross margins).
- It has introduced a premium membership with additional benefits like global rewards, but these do not include expensive services.
- The success of Costco’s Taiwanese stores (14 stores with excellent global performance) can provide some insights, but they cannot be directly replicated in China. The Chinese mainland is larger and more densely populated, and it also faces challenges such as instant delivery requirements.
Costco’s approach is to add new touchpoints (e.g., JD.com stores) without incurring additional costs or compromising its low-gross-margin strategy.
5. The Key to Success: Ensuring Members Feel the Value of Their Subscription
The essence of a membership program is not just collecting annual fees but making members feel that they get good value for their money each year. Sam’s Club does this by integrating membership benefits into daily activities (e.g., fresh food, baked goods, instant delivery). If Costco continues to focus on infrequent large-scale purchases, it will struggle to retain members. To improve renewal rates, it needs to:
- Adjust packaging (e.g., offer smaller portions without significantly increasing the number of SKUs).
- Offer more local fresh food options that suit Chinese tastes and control inventory losses.
- Localize its Kirkland brand products to create high-repetition items suitable for Chinese households.
6. The Competition Between the Two Models
Sam’s Club faces the challenge of maintaining quality while expanding rapidly (it was recently questioned regarding food safety in 2026). Costco, on the other hand, needs to adapt quickly without compromising the effectiveness of its model. The key to success for Costco is not to catch up with Sam’s speed but to make Chinese members truly appreciate its “selected products, low prices, and trustworthiness,” encouraging them to renew their subscriptions year after year.
In summary, while both companies have their own challenges, the difference lies in how they approach these issues. Sam’s Club needs to maintain quality, while Costco must adapt its model to meet the needs of the Chinese market without compromising its core values.