Guosen: Deep analysis of Costco, exploring the direction of domestic supermarket reform and improvement.

. The domestic retail consumer market in China is at a crucial crossroads facing deep transformation. On one hand, there is a problem of insufficient effective demand among residents under the cycle of economic transition, but at a deeper level, there is an extreme reversal in the supply-demand relationship in the entire retail industry. We have noticed that past channel transformations have been more focused on customer acquisition, through continuous innovation in front-end business models to achieve wider and more efficient user traffic acquisition. This model has been running smoothly against the economic and social background of the urbanization dividend, online dividend, and the demand expansion brought about by the wealth effect of residents under the real estate economy in China. However, since the outbreak of the pandemic, these dividends have gradually diminished with the relative solidification of the socio-economic structure, and a drastic reversal in the supply-demand relationship in the stock market has occurred. With the continuous strengthening of consumer sovereignty awareness, the improvement of product and service capabilities at the back-end has become a core factor in differentiating and widening the gap among companies today. Therefore, we have seen that several domestic offline retail companies have initiated a new round of adjustments and reforms based on the new situation. Previously, the main operating mode of most domestic retail companies was to continuously expand offline stores and attract customers online, accumulate a user base, and then achieve final profits through entrance fees, cutting point fees, etc., largely ignoring the construction of product competitiveness based on insight into consumer demand. In the current period, the focus of business operations is shifting from the front-end to the back-end product capabilities, requiring a closer focus on the changing needs of core consumers, to dig out and provide high-quality products and rich services, and fully tap the value of each customer. Looking at it from a global perspective, Costco is undoubtedly the benchmark retail company that retail enterprises should study and learn from in their transformation and development process. As the world's third-largest retailer and the largest membership-based chain warehouse retailer, Costco has been known for its continuous and stable business growth since its establishment in 1983, crossing several economic cycles. In the fiscal year 2024, Costco operates 890 stores globally, with a card membership of 137 million worldwide, generating revenue of $254.5 billion. Since 1990, it has achieved a compound growth rate of 10% each year, with positive growth every year except in 2009. It has achieved a profit of $7.4 billion in the 2024 fiscal year, with a compound growth of 12% since 1990, making it a true retail king that has maintained a constant performance through cyclical changes. In this article, we hope to analyze Costco's business model, explore its core competitive elements, and analyze the industrial background that supports its development to answer its core elements of constant performance. It also helps investors understand the motives and directions of the current round of retail sector adjustments and transformations and provides a reference basis for judging the success or failure of some targets in the future. Key Points Global warehouse membership store retail giant and retail king that survives cycles: Costco is a benchmark company in the global retail industry. As the world's third-largest retailer and the largest membership-based chain warehouse retailer, it has been known for its continuous and stable business growth since its establishment in 1983. In the fiscal year 2024, Costco operates 890 stores globally, with a card membership of 137 million worldwide, generating revenue of $254.5 billion. Since 1990, it has achieved a compound growth rate of 10% each year, with positive growth every year except in 2009. It achieved a profit of $7.4 billion in the 2024 fiscal year, with a compound growth of 12% since 1990. Its stable performance through cycles also supports the company's premium valuation, with a PE (TTM) ratio above 35 times in the past three years, at a high level compared to comparable leading retail targets in the United States. Analysis of Core Business Model: Costco's warehouse membership store model, based on a membership system to lock in customer demand, strengthens control over the supply-end product, liberating consumers from the opposition by matching with limited but high-quality products, in a sense letting them hand over the choice of products to the company and paying membership fees. Strong product capabilities are the premise of its model's success: 1) Product selection ability: carefully select products around customer needs, with an average of 4,000 SKUs in store, supporting a single store revenue of $280 million; 2) Supply chain: ensuring extremely low prices, with products generally priced 25-35% lower than competitors; 3) Strong terminal operations: simple store design and employee training to create high efficiency, with an average of $764,000 in revenue contributed by each employee over 24 years; meanwhile, the membership renewal rate is extremely high, exceeding 90% globally in the fiscal year 2024. Localization of excellent benchmarks in China: We believe that domestic companies should not only learn from Costco's appearance but also focus on its spirit, i.e., honing product capabilities. From the perspective of current excellent retail benchmarks in China, they are all based on strong product capabilities and combined with localization according to domestic consumption characteristics: 1) Sam's Club: an independent brand of a warehouse membership store under Walmart, with estimated revenue exceeding 80 billion RMB in China in 2023. Based on its deep cultivation of product capabilities in China for over 28 years and integration of domestic front warehouse models in recent years, supporting rapid online business growth; 2) Pangdanglai: operating in two locations in Xuchang and Xinxiang in Henan, with total sales reaching 14.6 billion RMB as of November in 2024. With its extreme product and service capabilities, and the social endorsement brought by its people-centric corporate culture, it has driven rapid growth in single-store revenue, actively sharing experiences in helping peers in the industry adapt and reform. Risk Warning: Consumer recovery lower than expected; intensified competition damages brand image; pressure on store transformation profitability Company Profile: Global leader in warehouse membership stores Company History: Costco's establishment originated from Price Club, founded by Sol Price in 1976. It was the world's first warehouse-style retail club, where customers had to be members to purchase goods in the store. Jim Sinegal, who was then the executive vice president of product, distribution, and marketing at Price Club, founded Costco Wholesale seven years after the first Price Club store was established. He used his accumulated business operation experience and professional capabilities to create Costco Wholesale, which has been known for its sustained business growth and stability since its establishment in 1983. In the fiscal year 2024, Costco operates 890 stores globally, with a card membership of 137 million worldwide, generating revenue of $254.5 billion. Since 1990, it has achieved a compound growth rate of 10% each year, with positive growth every year except in 2009. In the 2024 fiscal year, it achieved a profit of $7.4 billion, with a compound growth of 12% since 1990. Its stable performance through cycles has also supported the company's premium valuation, with a PE (TTM) ratio of above 35 times in the past three years, at a high level compared to comparable leading retail targets in the United States.In 1983, the first store of China Best in Seattle, Washington was opened, and compared to Price Club, Costco is the world's first warehouse membership store that is open to the general public and accepts non-business members.Due to its unique business model, Costco experienced rapid growth after its establishment. Approximately 200,000 people became Costco members in its first year of operation, and in less than six years, its sales revenue grew from zero to $3 billion. In 1993, Costco completed the merger with Price Club. Through a series of measures including improving the supply chain foundation, focusing on member needs, expanding overseas markets, and developing private label brands, the company gradually evolved into the world's third-largest retailer and the largest membership-based warehouse retailer. In the 2024 Fortune Global 500 list, it ranks 20th. As of the 2024 fiscal year, Costco operates 890 stores worldwide, with an average store size of 147,000 square feet (approximately 13,700 square meters). The global membership card holders total 137 million, and the number of employees worldwide reaches 333,000. The company achieved revenue of $254.5 billion and a net profit of $7.4 billion. Business Model: Membership essence lies in locking in demand, strong product force is the core of continuous operation The most fundamental point of Costco's business model is that its profitability mainly comes from membership fees based on "consumer value" rather than traditional retail channel profits based on "supplier value". For consumers, in a sense, it means handing over the right to choose products to the company. In an era of oversupply, the company provides curated high-quality, low-priced products and charges a membership fee for it. For the company, the paid membership system enables precise targeting and locking in of target customer groups. By offering member discounts that exceed the value of the membership fee, the company can earn unit product margins and membership fee revenue, thereby creating a win-win situation. Core of Business Model: Strong product force is the core of a successful model Under this model, the operation on the retail end must focus on strong product force as the core emphasis to attract target member groups and achieve high renewal rates. We believe that a strong product force is mainly reflected in three aspects: 1) Strong price competitiveness: By reducing costs and improving efficiency throughout the operation, Costco creates a cost-effective model suitable for lower prices for consumers. It provides a perceptible and sustainable pricing system for members. 2) High product quality: By closely following the needs of members who have been actively screened, providing high-quality differentiated products through third-party procurement, customization, or own design and production. 3) Sales service force: Apart from products, pre-sales and after-sales service system and auxiliary sales business create a risk-free shopping experience and an accessible shopping environment for paying members. Characteristics of Business Model: Membership consumption and high value-for-price products The strong pricing power and high product quality operation characteristics of warehouse membership stores differ significantly from other supermarket formats in specific store, product, pricing, and operating processes, as shown in the table below: 1) Membership consumption form: The most direct difference is that consumers must become a member of the company to purchase goods, unlike traditional supermarkets with no purchase threshold. 2) Significant price advantage: The prices of goods at warehouse membership stores are usually more than 20% lower than traditional supermarkets and are long-term stable low prices rather than short-term promotional price reductions as in traditional supermarkets. 3) Warehouse-style store layout: The layout of shelves in traditional supermarkets is relatively refined, while the store layout of warehouse membership stores is relatively simple, with shelves serving both display and storage functions. The store locations are usually far from the city center, in relatively remote suburbs, with low rental costs and store maintenance costs. 4) Selected SKU and mainly large-format products: Costco limits the number of SKUs to less than 4,000, as opposed to traditional supermarkets like Walmart which sell over 142,000 SKUs. This allows Costco's procurement team to rigorously select each product and provide it to members with the best quality and price. Operational Results of Business Model: Extreme efficiency Thanks to the company's unique business model and its accumulated operational advantages and barriers over the years, the company far outperforms its industry peers in various key performance indicators, as shown in the table below, with Costco significantly leading in store efficiency, sales per square foot, sales per employee, and unit SKU sales. Business Breakdown: Revenue mainly depends on product sales, profits primarily come from membership fees In the membership-based business model, the company's revenue comes from product sales and membership fees, with revenue mainly contributed by product sales. However, its low-cost, low-margin sales model results in minimal profits from selling products, so the primary source of profit comes from increasing membership fees and renewals. Product sales revenue includes all revenue obtained by Costco through selling goods and services through all channels. The company's main product categories include core products, store assistance, and other businesses. In the 2024 fiscal year, product sales revenue reached $249.625 billion, with a year-on-year growth of 5.01%, achieving a compound growth rate of 9.55% over the past thirty years. 1) Core product categories: mainly include food, non-food, and fresh produce 1) Food and groceries: including groceries, dry goods, candy, refrigerators, freezers, pre-cooked food, wine and tobacco, these form the main part of the company's retail business. In the 2024 fiscal year, revenue reached $101.463 billion, with a year-on-year growth of 5.50%, accounting for 40.6% of total revenue. 2) Non-food products: including electronics, health and beauty products, hardware, garden and patio supplies, sports equipment, tires, toys and seasonal products, office supplies, car care, postage, tickets, clothing, small appliances, furniture, home goods, special orders, and jewelry, etc.; In the 2024 fiscal year, revenue reached $63.973 billion, with a year-on-year growth of 5.11%, accounting for 25.6% of revenue. 3) Fresh produce: mainly includes meat, Shenzhen AgricultuRal Power Group, deli shops, and bakeries. In the 2024 fiscal year, revenue reached $34.22 billion, a year-on-year increase of 7.01%, accounting for 13.7% of total revenue.2. Store auxiliary business and others: This part of the business mainly focuses on meeting the retail needs of the company's members outside of retail, serving to attract traffic to the stores, maintain member stickiness, and bring incremental revenue to the company. In the 2024 fiscal year, this part of the business generated revenue of $49.969 billion, an increase of 2.62% year-on-year, accounting for 20% of total revenue. 1) Store auxiliary business mainly includes: gas stations, pharmacies, eyewear, food courts, tire installations, etc. These refer to related businesses operated within or near the company's stores, with the aim of encouraging members to shop at the stores more frequently. The number of stores with gas stations varies by country/region, and by the end of the 2024 fiscal year, the company operated 719 gas stations, with the net sales of its gas business accounting for approximately 12%. 2) Other businesses mainly include: e-commerce, business centers, tourism, etc. While the company's e-commerce business has developed relatively slowly in the past due to the company's emphasis on in-store sales experience, in recent years, the proportion of e-commerce sales has gradually increased. The focus is on providing convenience and a wider range of products and services for members. For example, while the SKU of the company's offline stores does not exceed 4,000, the SKU online is between 9,000 and 10,000. In 2024, the company's online net sales accounted for approximately 7% of total net sales. Overall, the company's product categories have remained relatively stable, but have gradually adjusted over the past forty years based on industry changes and consumer preferences: as shown in the chart, the proportion of fresh products has continued to increase and has been separated from the food department, while the revenue proportion of store auxiliary business has gone from nonexistent to occupying 20%; while traditional general merchandise products still account for the major proportion, it has gradually decreased overall. Membership fee income: Mainly from the annual membership fees collected by the company Membership fee income is another important source of revenue for the company, and considering that membership fees typically have a 100% gross margin, they are also the company's main source of profit. In 2024, the company's membership fee income reached $4.83 billion, a year-on-year increase of 5.4%, with a compound annual growth rate of 9.5% over the past thirty years. Introduction to the company's membership model: Two different levels and fee standards As mentioned earlier, the company's membership store model requires consumers to become members in order to purchase goods at the company's stores. The membership fees collected by the company in the 2024 fiscal year mainly include two levels: in the United States, the annual fee for regular members is $60, and for premium members, it is $120, with premium members eligible for a 2% rebate on qualifying purchases (usually up to $1,000 rebates annually). However, starting from the new fiscal year, the membership fees for both levels have been raised to $65 and $130 respectively, and the maximum rebate for premium members has been increased from $1,000 to $1,250 annually. Membership fee standards may vary in other countries/regions, with Costco membership fees in China being 299 yuan per year. All paying members receive a free family card, and in the 2024 fiscal year, Costco had a total of 76.2 million paying members and 137 million cardholders. Of these, the total number of premium members in 2024 was 35.4 million, accounting for 46.5% of all paying members (excluding family cards), and premium members tend to have higher sales amounts, with premium member sales accounting for 73.5% of the company's total sales. Company business drivers: Deep mining of member value In the membership-based business model, the company's performance growth drivers differ from traditional supermarket's store expansion-driven growth, focusing more on the full exploitation of unit value. This includes a focus on increasing revenue per store, single product sales, and single customer value, while on the membership income side, in addition to acquiring new members within the store's range, membership upgrades and renewals are also a focus. Growth drivers for product sales: Ensuring efficient growth through thorough mining of unit value 1) Store revenue vs. store expansion: While the company has gradually expanded its market to establish 890 stores over the past forty years, compared to traditional supermarket enterprises, the company has been more cautious in expanding its store network overall. This is mainly because the selection of core target consumer groups and the construction of the supply chain both require time for deep cultivation, so improving the efficiency of individual stores has always been the company's primary goal. Through localization efforts, converting local consumers into company members, and attracting them to continue repurchasing and making additional purchases with high-quality products. Strong internal growth of individual stores: Leveraging continuous refinement of product selection and operational management, the company's store revenue continues to grow, with Costco's average store sales reaching $280 million in the 2024 fiscal year, and sales figures for stores established 15 years ago continuing to show an annual growth trend. 2) Single SKU sales vs. category expansion: Among the four product elements of "fast, good, and cheap", the company's business model places more emphasis on quality and cost-effectiveness, following a strategy of broad SPU and narrow SKU, thus emphasizing the importance of product curation rather than expanding the product range. Since the company's inception, the average number of SKUs per store has remained below 4,000, with little change. With a limited product range, the company continuously optimizes its product structure around changing member needs to maximize the value of store product assortments. 3) Single member spending vs. acquiring new customer flow: Traditional supermarkets rely on foot traffic as a primary operational indicator, but under the company's membership model, actively selecting members who align with the company's goals, in addition to acquiring new members, drives growth primarily through increasing the average spending per member. By increasing their repeat purchase rate and average transaction value, among other methods, the company maximizes the value of each individual member. Sources of membership income growth: Steady increase in membership numbers and maintenance of high renewal rates 1) Steady increase in membership numbers: Costco's number of paying members has been steadily increasing, with the company currently having a total of 76.2 million paying members, and the compound annual growth rate of paying members over the past 10 years is approximately 6.1%. 2) Member upgrades: In addition to new member acquisition, the upgrading of regular members to premium members also contributes to the growth of membership revenue.The company's membership fee income brings blessings. Since the introduction of premium membership in 1997, its proportion has continued to increase. Currently, the total number of premium members accounts for 46.5% of all paying members. There is still room for further increase in this ratio in the future.3) Membership renewal rate: Through high-quality products, competitive prices, and personalized services, the company has maintained a high renewal rate. As of the end of the 24th fiscal year, the membership renewal rate in the US and Canada was 92.9%, and globally it was 90.5%. The majority renew within six months. 4) Membership fee increase: The company has been relatively restrained in increasing membership fees, with the main factor being the operational cost pressures brought on by inflation. Since its founding in 1983, Costco's regular membership fee at its first store in Seattle was $25, and it has been increased a total of 9 times, with the latest increase starting on September 1, 2024. This is the first fee increase in 7 years, with each increase being $5. Adjusting for inflation, the current membership fee is roughly the same as it was in 1983. Considering the high loyalty of Costco members, the impact of these small fee increases on renewal rates is very limited. Understanding Costco's valuation: Stability and sustainable performance lead to certainty premium Stock price review The company's successful business model has brought about successful fundamentals and rich returns for investors, with the stock price increasing by approximately 560 times since its debut on February 11, 1986, to December 27, 2024. Except for some years in the early stages of development and during years when there were systemic risks in the US stock market, there have been very few negative returns over the thirty-nine years since the listing. On average, there has been an annual growth rate of about 18%. Before 1998, during a period of business model innovation and expansion, including the acquisition and integration of Price Club in 1993-1994, the introduction of the Kirkland brand in 1995, and the establishment of new logistics centers in 2000, the company had high capital expenditures and lower stability in performance, leading to more fluctuation in the stock price. However, the overall trend remained upward. From 1998 to 2010, the company entered a mature phase with stable performance. During this period, the business model had matured, capital expenditures had decreased, and the company began increasing dividends and stock buybacks, which improved investor returns. The stock price also showed relatively steady growth during this period, driven mainly by EPS increases, with a PE ratio maintained in the range of 20-30x. Since 2010, stable performance growth and increasing valuation have been the main driving factors for the stock price. The company's performance has shown steady growth since 2010, with incremental increases in same-store sales and continued expansion of international stores. The valuation multiple has increased from 25x in 2010 to the current dynamic valuation of 55x, driving the stock price up by 15 times. Current valuation and reasons for premium As mentioned earlier, since 2010, the company's performance growth has entered a phase of steady growth, with an average increase of around 10% in most years, except for some special factors. During this period, the company's valuation has continued to rise. According to Bloomberg, the current dynamic valuation (as of December 27) is about 55 times, and the PE ratio (TTM) for the past three years has been above 35 times, placing Costco at the highest level among US retail leaders. The premium valuation compared to the performance growth is evident. We believe that Costco's valuation premium mainly comes from the following factors: 1) Stability and certainty: The company's business model has been tested over many years of competition and economic cycles, demonstrating sustained and verified growth capabilities. This high level of sustained growth and certainty contributes to its premium valuation. 2) Potential profitability: With its unique business model, Costco has strong bargaining power in the supply chain, enabling it to increase actual profit levels through price increases, membership fee hikes, and pressure on suppliers for lower prices. This potential for increased profitability, while currently untapped due to the company's long-term business considerations, contributes to the valuation premium. 3) New opportunities from international expansion: The recent increase in the company's valuation coincides with its globalization efforts. With the successful replication of its business model in various markets worldwide, Costco has laid the foundation for future growth, driving further increases in valuation. Industry background: Economic and social foundations behind the business model Warehouse membership stores emerged in the late 1970s and gained popularity in the 1980s. The uniqueness of this model requires a mature middle-class economic and social background to support its upfront membership fee, high single-purchase amounts, and high-quality merchandise. Additionally, the discounted unit prices attract consumers who are price-sensitive due to economic pressures. In summary, the target consumers are rational individuals with good shopping habits and mature consumption concepts, facing certain price and income pressures. The development of this format is mainly influenced by short-term economic fluctuations and long-term trends in consumer social maturity. Looking at the growth of warehouse membership stores led by Costco, it is indeed based on the expansion of the American middle class, population growth, and urbanization as the foundation for its growth, but it was also catalyzed by economic stagnation in the 1970s. Social background: Expansion of suburban homeowners and affluent middle class nurtured the customer base From the profile of Costco members, according to "25+ Costco Statistics" and Expert Beacon, 82% of warehouse club shoppers come from higher-income groups, and over 70% of warehouse club shoppers come from two to four-person households. Additionally, due to the special location and decoration of its stores, it is expected that the majority of its customers come from suburban areas. Firstly, relatively affluent and college-educated suburban homeowners better understand the value of membership and are more willing to pay the membership fee. Secondly, although Costco's individual product prices are generally the lowest, the larger product sizes result in higher average single purchase amounts, indicating that shoppers are willing to spend more.Need enough living space to store a large amount of purchased goods.coCostcoCostco198512276CostcoCostco's overseas expansion layout started relatively early, but the expansion speed is actually slow. During the 30 years from FY1995 to 2024, the average number of overseas stores opened per year was only 7.6. The relatively slow speed of store expansion is to conduct a more comprehensive and detailed evaluation and cultivation of local markets. According to Jim Murphy, Executive Vice President of the company, Costco needs to evaluate more than 20 indicators before entering a new market and immediately establish a local supply chain to offer the most suitable product mix for local consumers. In summary, the company's cautious attitude and in-depth analysis during its overseas expansion process have provided a more stable foundation for its long-term growth.The source of the company's high price-performance ratio: efficiency optimization throughout the entire chain The founder of the company once talked about Costco's secret to success: "sell good products cheaply." We believe that this statement is both correct and with some reservations. There are many ways to sell products at a low price, but achieving a stable profit model while selling cheaply is the most difficult. Currently in China, we see many companies engaging in low-price competition through price wars and promotions, but this low-price model is not sustainable and is not financially healthy. As shown in the graph below, based on data sampling and analysis, Costco's average selling price of products is on average 25-35% cheaper than similar products of the same type and specifications in traditional supermarkets, maintaining this price difference stably in the long term is Costco's greatest competitive advantage. As shown in the graph below, we believe that Costco is able to achieve this price competitiveness mainly through the optimization of every circulation link from production to sales, creating a cost structure model that caters to middle to low consumption levels, and reducing distribution price differences without added value. In the following sections, we will provide a detailed analysis: Core of price competitiveness - supply chain: Efficiency revolution throughout the entire chain The ability of the supply chain is the core of a retail company's ability to achieve low-priced products. Based on its differentiated business model, after 40 years of deep cultivation, Costco has built a stable supply chain system that can achieve a low-price model. This system spans procurement, logistics, warehousing, and store processes. Procurement cost: Large-scale centralized procurement for single SKUs, direct procurement to reduce intermediate distribution links Cost reduction through large-scale centralized procurement of single SKUs: As mentioned earlier, each store of the company has less than 4000 active stock keeping units (SKUs), much lower than other comprehensive retailers. By selecting a limited number of SKUs, the sales volume of single SKUs is increased, enhancing the company's bargaining power with individual product vendors, thereby reducing product procurement prices. Direct procurement upstream reduces distribution links: Costco purchases almost all of its goods directly from manufacturers, eliminating many costs associated with distribution channels. For brand suppliers, since Costco has a loyal membership base, goods sold to Costco are usually sold out before the payment deadline of the supplier. Therefore, although cooperation with Costco requires sacrificing a certain profit, rapid and certain sales can help the brand achieve better turnover, and as a result, suppliers are often willing to provide Costco with more favorable purchase prices. Integrated store-warehouse design: Optimizing turnover and reducing warehousing costs Costco's warehousing store design allows for a cross-docking distribution model, where products from suppliers can be directly delivered to retail stores without any additional transportation links and warehousing time, reducing inventory management and warehousing space costs. After delivery to the store, the warehouse-style shelf design allows the company to display goods directly on transport pallets for sale, without the need to individually take out and display each item, further reducing operating costs. In addition, store aisles are designed to allow forklift replenishment operations to facilitate easier product rotation and replacement. Logistics costs: Efficient warehousing and logistics facilities The direct procurement model on the procurement side and the integrated store-warehouse model on the sales side lay the foundation for Costco to achieve direct connectivity between the supply and sales ends of the supply chain. By integrating the high-efficiency self-built logistics system, the company truly realizes the rapid circulation of products throughout the entire supply chain. After purchasing goods from manufacturers, about 30% of Costco's products are directly shipped to stores, while about 70% are shipped to the company's logistics distribution centers, and then goods are combined according to orders to minimize transportation and handling costs, and finally delivered to the required stores or online customers. In summary, the company's optimization of the above supply chain capabilities covers the entire process and is interconnected: Costco purchases most of its products directly from manufacturers, and then ships them directly to stores or the company's direct transfer warehouses, where the goods shipped from manufacturers are re-distributed to various stores usually within 24 hours. This maximizes shipping volume and handling efficiency. When the products arrive at the store, they are directly put on shelves for sale to minimize receiving and processing costs, with almost no storage outside the sales floor. Maintenance of price competitiveness - terminal operations: Guarantee of member loyalty and efficiency Terminal operations are a manifestation of a company's refined operational capabilities, and low-price retail formats themselves have relatively weak profit margins, so differences in operational details can often lead to significant differences in final performance. On one hand, companies need to build a comprehensive and viable infrastructure and system, while on the other hand, they need to fully empower and motivate store employees, which require companies to combine early design planning with flexible incentive adjustments in the later stage. Low marketing advertising and store decoration costs, strengthening member word-of-mouth marketing Costco's investment in marketing is minimal, which is fundamentally determined by its membership-based business model: the membership model locks in user groups, allowing the company to focus on improving the shopping experience for selected members, thereby increasing customer loyalty and resulting in word-of-mouth recommendations. Traditional mass-market marketing campaigns for customer acquisition efficiency are also low because a large amount of traditional marketing spending may reach non-target members. Store location/decoration: mainly own properties, simple decoration, optimized operational costs The average size of company stores is approximately 147,000 square feet, relatively large, so controlling store costs is an important topic for cost reduction and efficiency improvement. Firstly, the company's store locations are generally remote, not in the central areas of the city with high traffic and expensive rents, but rather in remote areas where rent is cheaper and can meet the needs of large areas. Secondly, the company's stores are mainly owned properties, with a high degree of ownership that can withstand annual rent increases and erosion of cost rates, with the company's own store ratio remaining close to 80% in recent years. In addition, the company's store shelves are designed to allow forklift replenishment operations, making it easier to achieve product rotation and replacement.The decoration is also very simple, without the meticulously designed traditional boutique supermarket, but with exposed beams, trays and simple metal shelves. These are all aimed at cost-effective sales space, product handling, and inventory control. At the same time, it will create a cheap feeling for customers, maintaining consistency with the overall positioning of the products, and keeping maintenance costs low.Employee engagement: Fully empower employees, centralized embodiment of long-term development values Costco employs approximately 333,000 employees worldwide, and Costco's basic philosophy towards employees is to "empower them," which means much less micromanagement compared to many other similar positions and therefore the company has a very high productivity ratio. Each employee has unique abilities and very high work enthusiasm. The realization of this philosophy requires well-qualified employees and high employee loyalty, both of which are met. From the company's practices: 1) Providing employees with highly competitive compensation and benefits: Costco pays employees higher than the industry average wages, and in July 2024 the company raised starting hourly wages to $19.5, with the current average hourly wage in the US reaching $31. This level is much higher than the industry average. 2) Providing reasonable development plans and promotion opportunities: the company promotes employee development plans and promises internal promotions. In addition, a goal of 50% full-time staff ratio has been established. From the company's results: 1) The company maintains an extremely low turnover rate: in the 2024 fiscal year, for employees who have been employed for over a year in the US and Canadian markets, the percentage reached 93%, with a turnover rate of less than 10%, while according to the US Retail Federation NR, the turnover rate for the retail industry as a whole was over 60% in 2021. In addition, according to the company's official website, the average working tenure of Costco store employees in the US is over 9 years, with over 55% having worked for more than five years and over 1/3 having worked for over 10 years; 2) Extremely high company productivity ratio: the company's revenue per employee in 2024 reached $764,000, far higher than industry levels. In terms of benefits to the company: 1) A low turnover rate means the company does not have to bear the costs of extensive training for new employees, while a high productivity ratio means that although individual employee salaries are higher, their output is far higher than the industry average, both of which further drive the company to achieve a more optimal personnel management cost ratio. 2) Indirect contribution to the enhancement of the membership experience. Well-paid, motivated, and happy employees also help customers consistently enjoy a good shopping experience in the store, which plays an important role in member retention. Category management: Product operations centered around the member experience, fully tapping into the value of each customer Costco's membership model itself has a significant impact on consumer psychology. Once customers pay the membership fee, they consider it a sunk cost. Because of this, customers are motivated to frequent Costco to ensure profitability from this "investment." Category mix: In terms of the overall category mix, Costco's product selection strategy is based on essential items driving sales of optional items in a 3/4 to 1/4 ratio. Essential categories make up the majority of the store, attracting traffic and driving the sales of optional categories to ultimately increase the average transaction value. In addition, the company consistently updates about 20-25% of SKUs to ensure freshness of products and attract members to return for repeat purchases. Store layout: Since Costco operates with limited categories and regularly updates SKUs, there is no excess inventory in the store. Through continuous optimization of the store layout, customers are ensured to fully browse through products they need. The company also regularly offers many deeply discounted but limited-time supply products, attracting customers to explore the store, which Costco describes as a "treasure hunt." Product return policy: Costco's post-sale return policy is very liberal, allowing customers to return any purchased items at any time. This essentially is a commitment to risk-free investment for members, which to some extent also stimulates consumers to continuously try new products. Coupled with the company's low pricing characteristic, this often encourages impulse buying by customers. Therefore, in the long run, although the company maintains relatively low prices for goods, effective product mix, store positioning, and pre-sale and after-sale services can lead to higher actual average transaction values through cross-selling and repeat purchases, highlighting the unit economic benefits brought by each customer. As shown in the above figure, according to Perfect Price research, customers spend the most on a single shopping trip at Costco compared to other retailers. Central embodiment of product strength: Product selection capability ensures quality-price ratio of third-party and private label brands As mentioned earlier, the high quality-price ratio of products is key for Costco to maintain customer loyalty. Maintaining the quality-price ratio of products should not only focus on the denominator end of price, but the quality of products at the numerator end is also extremely important. Therefore, Costco must ensure that every product sold is carefully selected to meet the actual needs of members, allowing member consumers to rely on Costco without "choice paralysis." Currently, Costco's products are mainly divided into branded products and private label products, with a ratio of about 7:3. Selection and procurement of branded products 1) Advantages in product selection brought by the business model. Wide SKU range allows buyers to focus more on purchasing The strategy of wide SKU range allows buyers to meticulously select the most suitable products in each category. For Costco's buyers, selecting products is done one "item" at a time, rather than in batches, allowing buyers to focus more on the selection process, with a high level of precision achieved through supplier roadshows, trials, and factory visits to meticulously assess each individual product. 2) Buyer team: Rich experience + systematic evaluation ensures accuracy of product selection Buyers' experience is reflected in two aspects: one is a deep understanding of the purchased products, mainly in terms of judging the popularity of these products, and the ability to lock in purchase prices for popular products in advance; the other is the rich experience in procurement operations, with extensive negotiation and selection experience, effectively lowering actual costs. Experienced buyers require long-term cultivation, therefore the company's active investment in employee benefits and development, as mentioned earlier, is vital here. It's important to note that the company's buying team is usually promoted internally, starting from the bottom of the company and continuously improving or transferring positions, gradually becoming familiar with procurement and product circulation details, and constantly accumulating experience.Data-driven system evaluation as an auxiliary means: When the purchasing team evaluates products, they also incorporate data, benefiting from the company's precise big data accumulated from member sales. Using data tools, the company can accurately calculate the expected performance that new products or manufacturers may bring, thereby ensuring the reliability of purchasing decisions regarding recommended purchase quantities and profit levels. At the same time, the company also arranges for internal staff to test products, using the opinions of a large number of internal personnel, including senior management, as references. 3) Purchasing system: Global procurement of goods, comprehensive price comparison system for selecting procurement sources The company's global purchasing system employs buyers worldwide to find the best products and sources, and whenever the company expands into new markets, its procurement teams also enter in advance to conduct localized product purchases. Costco's main task after entering a new market is often not to achieve store profitability, but rather to understand the local market's product structure, procurement processes, and supply chain establishment. Selecting procurement sources with low prices as the core guidance: In many cases, Costco does not directly purchase from high-end brand manufacturers early on because these brands are not willing to sell their products at Costco's heavily discounted stores, which would affect their brand image. However, Costco's buyers will seek opportunities to purchase products from distribution markets or retailers eager to dispose of overstocked inventory legally, similar to the current low-price e-commerce channels like Pinduoduo in China. Building own brands: Kirkland Signature In 1995, Costco introduced its own brand, Kirkland Signature. The brand covers a wide range of categories, including groceries, home appliances, clothing, beverages, and food. Today, Kirkland own-brand products account for about 30% of Costco's sales and have become one of the primary factors in attracting and increasing customer loyalty. From the positioning of the Kirkland Signature brand, it actually reflects the company's more extreme expression of the quality-price ratio strategy: First, in terms of product quality, on the one hand, Costco's procurement system lays the foundation for the selection of goods for its own brand, while on the other hand, many Kirkland products are actually produced by well-known brands for Costco. For example, its selected coffee series is actually roasted by Starbucks, its diapers are manufactured by Kimberly Clark, a well-known brand under the name of Huggies, and its batteries are produced by the manufacturer of Duracell. Second, in its pricing process, Costco's consistent low-price operating philosophy usually prices Kirkland products more than 20% cheaper than similar products. In reality, when comparing Kirkland product prices with those of known brands from the same manufacturers, Kirkland products are often priced at 40%-60% lower, such as Kirkland Signature House Blend Whole Bean coffee being sold for $12.99 for 1130g, while the similar Starbucks product is priced at $12.29 for 340g, making Kirkland's price per gram 3.4 times lower. Benefits of own brands: 1) Increase profit margins. Although Kirkland maintains a relatively low price level, its own brands eliminate intermediary and brand markups, thus lowering costs and contributing higher profit margins to the company. According to the company's pricing strategy, the markup rate for a single product usually does not exceed 14%, otherwise, it requires special approval by the CEO. Therefore, we estimate that Kirkland's own brand usually has a gross profit margin of less than 14%, higher than the 8%-10% gross profit margin of the brand manufacturers, and as its sales proportion increases, it has a positive effect on maintaining the overall gross profit margin. 2) Provide differentiated product appeal. One of Costco's principles in developing new product categories for its own brands is that the category has market space, superior quality at lower prices, and unique products that cannot be found in the market. By commissioning manufacturers to produce these products, Costco achieves differentiation in its products. 3) With the continuous expansion of the company's own brand proportion, it also strengthens Costco's bargaining power with competitive brand suppliers. Auxiliary formats bring performance incremental while further enhancing member stickiness In addition to product sales, the company also offers various auxiliary services both inside and outside the stores, including food courts, gas stations, optical centers, pharmacies, hearing centers, photo studios, printing shops, car washes, etc. In the 2024 fiscal year, the company's auxiliary and other businesses achieved revenues of $49.69 billion, with the revenue share stable at 15%-20% in recent years, making it a stable contribution to the company's income. The purpose of this business layout is based on member needs, deriving services from product items, bringing incremental performance to the company, and serving as an excellent means of drawing traffic to the stores while maintaining member loyalty. Excellent domestic models: Sam's Club and Pinduoduo serve as benchmarks for localization Overall, over the past 23 years, consumers have shown a clear trend of "prioritizing price budgets while continuing to pursue quality" in their consumption behaviors. The priority of budgets in Chinese consumers' shopping decisions has increased, but their pursuit of quality has not changed. Consumers will start from both quality and price to find the optimal consumption choices. On one hand, residents' purchasing power is under pressure due to economic pressures on employment and income levels, leading to an increased sensitivity to prices among consumers. But on the other hand, in 2023, China's per capita disposable income reached 39,200 yuan, and per capita consumption expenditure reached 26,800 yuan, almost doubling from 14,500 yuan in 2012. Behind this growth is the consumer's cultivated consumption habits and increasing brand recognition, which means that consumers have not changed their pursuit of good products and services; they just tend to be more selective with limited spending on products with better performance and services that solve practical problems. In conclusion, the current domestic consumption environ...Similar to the background of the emergence and rapid development of warehouse membership store models in the United States in the 1970s, channel models that focus on value for money will become the mainstream consumption trend in the near future.At the third quarter financial report meeting, CEO Dong Minglun of Walmart revealed that about half of Sam's sales in China come from digitalization. Sam's online layout is the most successful aspect of Walmart China's localization, not only helping Walmart China achieve rapid growth, but also bringing experience to the upgrade of Walmart's global business model to a certain extent. At the third quarter financial report meeting, CEO Dong Minglun stated, "We continue to learn from China and other places, where e-commerce (including live streaming) is developing rapidly."Specifically, in terms of online business, domestic Sam's Club membership stores are mainly divided into three major models: one-hour ultra-fast delivery, next-day delivery, and nationwide single-warehouse delivery. These businesses are mostly based on Sam's Club stores and front warehouses, covering a range of 6 kilometers around the store, providing "free shipping over 99 yuan, one-hour ultra-fast delivery" service, and next-day delivery service in areas without warehouses. Based on the "store + cloud warehouse" delivery model, Sam's Club will effectively shorten the delivery distance. According to data from Lian Shang Wang, the "one-hour ultra-fast delivery" orders have accounted for nearly 70% of Sam's e-commerce orders, becoming the first driving force for Sam's incremental growth. Members only need to place orders through the Sam's APP to enjoy the fastest one-hour delivery service, and free shipping for orders over 99 yuan. The growth of Sam's ultra-fast delivery online business is inseparable from the aforementioned store-warehouse (store + front warehouse) model as the infrastructure support. The product model is similar, but the category selection is deeply localized Sam's Club has been deeply cultivating in China for many years and has built a complete and consumer-friendly product portfolio. Adhering to the concept of "broad SPU, narrow SKU," they seek comprehensive coverage of product categories, while rigorously selecting only 1 to 3 premium products in each specific category for members to choose from, completing the brand and quality selection for members. In addition, Sam's own brand (Member's Mark) sales are expected to account for around 30%, and their competitive prices are also reflected in the store, with most popular items priced lower than similar items in the market. The strong product power is the fundamental reason for Sam's success. Although the aforementioned front warehouse model is a successful innovation, many emerging domestic internet retail enterprises had attempted to layout this business model before Sam's. Ultimately, only Sam's achieved a stable profit model, with the core value of Sam's front warehouse lying in the products, not in the front warehouse itself. With the support of strong product power, Sam's has maximized the extraction of user value and to some extent alleviated the difficulty of acquiring customers through traffic. In addition, there are certain differences between the goods on the shelf and in Sam's store. The Sam's store has approximately 4000 SKUs, while the front warehouse selects around 2000 SKUs, further optimizing products based on different scenarios for user demand differences. ***Note: The translation has been truncated at the end due to exceeding the character limit***Increased by 13.9 times, reaching 1.88 million yuan.After this, under the assistance of Pang Donglai, Yonghui continued to adjust and transform its stores, absorbing experiences from previous adjustments and implementing autonomous adjustments. It continued to promote the adjustment and transformation of its stores and replicated the changes in major cities nationwide. For example, after the adjustment on November 8th, the Zhiyuehui store in Shenzhen achieved sales of 5.5 million RMB in 3 days, with a daily sales increase of 8 times compared to before the adjustment. By 2024, Yonghui had a total of 31 adjusted stores reopened, and it is expected to reach at least 41 by the Spring Festival of 2025. Significant improvement in product quality: In terms of product assortment: focusing on meeting the needs of daily life, Yonghui retained top-quality brands, removed low-quality brands, and added fashionable product categories. The proportion of fresh products decreased overall, and some bulk sales were changed to packaged sales. In addition, the deli area expanded significantly, with categories such as pastries, on-site processing, and pre-made meals attracting high-spending household customers. In terms of product selection, Yonghui aimed to align with Pang Donglai, with the product structure of some adjusted stores resembling up to 90% of Pang Donglai's. They introduced over 70 of Pang Donglai's own brand DL popular products such as craft beer, laundry detergent, and oatmeal. Additionally, they selected local specialty products. Overall, the adjustment of products was guided by the selection strategy and real sales data (turnover, repeat purchases). During the latest adjustment process, Yonghui's own brand, which has been learning from Pang Donglai's product development concept, also made progress. For example, at the Fuzhou Wusu North store that opened in November, Yonghui's own brand products accounted for 7.4% of the daily sales. At the Zhiyuehui store in Shenzhen, sales of Yonghui's own brand products in three days were close to 250,000 RMB, a year-on-year increase of about 512%. Environmental experience: In terms of store environment: through rearranging the layout, removing mandatory routes, widening main and secondary aisles, eliminating crowded displays, optimizing display positions, and improving lighting, Yonghui created a better atmosphere for showcasing products. Compared to before, the store now has expanded bakery areas, on-site processing, and deli sections, removed rented areas, added tobacco and liquor gift sections, and customer rest areas. This created a more spacious environment for customers, enhancing their shopping experience. Equipment and facilities: Existing equipment underwent comprehensive maintenance, updates, and additions such as daily distribution cold chains, fresh produce, bulk cereals, and shelves, with an overall update rate of 45%. Store services: After the adjustment, stores provided detailed services and added convenience facilities such as free pet storage, self-service water dispensers, free ice bags, on-site heating, basic medicines, blood pressure measurements, ensuring a comfortable shopping experience for customers. Employee aspect: Due to the changes in Yonghui Superstores' business model after the adjustment, focusing on quality products and providing thoughtful services, the demands on employees have significantly increased in terms of workload and work status. Therefore, employee treatment and incentives have become more important. Currently, Yonghui adjusted store employees' average wage increased by around 20%. The increase in the minimum wage threshold is even more significant; for example, the personnel at the Zhengzhou Xinwan store increased from 79 to 148 after the adjustment, and all existing employees received a pay raise, with basic employee wages increasing from 2,500 RMB to 4,500 RMB per month, with average daily work hours not exceeding 8 hours and an additional 10 days of annual leave. At the Zhengzhou Hanhai Haishang store, the minimum wage for employees reached 5,000 RMB per month, a increase of over 60%. Additionally, Yonghui Superstores introduced other employee benefits, such as 1) increased paid annual leave; 2) shortened work hours to 9 hours; 3) added employee lounge and shower rooms to maintain a good working condition; 4) provided employee discounts. Domestic supermarkets entering a new round of consolidation period, market trends expected to anticipate in advance For offline supermarkets and chain retail enterprises, the ongoing shift in online consumer business models, along with factors like the pandemic, has increased operational pressure. However, offline channels still have advantages such as concentrated and varied consumer scenarios. Through internal quality improvement, digital transformation, and format transformation, there is still potential to enhance competitiveness. Amid various factors, some leading supermarkets are currently entering a new phase of adjustment and transformation: for example, MNSO announced its intention to acquire 29.4% of Yonghui Superstores' shares for 6.27 billion RMB in cash, and Alibaba proposed to sell all of SUNART RETAIL's total 78.7% stake held by Suning to Delong Capital for approximately 13.138 billion Hong Kong dollars (approximately 12.3 billion RMB). Meanwhile, Yonghui Superstores and Step by Step are actively studying the excellent supermarket experience of Pang Donglai and advancing store optimization and transformation. Remarkable market performance during the previous transformation period We believe that the retail industry in China has undergone several rounds of industrial restructuring, with the previous retail industry consolidation occurring around 2015. At that time, online internet giants such as Alibaba, JD.com, and Tencent invested in and controlled offline retail companies, such as Alibaba's investment in Intime Retail and gradual acquisition of control; JD.com's investment in Yonghui Superstores in 2015, achieving a win-win cooperation in fresh supply chains and logistics distribution. From a capital market perspective, the previous wave of consolidation also brought remarkable market performance to the sector: in 2015, the retail industry index rose by 69.52%, outperforming the Shanghai and Shenzhen 300 index by 63.9%. Judging the future market trend based on the core elements of the current adjustment and transformation As mentioned earlier, we summarized that the main focus of the current offline retail adjustment includes product and service quality, which is also the core barrier for excellent enterprises like Costco. The realization of these two key adjustment contents will be an important basis for us to judge the future market trends of related companies.Competitive capability requires, on one hand, the vertical construction capability of the supply chain, balancing cost and quality, and on the other hand, the accurate understanding of consumer demand in the era of product surplus, with product selection being crucial. Therefore, it is usually necessary to accumulate commodity strength over a long period of time. Currently, we tentatively assume that relevant enterprises have directly integrated their commodity strength by learning from Pang Donglai. However, the core issue is that Pang Donglai, as a supermarket enterprise located in third and fourth-tier cities, may not have a product structure that is completely suitable for the preferences of consumers in different regions across the country. Therefore, in the future, we believe that the ability to adjust the product combination and selection in different stores is a prerequisite for relevant enterprises to promote their products in different regions across the country.Service Capability: On one hand, it is about employee capabilities: we believe that improving the service experience is an effective way to increase customer conversion rates and associated rates, and employees are the first point of contact for consumers in the service experience. The cultivation and motivation of employee capabilities are crucially important; on the other hand, it is about store environment: whether the store and facilities can create an attractive environment for entering and staying, and whether they can adjust the single-store model for different demographic groups. Based on the above two major directions for improvement: 1) Whether the future "fat adjustment" product capability can be replicated nationwide to bring the same level of performance to remote stores; 2) Whether the early adjusted stores can gradually profit and achieve self-sufficiency, providing continuous financial support for the subsequent improvement of employee and store service capabilities. These two points are important criteria for determining the success of long-term improvements. This article is sourced from a research report published by Guosen Economic Research Institute; GMTEight editor: Wenwen.