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Costco and Topshop enter China – but only online

Earlier this year, leading retailers Costco and Topshop entered China – but both through online stores only. As China’s e-commerce market grows at an exponential rate, retail brands are opting to skip brick and mortar stores and enter online instead. With global e-commerce sales reaching $889bn in 2013, China is the largest market worth an estimated $314bn.  Furthermore, financial publisher Barron estimates the Chinese e-commerce industry will account for 18% of the country’s total retail sales by 2018 – up from 8% in 2013.

Online before offline – a new approach to market expansion

To tackle the notoriously difficult Chinese market U.S retailer, Costco, partnered with the Alibaba Group to offer food, health products and several Kirkland Signature items. By utilising Alibaba’s local expertise it can filter the most suitable brands for its Chinese consumers and help identify consumer habits with no hefty brick-and-mortar costs.

Many global retailers opening in China have struggled to find product mixes and store designs favoured by local customers. “Digital storefronts are a powerful tool to help shape what a retailer might want to do with a physical store”, said Marci Merriman, executive director of retail strategy and customer engagement at EY. By selling directly to Chinese consumers on Alibaba’s platform, Costco aims to use local knowledge and a low-cost structure to avoid cultural mishaps that caused other retailers entering China to fail.

The company’s vice president, Jim Murphy, said, “Costco see’s tremendous growth opportunities in China, especially in light of Chinese consumers’ increasing appetite for imported products”. Anjee Solanki, national director of retail services at Colliers International says: “This shows Costco has learned from mistakes made by companies like Wal-Mart and also those who were forced to exit the market like Home Depot”.

David Cheesewright, head of Wal-Mart’s international division, acknowledged at the company’s investor conference that China remains tough even after 17 years. Part of the retailers struggle was caused by a lack of localisation by Walmart.

Failure facts

– Walmart stuck with its big box format even though Chinese customers prefer neighbourhood stores – leading to Walmart’s same-store sales declining 1.6

– “Everyday low prices” slogan backfired due to Chinese consumers equating inexpensive products with low levels of safety and quality as much as bargain prices

Similarly to Costco, fashion giant Topshop also chose to enter China through an e-commerce platform only. Launched in late September through online site ShangPin, its aim is to further understand the shopping habits of the Chinese consumer. “Topshop can reach shoppers across China and get a sense of what consumers are looking for”, states M. Claire Chung VP for international business development for ShangPin. Chung continues; “That’s something you can learn very quickly online, and that you can learn before ever deciding whether to open a store”.

E-commerce has grown to such heights in China that even big brands have to consider whether doing brick and mortar stores is worthwhile.  With property rental rates increasing at speed and fierce local competition for retail locations rising, global retailers need to question whether it’s worth the investment.

Brian Leong, general manager for Lowe Profero in Shanghai, speaks about a client that approached him with retailing ambitions in China and says; “They started with brick and mortar and told us they would invest in 30 stores in one year, while we were saying, ‘no, go with e-commerce, the retailer eventually did some ecommerce but by then it was too late. They had to pack up and go.”