Costco opens its third store in China – can it challenge Walmart’s Sam’s Club?

Costco (COST) plans to open a new warehouse location in China on Friday. This will be the company’s third location there, with plans to open two more units this fiscal year. The bottom line: Costco appears to be serious about acquiring Walmart’s Sam’s Club, which already has nearly 40 stores in China.

Costco’s new warehouse will be located in Shanghai’s Pudong, near the Disneyland Resort. Walmart’s (WMT) Sam’s Club has been present in China since 1996. Last fall, it opened number 39 and showed “commitment to accelerating and deepening its growth across China,” it said in a statement at the time.

CFRA analyst Arun Sundaram thinks there is room for both.

“The market is huge. Obviously the Chinese economy is huge so I think there’s room for multiple competitors to be successful in China so regardless of Sam’s Clubs growth strategy there I think Costco will do well ,” he said.

Costco launched its first brick-and-mortar location in China in 2019, proving successful as approximately 200,000 members signed up in the first few months, surpassing the goal of 100,000. Costco’s second location will then open in 2021 in Suzhou, a city west of Shanghai.

The location, which is set to open this week in Shanghai’s Pudong, has already signed up more than 80,000 members, according to the Global Times.

As it opens more locations in China, Costco executives seem aware that membership signups won’t be as large as that initial blowout response.

“We signed up so many members in those first two warehouses,” SVP Bob Nelson said in a call with investors after Costco’s fiscal Q3 2022, which ended March 31, 2022. He said with additional locations, “It’s going to change the dynamic a little bit. “

Costco’s fourth and fifth locations will be in Yinzhou, a district in Ningbo city, according to the website.

In total, Costco has 848 warehouses, including 584 in the United States, plus 264 international locations. Last quarter, Costco’s international operations saw same-store sales increase 3.8%.

Walmart, on the other hand, has 332 wholesale club locations internationally with the largest wholesale presence in Mexico (166 units). In Walmart’s Q4 results, the company reported a 2.1% increase in international same-store sales. [Walmart in Mexico]China and Canada led the way.”

This membership-only model gives an edge over retailers. In recent years, other retailers have seen a significant downturn in the market, such as Carrefour along with its parent company in China, Suning.com, which appears to be closing its doors.

“If you’re just a regular retailer, like a big-box retailer, you’re probably not going to do very well in China because that’s such a mature market,” Sundaram said. CFRA has a hold rating and $480 price target on Costco stock, and a buy rating on Walmart stock, along with a $160 price target.

A ‘slow and methodical approach’?

Slow and steady wins the race? Maybe.

Sundaram said the measured approach Costco used to enter the Chinese market was “smart”. Five years before opening its first brick-and-mortar location there, it began introducing itself to e-commerce on sites like JD.com (JD) and a division of Alibaba (BABA) called Tmall.

E-commerce “was a way for them to really understand the Chinese consumer and get to know their shopping habits.”

Sundaram also mentioned some risks. They include the regulatory environment in China, geopolitical issues following the US-China trade war, and local competitors who may have a better consumer pulse.

‚ÄúThere is a huge addressable market in China, but it comes with a lot of risks. That’s why it makes sense to really test the waters before making a huge upfront investment in China, which is why Costco has essentially been very slow and methodical in their approach to growth in China.”

Can Sam overcome this frenzy? People try to get a fried chicken at the first Costco store in China on the opening day of its stores in Shanghai on Aug. 27, 2019. (Photo HECTOR RETAMAL/AFP/Getty Images)

Why now is a good time for Costco to expand in China

And 2023 may be the right time to boost its presence in China, apart from the problems with the US.

This competition from wholesalers comes as the People’s Republic expects its GDP to increase by about 5% this year, meaning Chinese consumers may have more cash in their hands. That’s part of why CFRA analyst Sundaram thinks now is a good time for Costco to expand.

For starters, China’s upper middle class is experiencing a “massive rise” and consumers are intrigued by the concept of member-only shopping. “I don’t think that would have been the case, maybe 10 to 15 years ago,” Sundaram said.

According to the 2023 McKinsey China Consumer Report, the upper middle class is seeing double-digit growth and high-income households are driving “robust consumption growth”.

Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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