Costco Entry into China - Case Study Example

Costco Entry into China The Chinese market has gained increased interest from supermarket companies intending to introduce their businesses in the global market due to the country’s rapidly growing economy (Hu, Reardon, Rozelle, Timmer & Wang 2004). The growing economy, as well as the large Chinese population, has presented great opportunities for multinational corporations although significant challenges remain eminent in venturing into the Chinese market (Khana, Palepu & Sinha 2005). Despite the increased opportunities in China, entry and establishment of a successful business has remained a great challenge for many multinational companies. In this case, companies intending to venture into the Chinese market must ensure a proper analysis of the market situation in order to establish the appropriate strategies capable of yielding a successful venture. Companies venturing and operating in the Chinese market face several challenges including negative foreign brand perceptions, negotiation setbacks, and business environment (Wu 2008). Therefore, the management of Costco must have a proper understanding of these market challenges in order to formulate the best approach in its entry to the Chinese market that guarantee a successful venture. This critical analysis explores Costco’s strategic entry into the Chinese market based on theories underpinning the concepts of perception, competition and segmentation. Careful synthesis of the company’s competitive positioning strategies and analysis of competitors is done to feed Costco with reliable planning information. Background Information Costco as one of the successful retail stores in the U.S. market plans to extend its operations into the potential Chinese market. Costco Wholesale Corporation currently has the largest membership warehouse club with its stores operating in most parts of United States (Boyle 2006). In 2009, Costco ranked third amongst the largest wholesale chain stores operating in the U.S. market, and ninth in the global market. The enterprise takes pride as one of the best wine retailing shop around the globe. Costco has its headquarters in Issaquah, Washington, despite having established its first offices in Kirkland, in the same region. The company established its first warehouse in Seattle, and has over the years ventured into the global market opening new branches in Australia, Canada, South Korea, Japan, Mexico, United Kingdom, and Taiwan. Jeffrey Brotman and James Sinegal founded Costco on September 15, 1983 in Seattle, Washington, DC. With the two founders having started dealing with retail distribution at their tender age, they brought together their expertise to establish what has now become a globally recognized enterprise. One of the greatest milestones achievements in the company’s history revolves around its business merger with Price Club, accomplished in 1993. The merger was driven by the similarities between the two companies in terms of the business size and model. Sol and Robert Price in San Diego, California, founded Price Club in 1976. This merger saw the company change its name to PriceCostco as the merger resulted in doubling the parent company’s operations hence the need for an umbrella name. After successfully securing this merger, the new company’s operations extended to about 206 locations as well as an increase in its annual sales to approximately $16 billion. Management of the company under the new umbrella name remained under the company executives from the two firms. However, after some time the owners of the Price Club existed from the company to start another company known as Price Enterprise (Costco Wholesale 2009). Following, the tremendous growth in China’s economy that confers a potential market for global enterprise, Costco has expressed increased interest in the Chinese market. The company management has evaluated its strengths in the mother country market and concluded that a venture into the Chine would most likely increase its profitability. However, the company has to study the Chinese market situation in order to put up proper strategies to ensure a successful venture. Perception of Foreign Product in the Chinese Market Although credible information based on empirical research on consumer perceptions in the Chinese market seems scanty, it is imperative that they must hold significantly different perceptions about foreign businesses and their products. According to Zhang (1995), it is thus crucial for a foreign company to understand underlying Chinese consumers’ attitudes towards western products. Introduction of foreign products especially from United States in the Chinese market has faced significant resistance owing to some cultural beliefs common among the Chinese people. China’s long history and experience in the hands of western and Japanese imperialism cemented significant resistance in the introduction of brands with the American origin in the Chinese market (Khana, Palepu & Sinha 2005). Some of the Chinese people see introduction of western products as imposition of western culture via the notion of dubbed ‘western culture imperialism’ (Hooper 2000). With China’s interest in mounting cultural nationalism, the Chinese people have been adamant in accepting introduction of foreign products in the Chinese market (Hooper 2000). Perception of western services provided in the Chinese market as a threat to the Chinese culture has resulted in decreased demand in such services especially in the local conservative Chinese people. Studies have indicated that Chinese people in the non-coastal areas regions such as Jinan, Chengdu, and Shenyang experience the least purchases of foreign products due to limited interaction with people from western countries (Gao & Zhang 2011). Major towns like Shanghai and Beijing have, however experienced establishment of several foreign companies leading to increased purchase of foreign products. Increased urban population mainly composed of young people has led to increased consumption of western products as some of Chinese young population associate themselves with western styles (The Mckinsey Quarterly 2006). Additionally, the rich class of Chinese people has a strong fondness for western products due to their perception that products with American brand names associate with high esteem, and the same character is ubiquitous among the college-educated youths (Chu & Huang 2010). This exclusive is ubiquitous in the mushrooming Chinese urban population, which has led to easier marketing of the products in the Chinese market. In order for Costco to conquer the Chinese retailing market with relative ease, two core imperatives bolster acceptance and strategic positioning. Notably, as afore mentioned, there is an emerging middle class population in growing Chinese sub urban areas to whom western products appeal. This implies that Costco can extrapolate its established American corporate culture into China (Gereffi & Ong n.d). Additionally, considering that Costco commenced entry into the Chinese retailing industry with relatively scanty experience with the people, its strategic plan should recognize local adaptation mechanisms. Gereffi and Ong (n.d) suggests that the literal sense of ‘Chinese freshness’ must be considered when planning a product’s acceptability by the locals. In addition to studying the Chinese perception on the country of origin of products, Costco should invest more efforts in understanding what the essence of freshness connotes to Chinese consumers, and its effect on purchases. This premise implies that Costco must integrate Chinese preferences into the product procession and designs if such strategies as having wet markets indoors pull customers towards buying. Alternatively, the company can also stock variety of locally produced products in its Chinese stores to serve as a source of attraction for the Chinese people into their outlets. Since the Chinese people prefer buying products produced by the domestic producers (Ghauri1999), Costco could also contract some of the domestic companies to produce some of its products. Joint ventures for most manufacturing companies have particularly played a critical role in the establishment of some foreign enterprises as such local firms enjoy the loyalty of the Chinese people to domestic markets (Chung, Haire & Hartel n.d). Competition A comprehensive analysis of Costco’s competitive positioning would be a yardstick measure to give the firm its overview in the Chinese market. This is because it will elaborate the available market share, the Chinese perceptions of its products, existing prices, operating costs as well as motivating the company to evaluate its prevailing marketing strategies (Fleisher & Bensoussan 2007). Additionally, the competitive positioning analysis would elucidate Costco’s competitors thus giving a relative picture of its standing in the Chinese market. The rationale of competitive positioning is underpinned by exploration and enhancement of the perceptions of clients serviced (Fleisher & Bensoussan 2007). Costco will achieve this through targeted analysis that feeds the firm with directly important information to bolster strategic planning while giving the company ability to reliably assess its competitiveness. This strength is underpinned by assessment of essential factors that influence its marketability and profitability. Particularly, assessment of industry participants, their competitiveness, their market share, and acceptability by clients play a pivotal role in strategizing on market entry plan (Fleisher & Bensoussan 2007) Costco’s Competitors Costco expects to experience competition from western giant retailers that have mustered entry strategies as well as marketability to the Chinese people. Competitors in China’s retail sector include both domestic and well-established foreign chain stores such as Wal-Mart, Tesco China, and Carrefour (Euromonitor International 2011a). Some of the domestic retailers have established themselves in strategic parts of China’s famous towns, which increase their competitive advantage over new entrants in the market (Jiang & Kattuman 2010). Claims by Jiang and Kattuman (2010) indicate that domestic retailers have established their stores in strategic areas of the towns with high traffic, which present new entrants with cost challenges. Costco’s main competitors will definitely be the Wal-Mart and Tesco, retail stores that have entered the Chinese markets earlier and with relatively much success (Euromonitor International 2010). However, via its well performing warehouse club channel, it will face off competition from Wal-Mart whose Sam’s Club brand is a fierce challenger. The company has been on record for maintaining its competitive strategies with much success, which has built a culture of efficient stores and supply chain operation. This is a strength that Costco will capitalize upon to operate on margins that are lower than competitor’s. As reported by Euromonitor International (2010), this benefit gives Costco room for launching into markets with strong competence anchored on low prices as well as giving customers value for their money. Additionally, Costco has a strategy of offering valued products at lower prices and luring customer to rush for purchases as they think delayed purchases may make them lose out. This novel approach pulls return customers as they keep seeking offers that may not be there next time. These are essential competence positioning differentials that the company will invoke in the Chinese markets. Wal-Mart However, foreign companies such as Wal-Mart with similar origin as Costco and already well established in the Chinese market pose stiff competition for new entrants (Euromonitor International 2011b). Wal-Mart is a considerably strong brand for Costco to wrestle at its infancy in the Chinese retailing industry. Wal-Mart is one of the market leaders in the Chinese retail sector, whose strength is underpinned by strategic expansion policy across China that bolsters strong brand awareness. In addition to competing directly with Carrefour, Wal-Mart’s success is attributable to its formidable marketing and promotional designs (Euromonitor International 2011b). Notably, though competition from Wal-Mart is inevitable, Costco should capitalize on its warehouse club channel to compete with Wal-Mart’s warehouse club, which is the only one in the Chinese market. Moreover, as Chinese population tends towards middle class households in the near future (The Mckinsey Quarterly 2006), the firm should target developing sub urban areas as opposed to the large cities where other international retailers are concentrated. It is imperative that marketing strategies can be conventional, but a success in their adoption is a function of how individual firms employ them to their advantage (Cui &Liu 2000). Wal-Mart, though a direct competitor of Costco in the lucrative Chinese retail industry, has feasible marketing strategies that can be extrapolated creatively to confer competitive advantage. For instance, to avoid price wars that may affect Costco’s products in China, the firm can adopt a supplies influential policy that gives the company ability to reduce high supplier margins that are shifted to the buyers. For successful entry into Chinese market, Costco should build its competitive model around customer focus and innovative products so as to initiate designs of local products in its product base. The strategy should seek reliable understanding of real customer wants, means to fulfill the desires, and strategic products innovations (Cui &Liu 2000). The company can achieve this by designing customer-centered marketing mix, which should include an extensive survey to understand the customer wants in the target zones. Moreover, as argued by Max and Yuval (2010), the strategy should seek to tap core customer demographics characteristic of urban markets that would bolster good relationship while facilitating efficacy in provision of goods and services. A competent entry strategy would be defective without a suitable customer care service that is custom made to reinforce a Chinese locales satisfaction (Cui &Liu 2000). Tesco Costco is set to compete against Tesco, another though non-American brand, English leading chain store that has established relatively well in the Chinese market. Though Tesco has not been competitive enough to beat Wal-Mart and Carrefour in the Chinese retailing industry, its strategic positioning, anchored on expansion and increased investment in the growing grocery retailing, gives it a competitive edge (Euromonitor International 2011c). In addition to capitalizing on these Tesco’s fluid strategies, Costco should optimize on the internet marketing that its competitors are yet to command. Crucial Competitive Strategies Moreover, following China’s World Trade Organization accession, foreign large-scale retail groups have better advantages in the fields of commodity, service, and price than most Chinese retail enterprises (Ianchovichina & Martin 2001). Foreign entrants into the Chinese market stand a better competitive advantage with a fair playing ground due to their advantages in the fields of mechanism, size, financing, technological equipment among other factors (Huang 2007). Costco’s successful establishment of its business in Taiwan presents a formidable synergy for the firm to withstand challenges in its attempt to enter the Chinese market. The company’s successful venture into the Taiwanese market provides a better opportunity as its venture into the Chinese market may not be viewed as an American move hence limited resistance. In order to increase its competitiveness in the Chinese market, Costco can take advantage of its strategies for down cutting prices for its products. The company’s innovative team could also enhance its competitive edge over other competitors through introduction of its new brands to the Chinese urban market segment characterized with high preference for new products. Segmentation China as a rapidly growing economy characterized by increased income among the Chinese people, has led to development of wide market for all products (The Mckinsey Quarterly 2006). For successful market segmentation, Costco should build a strategic approach underpinned by target Chinese population demographics (Gereffi & Ong n.d). To stamp sustainability in its target clientele policy, Costco should consider both the poor and rich Chinese people in order to apply appropriate marketing tools effectively. This is achievable by planning to have outlets in both the cosmopolitan China as well as the developing urban centers. In this instance, being a relatively new entrant in a highly competitive market, Costco can benefit from a strategic positioning analysis that harnesses its competitor’s success strategies been longer in the market. This is by targeting low-income customers especially in the rural China. Additionally, owing to income differences and consumer spending variability, Costco must target largely the growing middle class and the rich. Emerging Middle Class The rising income has encouraged emergence of a middle class market segment mainly comprising of people in the urban centers (The Mckinsey Quarterly 2006). This market segment has a strong potential especially due to the improvement in the purchasing power because of increased income (Yu & Zhou 2010). Despite the growing Chinese economy, majority of the local people have remained poor hence limiting expansion of business to such regions (Chow 1995). With many of the domestic and some foreign companies focusing on the urban population, some of the foreign firms have embarked on understanding the regional diversity in consumer purchasing power and lifestyle in an attempt to exploit the unexploited regional markets (Zhu, Wang, Yan & Wu 2009). The Chinese regional markets are classified under emerging and growth markets; with the growth markets referring to markets in southern and eastern parts of China. These regions comprise of economically developed areas with populations endowed with high purchasing power including Hainan Province, Fujian, and Guangdong provinces (The Mckinsey Quarterly 2006). These regions have high number of potential consumers thereby attracting a great number of foreign investors from Taiwan among other countries. Shanghai, which also falls under the growth markets, has over 200 million consumers mainly comprising of middle class people known to set pace in fashion and lifestyles. China’s Market in Different Regions Another market segment in China entails the emerging markets that comprise of regions in the northern, central, and southwestern parts of the country (The Mckinsey Quarterly 2006). The potential markets in the north have attracted investors from both the domestic and international markets due to improved infrastructure, telecommunication, and computer technology (Cui & Liu 2000). In addition to the improved infrastructure, the region’s economy has continued to open with the increased port cities in the area. However, some regions such as Beijing are dominated by the Jing-Pai culture with in-depth Confucian doctrines that limit foreign investment. Investors must consider the overall China’s market potential because different regional markets have unique characteristics that influence the success of a business. Evaluation of the regional market variations plays a critical role the marketing strategies adopted by an investor. Despite the large Chinese retail industry posing significant competition for Costco’s entry into the Chinese market, some of the small retailers present a potential market for the company (Huang 2003). Small businesses in the Chinese market are likely to become attracted to the wholesale strategy adopted by Costco and its ability to offer relatively low prices to its clients. With the Chinese large population and their social setup, Costco can target large families as well as the small businesses located outside the main town centers as their key clients. The regions identified here that continue to experience economic growth present opportunities for establishment of small business likely to increase the demand for bulky products. Recommendations and Conclusion For a successful venture into the Chinese market, Costco management must analyze the critical factors that underpin customer satisfaction in the traditionally communist society. This should bolster understanding of the Chinese market and aid in streamlining their operation to meet some of Chinese people’s expectations. In addition to corporate cultural differences, the perception of Chinese customers on foreign brands influences several aspects of business operations especially the marketing strategies and acceptance of the company products. Costco must also be aware of the traditional purchasing behavior of the Chinese people, which drives their preference for Chinese owned businesses and locally produced products. In order to evade the poor attitude among the Chinese people towards foreign products, the company must seek to stock products capture local people’s appeal. This may be accomplished through stocking variety of locally produced products in their stores in order to attract the Chinese customers into the stores. The company must also consider the Chinese people’s perception of American products, and make use of its already established Taiwanese stores to influence their attitudes. Costco can also enter into manufacturing contracts with the domestic companies to have some of its products manufactured locally. Due to the high competition in the retail market especially from the domestic retailers who have established their stores in strategic areas of the urban centers, the company can reduce the competition by targeting small business that purchase goods in bulk. Costco can also focus on the emerging markets with few retailers as a way of diversifying its target market from the highly competitive urban market segments. In conclusion, the management of Costco should strategically analyze its competitive positioning in the Chinese market and follow some of recommended strategies. The company should ensure its operations reflect and respect the Chinese demographic trends for a successful venture in the promising market. Moreover, the company should locate its operations in the emerging Chinese markets to reduce the stiff competition in the growth markets. 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This stability provides an excellent business atmosphere that definitely will benefit Costco as it relocates to China. Taxes and other levies and duties are favorable to a continual growth of the business in China. Chinese government is offering various incentives meant to benefit foreign investors to their economy such as Costco (Datamonitor, 2009). If the management of Costco decides to take advantage of these governmental incentives, it will surely have an easy time upon entrance into China. Economic Analysis The company expects to face a hard time as it tries to shake off the effects of the recent global meltdown. This is because if there is another economic downfall, consumers of their products will change their spending habits in order to direct their money to avenues that are more urgent, which may ultimately lead to a massive drop in their profits (Datamonitor, 2008). To cushion itself from this problem, Costco has implemented a balanced spending strategy that will ensure that the company survives any incidence of a meltdown in the Chinese economy. However, the good news for Costco is that being progressive multinational, its products are likely to attract the Chinese consumers who according to Jap (2010), tend to favor international brands against local products because they perceive them as of much higher and better quality and performance. Technological Analysis China being a hub of many technological innovations and new technological advancement (Zu et al. 2011), it is the ideal market that Costco should expand its target market to by relocating there. This is because the company will be able to take advantage of these innovations to streamline its service delivery in order to serve as many clients using the least amount of time and resources, especially through transfer of the American computing technology that is being hailed in the Chinese markets (Business Wire 1999). In addition, the company will be able to synchronize all its operations in all its subsidiaries in order to coordinate all its inventories and supplies schedules in real-time. Legal and Regulatory Analysis Some of the challenges that Costco expects to deal with in this new market is the price control regulations that the Chinese government has introduced recently (Knapp 2008). This will force the company to re-evaluate their pricing strategies in order to maintain a healthy profit margin while complying with these regulations. Costco plans to launch new products specifically for this overly controlled Chinese market. This will give the company products that they can rely on to meet their tax demands and keep the business in operation all year round. Environmental Analysis It is important that Costco understands the market environment in China increasingly being aligned with environmental protection policies that every business has to satisfy. Social cultural issues form the core of the basis for Costco to analyze and integrate its company culture appropriately with that of Chinese regulations, while integrating the ‘green strategy’ environmental rhetoric being sold to the Chinese by the people’s government (Datamonitor 2009). However China has been burdened with uncontrolled environmental pollution issues such as air pollution, water pollution and soil erosion, government is pushing for a balance on the stress imposed on natural resources motivated by the rapid economic growth (Datamonitor 2009). These are issues Costco will have to deliberate upon in long range particularly in its packaging policy so as not to appear environmentally insensitive before the Chinese consumers. Read More