An in-depth analysis of the warehouse membership store model to see the competitive cards of Costco, Sam's Club, Fudi and other players

Under the shadow of Sam's Club, which is a "starfish model", and Costco, which is a "coral reef model", can Fudi successfully "expand its territory"?

Membership stores and discount stores have become the two mainstream formats that retail enterprises have explored in recent years. The hot market is naturally full of new things. Not long ago, Aldi opened its largest store in the Chinese market in Jinshan, Shanghai, and Fudi warehouse membership store, which has its own Internet celebrity attributes, also announced that it would move from Beijing to Shanghai and start a nationwide layout.

The membership store model has become a new driving force in the domestic new retail market. Regardless of old players such as Costco and Sam's Club, even M membership stores standing on the shoulders of the retail giant Sun Art, as well as cross-border players such as Oriental Selection and Laiyifen have successively entered the market to fight.

Standing at the crossroads where foreign and local brands are secretly competing, we need to think about: What is the core of the membership store model? Does Fudi's nationwide expansion mean the second take-off of the membership store model? What characteristics will enable players to gain real victory in this wave of membership stores?

1. The core of the membership store model

In recent years, in addition to the hard discount model, the hottest model in the retail industry is the membership store model. Its industry representatives, Sam's Club and Costco, have annual sales of more than 200 billion US dollars. Why is this model so unique? Why can it maintain continuous and steady growth and profitability? The author attempts to dismantle the core of this model.

Figure: Costco and Sam's Club

First of all, the essence of the membership store model is to continuously meet as many needs of a specific target consumer group as possible through specific products and services.

Figure: The essence of the membership store model

The first "specific" refers to the differentiation of goods and services. It requires enterprises to have strong product selection capabilities, or even product creation capabilities, that is, the ability to research and develop private label products (PB). Only with this ability can retailers provide consumers with "high-quality and low-priced" products to ensure the repurchase rate of members. At the same time, in terms of service, it can keep improving, innovate, and continue to provide customers with the ultimate shopping experience.

The second "specific" refers to the selection of target consumer groups. "From the vast expanse of water, only one can be taken", and a limited target consumer group can be locked in through paid membership, rather than being open to unlimited. With the target group defined, their needs can be better understood and met, and then a better shopping experience can be created with the help of consumer preferences, thus further ensuring the level of service.

Secondly, the core elements of the membership store model are goods and services.

Different from the general needs of the general public, the demands of "specific" target consumer groups on retailers are more concrete. Goods and services are two handles that directly target consumers and give them a deep experience.

In terms of merchandise, the membership store model requires retailers to consider various factors including category, appearance, taste, price and packaging (scenario) based on target consumers. Choosing which category to use to meet consumer needs in a certain scenario and presenting the merchandise in a way that consumers can accept and in a suitable packaging form, as well as meticulous work details, is a big challenge for many retailers.

Figure: The whole process of product service

In terms of service, as one of the core competitive advantages of the membership model, meticulous design of the entire process is also the key to increasing membership fees and renewal rates.

How to design membership benefits before purchase, so that consumers can trust and be willing to pay for membership first, and make this thing efficient? In addition, there is the effective reach of daily products or store marketing activities, including how to make consumers think of you first when they have needs, etc.

Consumers have multiple channels to choose from, such as online and offline. How can online consumers find the products they want more easily, or can they use big model capabilities to accurately push products based on user portraits to reduce the randomness of consumers' shopping process? The offline part is more about scene experience, invitations for tasting and trial, and the seamless recruitment of shopping guides are all worth the effort to design.

The post-purchase part mainly involves in-store service and after-sales service. The membership store model requires retailers to consider how to plan their own logistics system, whether to build it themselves or outsource it to a third party, and whether the delivery time is half an hour or one hour. In addition, the rise of e-commerce is largely due to the support of "7-day no-reason return" that makes consumers worry-free after purchase. For membership stores that have the advantage of offline physical stores, whether they can provide the same level of service and whether consumers can really perceive it are all things that need to be considered.

Finally, the author believes that there are three necessary conditions for the success of the membership store model: business planning, insight into demand and effective response, and continuous operational investment.

Figure: Necessary conditions for the success of the membership store model

Business planning refers more to site selection. Because the membership store model is a business that is mainly offline and supplemented by online, the site selection largely determines whether the store can be successful and profitable. Effective site selection can bring natural traffic. The opening of the funnel determines both the upper limit of the size of the target consumer group to be served and the absolute number of effective conversions.

For new players in the membership store model, in addition to customer flow, they also need to focus on vehicle access and parking convenience when selecting a location. The failure of Carrefour's Yanggao South Road membership store was largely due to a lack of consideration in this regard.

Insight into needs and effective response. Professional things need to be done by professionals, preferably by front-line employees who are truly facing consumers. Traditional retail companies lack such full-time market researchers and rarely send people to the front line to conduct research. Product selection and creation can only rely on second-hand or even multiple-hand information.

Therefore, the membership store model requires retailers to form a professional consumer demand insight team that can discover the needs of members earlier than they serve. At the same time, they also need to be able to respond effectively to the needs, that is, to have the right products or services to meet the discovered needs as early as possible. This requires organizational support.

Continuous investment in operations. The membership store model focuses more on word-of-mouth marketing, using its own product and service strength to bring consumers a high-quality experience, thereby generating continuous repurchase and recommendations.

"Rome was not built in a day", and the same is true for good reputation. It requires retailers to make continuous operational investments, that is, investments in talent, store expansion, supply chain, etc. It is necessary to treat this model as a five-year or ten-year business. The first two or three years are more of a process of accumulating momentum. Only after three to five years of hard work can it be possible to achieve fruitful results. In the current economic environment, any new player needs to have great courage to achieve this.

2. Sam's Club and Costco's two models have the same goal

As representatives of the membership store model, the two retailers Sam's Club and Costco have also taken two different paths.

First, the Sam's model, especially Sam's China, is to expand its business with the starfish model of "large store + forward warehouse". According to its official disclosure, Sam's China has currently opened nearly 50 large stores and 500 forward warehouses, with an annual turnover of more than 80 billion yuan, and online accounts for 50%. The average operating area of ​​large stores is more than 20,000 square meters, and the average operating area of ​​forward warehouses is less than 500 square meters.

Figure: Sam's "Starfish" model

The former provides consumers with a large and comprehensive selection of goods, as well as a variety of offline tasting and trial experiences; the latter provides consumers with a small but refined selection of goods, but with an efficient hourly delivery service, allowing consumers to complete their shopping journey on their mobile phones. The former's customer orders can reach 1,000 yuan; the latter's customer orders are also much higher than those of platforms such as PuPu Supermarket and Dingdong Maicai, reaching 200 yuan per order. Quality, price and experience, the "impossible triangle" of retail has achieved a breakthrough in the Sam's model.

The reason behind this is that Sam's Club has a deep understanding of consumption scenarios. In-store consumption is more about consumers making plans in advance, and "shopping and eating" is the focus of offline shopping. For this type of consumers, Sam's Club focuses on "regular stockpiling and shopping" through 4,000+ SKUs.

Online shopping is more about satisfying consumers' immediate needs. Consumers want goods to be delivered to their homes without leaving their homes. For this type of consumers, Sam's Club has carefully selected 1,000 SKUs, focusing more on "daily convenient shopping."

The forward warehouse is like the tentacles of a starfish. With a much lower construction cost than a large store, it has expanded the service radius of Sam's stores and broadened the service scenarios of large stores. With the potential of large stores and high online customer orders, Sam's Club has made a breakthrough in the forward warehouse model that was originally considered unworkable by the industry. According to estimates, the forward warehouse efficiency of Sam's Club exceeds RMB 100,000, a figure far higher than any existing retail enterprise in China.

Figure: Forward warehouse cost calculation

Let’s look at the Costco model. To borrow Apple’s advertising slogan, the Costco model is “more than just big.”

First, the store is large and the product packaging is large. A large store not only provides consumers with a large enough shopping space, but also leaves room for employees to perform mechanized operations such as stocking shelves, picking and packing. Large packaging reduces the packaging and loss of products, making the unit cost of products extremely competitive.

In addition to the "big" stores and packaging, Costco's unique "3T" business philosophy of "Taste, Touch, Take" allows consumers to have a better understanding of the products and reduces the risk of after-sales returns. In addition, it has a rich variety of categories and services, from gold jewelry to watches and bags, from glasses and cosmetics to windshield wipers and tires, hearing centers, and self-service gas stations. To some extent, the Costco model is more like the "coral reef" model, and each single store is an ecosystem that meets the multiple needs of members.

Figure: Costco's "Coral Reef" model

Finally, the business logic behind "big". In addition to the sense of space mentioned above, there are three more points:

First, “big” can bring concessions on commodity prices, allowing consumers to obtain the benefits of “high quality and low price”.

Second, "big" can increase the average order value per customer, and the operating cost ratio of a single order can be reduced to the greatest extent.

Third, because “big” meets the needs of family shopping, it is easier for members to develop a stickiness for repeat purchases, and through continuous and high-frequency interactions, it can also subtly shape consumer mindsets.

In addition, what is amazing about the Costco model is its extremely low gross profit margin and operating expense rate. With a gross profit margin of less than 14%, Costco achieves a net profit of more than 2%, and its operating capacity is the best among global retailers.

In order to allow members to buy goods at extremely low prices as much as possible, Costco chooses to build its own property. The advantage is that the overall cost is controllable. It can be implemented in the most simplified way according to the actual facility configuration required by the mall, thus ensuring the lowest cost. Costco is expanding its stores in this way. Although the pace is slow, a project takes an average of two to three years, but it brings extremely low annualized site costs.

Another high-profile component of administrative expenses is employee salaries. Costco is well aware of human nature and uses salaries higher than the industry average to maximize employee potential. Its actual per capita sales contribution is also much higher than its peers. As for marketing expenses, Costco does almost no advertising. High-quality and low-priced goods plus one-stop service as much as possible are the most effective "advertisements" for members.

3. Can the Fudi model “expand territory”?

The top two players in the warehouse membership store market seem to have taken two different development paths, but in fact they have the same goal. Both of them are difficult for most of their peers to match in terms of the two core elements of goods and services. Just like the domestic Jiajiayue membership stores and Yonghui’s warehouse membership stores, most of them are just “enlarged versions” of the original stores. Without any substantial changes in the operation of these two core elements, the result is predictable.

However, the domestic Fudi membership stores seem to have found a "path through the woods". I believe there are three main reasons for this.

First, effective positioning.

The brand's target customers are young consumers who "love beauty, seek novelty, and pursue fashion". Its core business philosophy is "freshness, health, and high quality", and its vision is to lead the future urban dining life.

Photo: Fudi Warehouse Membership Store

Different from the traditional retail supermarket decoration style of "bright red, yellow and blue", Fudi adopts fresh and bright pistachio green as the main tone, and creates a relaxed and pleasant consumption atmosphere for consumers through the ingenious store space design and decoration style, and effectively arouses enthusiastic attention and a check-in craze among young groups. It quickly stands out in the competition of membership stores with the marketing method of "Internet celebrity personality".

Second, control of gross profit.

When traffic comes, it is meaningful to be able to effectively handle it. Fudi chooses to attract consumers to check in and buy by using extremely low gross profit margins. Of course, the impulse consumption brought about by the "Internet celebrity" effect will not last long. Only high-quality and low-priced goods are the reason for consumers to continue to consume. As a new entrant in the local membership store, Fudi is the first in the industry to make a commitment to a comprehensive gross profit margin of "no more than 10%." Low prices bring positive feedback, and the increase in product sales promotes the bargaining power of upstream, which may bring lower prices. The low-cost strategy also highlights Fudi's ability to control overall operating expenses.

Finally, a stable supply chain system.

Unlike most retail companies, Fudi relies on the mature supply chain system of "Caixian Guomei", that is, its own upstream farms, animal husbandry and fisheries, etc. It can directly enjoy the synergy of resources within the group in terms of commodity procurement, logistics and distribution, etc., reducing costs and ensuring product quality. For processed products, Fudi makes the overall delivery quality of commodities reliable and stable by deeply controlling each link from raw materials to product research and development, production, procurement, logistics, etc.

From the opening of the first store on the southeast fourth ring road of Chaoyang, Beijing in May 2021 to the present, Fudi has only opened 4 warehouse membership stores and 2 fudi+ selected community stores, and the overall pace of store opening is extremely restrained.

Image source: Fudi Member Store Official Weibo

The reason behind this is probably that the model has not been fully implemented and the profitability is not optimistic. Therefore, for Fudi, its biggest challenge is how to fully implement the model and go beyond Beijing, so as to replicate its successful business model on a larger scale.

Influenced by the Sam's Club Cloud Warehouse (forward warehouse) model, according to Li Xue, vice president of Fudi Member Store, Fudi has started site selection nationwide. Considering the series of difficulties that may be faced in opening stores in other cities, such as supply chain, logistics and warehousing, forward warehouses will also be the key format for market expansion. The development and innovation of forward warehouses will be an important strategy for Fudi in the future.

The author believes that the success of Sam's forward warehouse "starfish model" is based on the success of its large stores. As mentioned above, the forward warehouse is more of a tentacle to expand its service radius. If we only think that the forward warehouse model is cost-controlled and can better expand the store radiation, we will go back to the old path of the forward warehouse model and success will be a long way off.

4. Challenges faced by the domestic membership store model

Whether it is the Sam's Club model or the Costco model, I think both are worth learning from for domestic retail enterprises. Of course, the following aspects also need to be considered:

First, market positioning and differentiation. Membership stores need to have a clear market positioning and provide differentiated goods and services to attract consumers. If retailers cannot clearly define their market positioning, or the products and services they provide cannot be differentiated from existing membership stores, they will find it difficult to succeed without core competitiveness.

Second, membership awareness and education. Consumers' awareness and acceptance of the membership system needs to be gradually cultivated, especially in a market environment where the membership system is relatively new. Although more and more people are beginning to accept the concept of membership and are willing to pay the corresponding annual fee, there are still a considerable number of consumers who prefer traditional shopping methods. Therefore, the design of effective membership benefits will be a good starting point.

Third, supply chain and logistics challenges. The membership store model requires a strong supply chain and logistics system to support it, ensuring that high-quality goods can be provided at a lower cost. This is a challenge for many local retailers, especially in the initial investment stage. The membership store model requires efficient supply chain management to reduce costs and provide competitive prices. To achieve this, it is necessary to establish long-term partnerships with suppliers and be able to effectively manage inventory and logistics. This is a challenge for retailers who do not have sufficient scale advantages.

Fourth, capital investment. Membership stores usually require a larger store area and higher initial capital investment, which not all retailers can afford. In addition, long-term investment is required to maintain operations and service quality. Successful membership stores require a lot of initial investment, including building large warehouses, optimizing supply chains, and developing private brands. This is a huge expense for many retailers, especially for those companies with tight capital chains.

Fifth, brand building and consumer trust. Sam's Club and Costco enjoy a good reputation worldwide, which helps them build trust in the Chinese market. New retailers may need to spend more time and resources to build brand awareness and trust. With the rise of e-commerce and the development of other forms of retail formats (such as convenience stores, discount stores, etc.), market competition has become increasingly fierce. For retailers trying to enter the membership field, they must not only face competition from existing membership retailers, but also cope with challenges brought by other retail formats.

In general, the membership model is more challenging, but there is no doubt that it will be one of the important or even major formats in the future retail supermarket industry. If retail enterprises can make full considerations and preparations in the above aspects, enter the market early, and continue to invest in operations, they will surely be able to carve out a niche for themselves.

Author: Qian Xing Editor: RBF Content Group Produced by: Retail Business Finance ID: Retail-Finance