Is it worth paying more for Costco memberships?
It wasn’t until the arrival of Costco’s membership renewal form, that the reality of Costco’s raise in membership fee really sink into Taiwanese consumers’ minds; Gold star membership fee went up from NT$1200 to NT$1300, business membership from $1,000 to $1,150, and secondary business card increased the most from $500 to $950, an almost 90% increase! From this one can guess that Costco is placing more focus on recruitment of the individual members, and currently with already 2.2 million members, Costco had been aggressively expanding new stores for the past couple of years, clearly demonstrating strong intention to further infiltrate Taiwan’s FMCG market, however with its latest increase in fees, will the love for the wholesale giant continue? Or will it be lost to its fellow competitors?
Looking back at the evolution of Taiwan’s FMCG market for the past ten years, Kantar Worldpanel Taiwan had continuously tracked Costco’s milestones of becoming the second largest FMCG channel in Taiwan, with an initial market share of only 2% in 2008 and eventually peaking at 7.5% in 2014. However, despite Costco’s aggressive store expansion, it is doing very little in helping Costco gaining further ground, with both penetration and traffic flow remaining stagnant for the past two years. Instead, what the increase in stores seemed to be doing is only balancing out the traffic flow of existing stores, ie. the opening of Beitou and Hsinchuang store, rather than attracting new customers, is instead relieving the over crowdedness from the exiting Neihu and Chungho Store; likewise the biggest benefit consumers seems to be perceiving from the opening of the North Kaohsiung store, is relieving them from making the road trip to the Southern branch.
Has Costco lost its competitive advantage?
‘Convenience’ is one of the biggest advantage of Taiwan’s retail environment, and one thing to know about Taiwanese consumers, is that they have virtually no store loyalty. According to Kantar Worldpanel’s study, Taiwanese consumers will shop at an average of 16 different retailers per year, which means it cannot be guaranteed Costco member will definitely select it as the final purchase destination, they are likely to shop at other retailers that offers similar products and services. Hence how to instantly capture consumers’ needs the moment they walk in and maximize their in-store investment, is something that all retailers are striving to achieve. For Costco, building that unique competitive advantage service is even more crucial, as with an annual membership charge of NT$1350, if members do not feel they ‘have’ to shop at the store, they will go somewhere else especially for the price sensitive consumers.
Costco has long been popular for various reasons, including its US style store ambience, food sampling, seasonal festivities, and high quality imported goods. However, if other retailers can provide similar shopping experiences, then Costco is in for some serious competition. It was already observed that several leading retailers in Taiwan including both hyper and supermarkets, had been actively upgrading their marketing and in-store offerings, examples include parent & kids special, 3D makeup trial, VR experience etc; Many retailers are also copying Costco in offering consumers seasonal shopping, imported goods and free returns, but free of membership charges. Moreover, with growing presence of Internet shopping, various brands can now easily ship their good internationally, and often at a more affordable price when foreign currencies depreciate, all these making Costco’s effort in remaining as leading retailers more challenging than ever.
The hidden risk of Costco’s private label strategy
Kantar Worldpanel also observed that categories including fresh milk, instant coffee, health supplement and household paper products, which contributed to Costco’s previous strong sales, had been on the decline in recent years, with total traffic flow dropping by 4-6% for two years in a row. In the face of this situation, naturally the manufacturers will contemplate how to redefine their retailing strategies with Costco and other major retailers in order to stop further decline in sales. At the same time, Costco had been actively promoting its private label Kirkland, with more and more related products starting to make appearance on the in-store shelves. For a retailer that once boasts a procurement team of up to hundreds of purchasing specialist, and markets itself as leading provider of high quality, different, unique services, will Costco’s growing focus on their own brand be accepted by the consumers, is also something to keep track of for the future.
Small families, not so big on big size packages
Another hidden risk for Costco is their big size package strategy. Costco is long famous for its unique family size package, but with small family of under 3 people on the increase for Taiwanese population (49%), is Costco’s package strategy satisfying the need of the increasing small size families?
For Costco, how to continue to capture the big families, aka their major consumer pool with pack size, quality and money for value, while catching up with the change in demographics and attract individual or small families to not just window shopping but make actual purchase, are the important factors for them to consider in order to gain further future growth.