The Costco Frenzy and a Sober Look at New Retail

¥1,498 Moutai. A ¥13,999.9 PRADA tote bag. A ¥199/year membership fee — the lowest in the world…

On August 27, Costco opened its first mainland China store in Shanghai’s Minhang district. Prices were dramatically lower than market rates — some items 30% to 60% cheaper — and the result was pandemonium. Nearby roads gridlocked. Shoppers waited three hours for parking and two hours at checkout. The crowds were so dense that the store was forced to suspend operations just half a day after opening, with local police called in to manage the scene.

The Costco frenzy stirred up a retail industry that had been quietly stagnating. But the enthusiasm had actually been building for a while — hundreds of Costco “disciples” had already emerged, and its membership-based model had become widely cited as the future direction of New Retail.

What Costco itself probably doesn’t realize is that in China it has been crowned a symbol of “New Retail.” The reason people find it so novel is simple: China never really had a mature membership model before.

That’s why it is critically important to return to common sense and clear thinking. It helps us distinguish what actually creates value from what is merely noise.

Take the multi-year “New Retail” wave, for example. Beyond rescuing commercial real estate landlords, agents, and interior fit-out contractors, it’s hard to point to much else it actually accomplished.

There is no such thing as “New Retail” in a strict sense. That’s not a denial that retail needs to evolve — of course it does. But a black-or-white framing of the world is its own form of intellectual laziness.

The problem with the term “New Retail” is that the emphasis falls on “New” — which leads people to believe that wholesale reinvention is the only correct path. That’s precisely why we’ve seen so many baffling, commercially illogical projects, and all conceived by apparently smart people.

I’d argue “Retail, Renewed” is a more accurate framing. The emphasis stays on “retail.” Only by respecting retail’s fundamental principles can real transformation happen.

The Real Complexity of Retail

What is retail? Many people recite the answer as “people, products, and place” — a neat, investor-friendly framework.

But knowing that formula and actually running good retail are two entirely different things.

Real retail mastery means deeply understanding inventory management, payment terms, supply chains, merchandising, and a hundred other operational details. That’s what separates practitioners from pundits.

Retail is far harder than it looks from the outside.

A single store might carry thousands or even tens of thousands of SKUs, supplied by hundreds or thousands of vendors. Managing that takes genuine operational skill — you can’t talk your way through it.

Why have so many retailers gone under? Primarily because inventory costs and extended payment terms slowly bled them dry.

Why are clothes so expensive in China? Because for every garment that sells, the retailer is effectively paying for four — the other three sit as unsold inventory.

So while “people, products, and place” sounds like the whole picture, there’s an enormous amount of painful operational work underneath it. And unless that foundational work is done right, you’ll never get the customer-facing model to function properly either.

For what it’s worth, Costco is hardly a “new model” in the West. It has been operating in the United States for nearly twenty years.

Costco generates roughly $2 billion in annual membership revenue. In fiscal year 2017, its net profit was $2.68 billion — meaning the majority of Costco’s profits come directly from membership fees, not merchandise margins.

Over the past decade, Walmart’s average annual revenue growth was 5.9%, Target’s was 5%, and Costco’s was 9.19%.

What’s behind those numbers? And does this model actually translate to China?

The short answer: maybe not — at least not yet. And the reason has nothing to do with Chinese consumer habits. It has everything to do with income levels.

After all, weren’t supermarkets and shopping malls Western inventions that China adopted perfectly well? So why assume membership-based retail is fundamentally incompatible with Chinese consumers?

The real issue is that a stable middle class is a prerequisite for the membership model to survive. It simply can’t thrive without one.

Costco carries only 3,000–5,000 SKUs. Walmart carries 30,000–50,000 per store — roughly ten times more. At Walmart or Carrefour, you’ll find dozens of toothpaste brands spanning a wide price range. At Costco, there might be five or six options, sold exclusively in bulk — six-packs, twelve-packs. Costco deliberately eliminates the budget end and the luxury end, stocking only the brands that middle-class households reliably use.

With very thin gross margins, Costco nonetheless achieves a far higher average basket size than Walmart.

Here’s why that matters: bulk stockpiling of non-essential goods is a distinctly middle-class behavior. So is having clear, consistent preferences for specific everyday brands. Lower-income consumers don’t collectively stockpile — just think back to mainstream shopping habits fifteen or twenty years ago in China. That behavioral distinction is the core of everything.

On top of this, China’s retail market is ferociously competitive — no number of superlatives does it justice.

Charging a meaningful membership fee is extremely difficult when countless retailers are already operating near-zero margins without one.

In China, “membership” in retail has largely been interpreted as issuing loyalty points and discount coupons to drive repeat visits. Only in sectors like hair salons and gyms has the paid membership model taken hold — and even there it has long since become distorted and distrusted.

So when I hear about projects claiming to build “China’s Costco,” I’d say: make sure you fully understand the underlying logic before you start.

No Matter How “New” Retail Gets, the Old Fundamentals Still Apply

Whether you call it New Retail or Next-Generation Retail, you cannot escape costs. In fact, a great deal of commercial real estate has effectively been a trap for venture-backed retail startups.

When analyzing the cost structure, start with the big-ticket items before the smaller ones.

1. Rent and security deposits

Don’t underestimate the deposit. If the business underperforms and you exit early, you’re almost certainly not getting that money back. Landlords generate significant income from forfeited deposits every single year.

On rent itself, you need to negotiate relentlessly — every percentage point off the base rent, every week of rent-free period during fit-out — because it all flows directly to the bottom line. Run the actuarial math carefully.

If rent exceeds your break-even threshold, you will lose money. Don’t assume that working harder will close the gap. Your network of stores needs to reach critical mass, and each individual location must be able to cover its own costs without heroic effort. Otherwise, the more locations you open, the deeper the hole you dig.

Retail profit is accumulated one thin margin at a time. That means every outgoing dollar must be spent with discipline. Loosen your grip on costs and you’ll have worked for nothing.

The wave of retail bankruptcies over the past several years was largely driven by exactly this dynamic.

In the race to capture territory and plant flags, retailers paid whatever it took to secure locations — ultimately enriching agents and landlords more than themselves.

2. Store fit-out and renovation

One puzzling mistake many “New Retail” ventures made in recent years was spending heavily on store renovations and adopting wide, spacious display layouts — which actually reduced sales per square meter.

Anything that raises the aesthetic bar but lowers operational efficiency is the wrong direction. And unless renovation costs are amortized over a sufficiently long lease period, they become a straight-line drain on profitability.

3. Operating costs

Labor and shrinkage are where the hidden losses lurk — what I’d call “stealth losses.”

A sudden large loss sets off alarm bells. But a slow, steady leak goes unnoticed until you do the year-end numbers and realize how much has quietly drained away.

4. Operational details and staff training

Staff training must be handled by professionals. It can account for 50% or more of sales performance — that’s not an exaggeration.

Retail is not a grand strategic exercise you can win with eloquent frameworks. It lives and dies in the details. Customers don’t evaluate your vision; they experience your execution.

Consider why every hypermarket stations someone at the entrance to hand out shopping carts. It’s because a cart — even an empty one — increases the likelihood that customers will buy more. That single action can lift sales by 30% or more.

Why does MINISO have staff handing out shopping baskets? Because carrying items in your hands limits how much you’ll pick up. Put something in a basket and you’ll naturally buy more. Small jewelry boutiques use trays for exactly the same reason. These aren’t grand ideas — they’re operational details that directly drive sales.

Don’t expect 90% of frontline staff to self-direct. You need to break instructions down to a concrete, executable level.

For example: telling an employee to “improve sales performance” with a bonus attached is too abstract. They don’t have a mental framework for it and will simply feel overwhelmed. Instead, tell them: “Your task today is to sell ten yogurts that are about to expire — offer them at half price.”

Training is arguably the most important battlefield in ground-level retail. The workforce tends to be hardworking and committed but not always equipped for abstract problem-solving — no slight intended, just a practical reality that demands proper guidance and structure.

Incentives also need to be designed for the actual people doing the work. Misaligned incentives accomplish nothing.

The morning exercises and group chanting at hair salons and real estate agencies may look odd from the outside, but they’ve survived for decades because they work.

Whether you’re actually running “New Retail” depends far less on whether you’ve put a robot in your store and far more on whether your training and management practices have genuinely empowered frontline staff for the current era.

Why Did Unmanned Retail Fail?

Many people argued that unmanned retail was the future. But in China, the category has nearly collapsed entirely. The reason is that most players were obsessed with the packaging and the novelty angle rather than solving the real problems.

Outside of fast fashion like Uniqlo, a skilled salesperson is enormously valuable on the retail floor. Countless customers have added items to their basket simply because a good sales associate gave them an honest compliment at the right moment. Great retail staff know how to connect, how to engage, how to earn trust.

For unmanned retail, the best-fit application today remains the vending machine — suited to high-frequency, essential goods with a limited SKU count, deployed in dense clusters where purchase frequency is high enough to offset backend maintenance labor costs.

Unmanned stores are, in most cases, a pseudo-concept. They’ve removed the salesperson but still require a full team for replenishment and maintenance. When the day comes that maintenance itself requires no human intervention, the model might genuinely work at scale. Until then, it doesn’t.

Look at Japan — an even more aged and densely populated society where vending machines are ubiquitous and sophisticated — yet truly unmanned retail stores have not taken hold there either.

The English word “retail” is instructive here. “Tail” refers to the long tail — the idea of moving goods through distributed, individualized endpoints. But any single long-tail channel can only absorb so much volume.

That’s why brands traditionally operated through layered distribution: national distributors, regional distributors, wholesalers, and finally the retailer.

The problem this creates is compounded markup ratios. A product with a ¥10 production cost might be priced at ¥50 (5x markup) or ¥100 (10x markup) — the only way every tier in the chain can earn a margin.

Whoever can genuinely solve the problem of chain length can build real New Retail.

Eliminating the intermediate layers entirely, leaving only the brand on one end and the consumer-facing retailer on the other, is probably the most viable path forward. But this is a game for massive platforms. Small players have no leverage to restructure an entire market.

Both Tencent and Alibaba are investing enormously in this direction. The e-commerce giants are experimenting too, but it’s clearly a long road — there are no shortcuts here.

Alibaba’s New Retail flagship — Freshippo (Hema) — I’d call it 50/50 in terms of success.

Its app serves as the membership gateway. Once you’re inside the ecosystem, repeat purchase rates increase significantly. Fresh food is a high-frequency category with better margins — a smart anchor.

But its price positioning means it can only thrive in middle-class urban concentrations. And its cost structure means it needs sufficient location density to function. Push it toward older neighborhoods or suburban areas, and the model struggles.

It has also inadvertently pulled operators like Yonghui into chasing the same playbook with similar results.

That said, the core logic of the first half of Freshippo’s strategy is sound. For broad applicability across China, the optimization that’s actually needed is subtraction and simplification — not addition and complexity.

Knowing What You Should Be Doing Is the Most Important Thing

For Chinese businesses today, two fundamentals matter above all else: product and media. This holds equally for retailers and for brands that rely on retail channels to move goods.

Whether your goal is a product with compelling design, outstanding value-for-money, or strong subcultural resonance, every route still runs through product and media — because media is the primary engine of brand-building.

Retail today is no longer won through massive budgets alone. It’s won through countless moments of earned media attention. A New Retail venture that has established neither a compelling product narrative nor a media presence is already dangerously close to irrelevance.

In a sense, product is what attracts customers and what draws franchisees. Media is the lever that amplifies both.

If you’re launching a convenience store — regardless of the concept you wrap around it — and as a late entrant your product assortment is identical to FamilyMart or 7-Eleven with no channel advantage to speak of, what exactly is your competitive edge? And why would anyone share your content or write about you?

Coming back to first principles: people, products, and place are cyclically interdependent. Product shapes who comes. Who comes shapes what kind of space is needed. Space shapes what product makes sense.

The key to breaking through is finding the single ring of this cycle where you hold a genuinely strong advantage — and entering there.

For brand companies specifically, the critical question is whether you can convert your production lines to flexible, small-batch manufacturing. That capability will determine whether you can plug into the New Retail ecosystem at scale.

Society runs on specialization. Most brand owners should resist the urge to open their own retail stores. The odds are against them. Instead, pour that energy into building real brand equity, and design differentiated, channel-appropriate products for each retail partner.

We are no longer in an era of ordering hundreds of thousands of identical units. That places significant new demands on brands. The age of customization and non-standardization is arriving. Those who adapt first will emerge first.

Digitization and online enablement are critical components of the New Retail thesis. But the real question is: what can digitization actually deliver for retail — and what would it take for an internet company to build a defensible position in this space?

For a mom-and-pop shop considering a platform affiliation, the pitch is simple: show them an income boost. That’s all they care about. And for you as the platform, the real challenge is keeping them loyal long-term once they’ve joined.

Alibaba’s approach here is instructive: beyond providing data and traffic at the front end, it helps small retailers solve real financial pain points at the back end — access to credit and working capital. That’s a genuine value-add that creates stickiness.

Tencent is also thinking hard about how to empower retailers — but its more pressing challenge is figuring out how to lead with its own core strengths rather than playing catch-up with Alibaba’s playbook.

Let the giants battle it out while the rest of us watch. No matter what they do, most people are better served by a clear-eyed understanding of what they can do and what they shouldn’t touch. Spending too much energy analyzing moves that are far out of your reach is the equivalent of a Beijing cab driver debating national policy. It’s good entertainment but bad strategy.

My friend Ma Yingyao, Chairman of Shang Mei Group and operator of 3,500 chain hotels, is also navigating the New Retail landscape.

I asked him: where are the real pitfalls?

He said: the pitfall is the word “New.”

I couldn’t agree more.

Let me close by repeating the opening line: returning to common sense and clear thinking is critically important. It helps us distinguish what actually creates value from what is merely noise.

These have been my thoughts on New Retail.