Will Costco Survive in China?

Will Costco survive in China? 

Recently (August 27), Costco made headline news because it opened its first physical store in China (Minhang district of  Shanghai- as a rough idea, 23km from Shanghai downtown Center to Minhang Center, not accessible by mass transit). Despite the location, the opening days turned into a frenzy, with people queueing up at 2a.m., and people literally fighting over goods. So much so that the store had to close early due to a situation which became potentially dangerous.

The headline welcoming offers were Hermes bag for $14000 and MaoTai liquor for $150. Membership fees were offered at $28. 

Sounds good, right? The store surely opened with a bang. But those of us who understand the China retail scene will seriously question Costco's viability in the China Market. Why?

Foreign hypermart  and warehouse retailers have, almost universally, not been successful in China:

·     French hypermart Carrefour, after more than 20 years in China, sold 80% of their ownership stake to Suning.com, a local retailer, in June 2019;

·     Metro, the German warehouse store, is anxiously looking for a buyer for its stores in China;

·     Korean Lotte Mart has sold 93 of its retail locations to local retailer Wumei Holdings in 2018;

·     British retailer Tesco failed miserably in China and had to abandon itself to a joint venture that all but erased its identity (whatever it was).

Walmart, who owns Sam's Club warehouse stores, is growing in China, but is dependent on its partnership with JD.com for its execution (Costco has some kind of partnership with Alibaba).

What is the root of the problem that has chased respectable retail chains from China? And how can Costco overcome these challenges and survive? Everyone (including me) has an opinion on the answer to these questions, but the truth is that the real answer is, nobody knows- up to now there is no formula for success for foreign mass merchants- only a history of failure.

Having lived in Shanghai for ten years, I have personally seen and shopped at all of the above retailers. But my point of view, as a foreigner, even one with on-the-ground experience, must be understood in context; to understand why these retailers have failed, we have to understand the nature of the China retail scene and, most important, the mind of the Chinese consumer.

I used to believe that Carrefour was successful because they morphed their China identity to be, in many ways, a mirror alternative to local markets and online retailers; stores contained a very small import products section and 95%, including fresh food, was focused on duplicating local products. Now I realize that the ultimate failure of this chain was due to the fact that Carrefour did not establish a separate identity from the shopping alternatives; in most cases price, quality etc. was no different from the local markets and ecommerce sites such as Taobao and Tmall.

From the above, I believe that we can learn the first relevant lesson for Costco: These retailers focused on price, which in the China market is the equivalent of the destructive head-to-head battles of WWI- nobody really wins, but lots of people die in the process. That, and duplication of the local product that was available every elsewhere.

All over the world, for sure in China, people intuitively understand the difference between price and value. Price is tangible- it is a number and 100% factual- 2 is less than 3. Value is perceptual- it is the buyer's interpretation of the significance of the number to them and their lives.

If you try to compete on price in China, you are born to lose. Establish a unique and robust value proposition, and people will pay more for your product at regular price, and go nuts when it is on sale. In China recent retail history, this is the formula for success of Inditex (Zara, Massimo Dutti, etc.); everyday prices on goods that are current fashionable and are good value; when they go on sale, the enthusiasm of the customer rises to a fever pitch (kind words for shark-like behavior).

Additionally, as we have seen in mass market stores like Walmart in the US, leading with fresh food is the key to success. Fresher, Better and sometimes Cheaper should be the formula. Core value proposition: These grapes at 15RMB/jing (aka lb. in China) are better (I perceive) than what I can get on the street for 10 RMB. Costco needs to establish a niche in China that creates a perceptual divide of VALUE between them and the local competition.

Finally, a long list of foreign firms has failed in China because they either failed to understand the Chinese mentality or were too arrogant to believe they should. You cannot superimpose an American or European strategy on China without change. To succeed, management need a humble and complete understanding of what they are up against. They must follow Sun Tzu's principles and win based on superior intelligence and understanding of the marketplace. Should this intelligence be Chinese, foreign, Asia Asians, Western expat, etc? Frankly, my opinion is that it doesn't matter the nationality of the leadership, as long as they have lived/worked/taught in China and thoroughly understand the local social and commercial environment. In my experience, the best formula for a successful team is a collaboration of foreigners and locals working together as equals.

Even with the above said, Costco's success or failure in China will depend on the decisions and the decision makers- from the macro to the mundane. Based on history, Western companies will send their best and their brightest- who in most cases will lack maturity AND any track record of success (or even visits) to China, but will be fully full of themselves. Based on their inexperience and lack of understanding, (added to those of the executives in the parent company), history will repeat itself.

For Costco, it is more than selling great products at great prices; it is about learning from those who have come before and failed; then, move forward without arrogance and with full armor of market information: create an unique and robust strategy. if not, welcome to the scrap heap.

Human Behavior, Likability and CRM: How important is it?

Human Behavior, Likability and CRM: How important is it?

Recently, in today's technology-obsessed world, great emphasis has been put on the Operational aspects of CRM (Customer Relationship Management): Data, software, metrics, data analytics, etc. Some university professors and textbook writers are mistakenly leaning too heavily on the data side without thinking clearly about what it interprets: human behavior.

Which is why the practice of CRM today is too often underused and improperly applied, resulting in additional cost and business failure. One thing we can all agree on is the concept of Customer Lifetime Value (CLV), which, put simply states that once you spent the money to acquire customers (Customer Acquisition Cost), your profit will increase disproportionately if you are successful in keeping them over the long term.

So how to keep customers? Let's get a start on the road to long-term customer retention by analyzing the title of the practice that is supposed to guide companies to success in delighting and, more importantly, keeping customers:

Customer Relationship Management. Three nouns, which, by their order, tell us what we are supposed to be doing: First, the Customer, who is our focus. Next, Relationship. We all know that word because we all have them, and the business context is no different. What is a relationship? It is a mutually satisfying exchange between two entities; in the case of your boyfriend/girlfriend/partner/mother, is success determined by different factors than business relationship? In the broad sense, no.

Don't agree? Lets' take a closer look. In the book, "Customer Relationship Management: Concepts and Technologies" by Buttle and Maklan (4th Ed., Routledge, 2019), Customer Value is represented as an equation:

                                    Value= Benefits/Sacrifices

            Is that any different than the relationship between two people?

Further, Forrester Research is quoted in the same book as the "4 I's": the level of "Involvement, Interaction, Intimacy and Influencethat an individual has with a brand over time." How different is that from your relationship with your mother, father, wife, etc.?

Scott Galloway, in his groundbreaking book, "The Four: The Hidden DNA of Amazon, Apple, Facebook and Google" (Portfolio, Penguin, 2017), attributes the fantastic growth of these four companies to what he calls "Evolutionary Anthropology", the primal appeal to our most base instincts. In the book he depicts it this way:

This further cements the proposition that CRM must go way beyond technology to understand and Manage the Relationship with the Customer based on behavior; technology is only a useful tool if we understand the behavior that produced the results we are trying to analyze.

Now to the main point (finally) of this article. Again, drawing from The Four, Galloway writes about the T Algorithm, which are the eight characteristics that The Four have in common in their DNA. One of these characteristics in Likability. Galloway says, "Perception is a company's reality that makes the importance of being likable, even cute, the fourth factor in the T Algorithm" (op. cit, p. 192).

So how important is it to be likable to have a successful  and long-lasting relationship with your customer, which should be your CLV goal? I believe that the  importance of likability (in the human sense- can data measure likability?), and even the word, is massively misunderstood and underemphasized, if acknowledged at all.

Let me give an example from my own experience. My bank, which is a global bank whose name everyone would recognize, messes up regularly and in ways that seem at best incompetent, even stupid. So why don't I pull my money out of this bank and switch to another? The switching cost to me is virtually zero; I might even make some money out of the other bank's excitement to get me as a customer; the only risk is that they could be as ditsy as my current bank. The  only reason is because the people with whom I have human interaction, a relationship, with, are genuinely likable. 

Let's go back to the equation I cited earlier:

                                    Value= Benefits/Sacrifices

If you believe this equation is accurate, which I do, then it is clear that the repeated mess ups of this bank are either not much of a sacrifice, OR that, behaviorally, I consider likability a benefit.

Referring to Forrester's 4 I's I cited earlier, which factor is increased by likability: Intimacy. So the point is that the value of likability cannot be underestimated.

The perception of Likability has played an underestimated and under recognized role in the success of dictators throughout history, with some horrible consequences.

Let's take a quick glance at some dictators that caused unconscionable death and destruction: Hitler, Saddam Hussein, Stalin, Mao. Were they likable OR were they portrayed as likable to their followers and constituencies? The answer that history is increasingly giving us is yes. 

Here are a few examples:

In her book, "Hitler at Home" (Yale University Press, 2015), Delpina Stratagakos reveals her discovery that Hitler's propaganda staff, led by Goebbels, 

They were able to engineer a complete transformation of Hitler’s public persona,” says Stratigakos, interim chair of architecture in UB’s School of Architecture and Planning. “They accomplished this by focusing on his private life — by showing him playing with his dogs and with children, and at home in architectural spaces designed to evoke a feeling of warmth. By the end of the 1930s, news stories around the world described him as a caring, gentle individual with great taste in home décor.”

“It was dangerous because it made him likeable,” Stratigakos said. “After reading these stories, people would feel like they knew the ‘true’ Hitler, the private man behind the Führer mask, and that maybe this person was not as bad as all of the news coming out of Europe seemed to suggest.”

In the article, "5 Reasons Why Horrible Dictators Always Catch Us Off Guard, "

Cracked.com humorously but accurately analyzes the ruse or even reality of likability as reasons dictators are successful in transforming the masses. Their analysis is taken from biographies of these dictators, which are linked in the article. Examples:

·     Reason No. 5 is "You'd Probably Like a Dictator If You Met One", the article cites that Saddam Hussein became endeared to his American captors, who shed tears when he was hanged.

·     Reason No. 4 is entitled "You Can Commit Genocide And Be A Doting Parent" in which they cite Stalin's love for his children and his wife and his avocation for growing lemons;

·     Reason No. 2 is called "Nearly All Dictators Are Artists", in which they cite the well known fact that Chairman Mao was an accomplished poet.

Why is this important? Because CRM is, in the final analysis, the management of relationships with people with the goal of creating a following that results in purchases and long-term profits. You can have all the marvelous software, data and AI in the world, but it won't get you business for long if people simply don't like you.

On the other hand, as a company, if they DO like you, it can overwrite mistakes and even stupidity that really should impair or end your relationship with your customers.

Sun Tzu's Six Principles- Wait- 2,500 year old strategy still works today? Yes, It does

Timeless, spot on and still studied today, 2500 years later.  Sun Tzu wrote a lot about Strategy and Leadership, but these six principles are the cornerstone of his teachings, and continue to apply to business today.

First, here they are:

1. Win all without fighting
2. Avoid Strength, Attack Weakness
3. Deception and Foreknowledge
4. Speed and Preparation
5. Shape your Opponent
6. Character-based Leadership

Now, let's look at their application in today's business world:

Principle 1- Win all without fighting

1. Gain business and/or market share without:
1. Spending large sums on gaining that share-eg., advertising; advertise cleverly and use social media for your advantage;
2. Compromising your product by reducing price and/or quality
3. Do not use price as a strategy- fashion merchandising which makes your offering special will get you an advantage (Inditex)
4. Analyze costs of growth- more business does not necessarily mean more spend (Think Big, Be Small)

Principle 2- Avoid Strength, Attack Weakness

1. Find your Market NICHE- what separates you from your competition?
2. Don’t try to COPY dominant product- IMPROVE or REINVENT it;
3. Find a customer who has not been served or served properly;
4. Find a new Geography- eg., urban vs. rural
5. Fill a need- eg., Untuckit
6. Incumbents have more money than you so do not compete head on;
7. Incumbents may not have the will to enter a new market segment-it will cost you less to start up than it will them.

Principle 3- Deception and Foreknowledge

1. THOROUGHLY research and know your market, your customer- what they have, what they need, what their shopping habits and fashion choices (Untuckit);
2. Never stop research and discovery-even for a day;
3. Use all available resources provided by technology (AI, CDP, Social media);
4. Always be first-do something new every day
5. There is no limit on disruption (Amazon)
6. Keep your competition guessing;
7. Know your capabilities- don’t bite off more than you can chew;
8. FOCUS on what you do best;
9. Have better fashion insight than your competitors- hire the team that can see the future.

Principle 4- Speed and Preparation

1. Speed to Market- be faster better cheaper (maybe)
2. Gather the best information available
3. Never give yourself too much credit for what you did yesterday;
4. Prepare your offering with Common Sense;
5. Use the best technology available for information and customer service;
6. Have better and faster service than your competitor;
7. TALK to your customer;
8. Be decisive- sometimes you will fail, but not if you don’t try;
9. Shorten your design/delivery cycle;
10. Think It Through.

Principle 5- Shape Your Opponent

1. Make your competitors chase you- not the opposite- make them play in YOUR sandbox;
2. Second is last- be FIRST
3. Update/change/grow your offering faster than the competition (Apple)
4. Your fashion and product/brand image should be an EXAMPLE your competitors want to follow;
5. Your offering must be simple, accessible, easy to understand and buy.

Principle 6- Character-based Leadership

1. Hire PEOPLE, not RESUMES;
2. Hire by CHARACTER fit, with at least the following characteristics:
1. Courage
2. Will to Succeed and Win
3. Intelligence
4. Loyalty
5. Likability
3. A leader will only succeed with a strong TEAM whose skills complement each other;
4. Build Great Captains, whose character and skills will help you as you grow;
5. Challenge to change and react, never sit;
6. Original Thinking-the Fashion Industry is build on CHANGE;
7. Open- Minded Management
8. Humility- Never get too impressed with yourself;
9. Lead By Example-all the above won’t work if it is not part of your style.

Sounds simple, right? How many of you business leaders can state with perfect honesty that the above is exactly your management philosophy, style and execution? (I can)

When we attend the funerals of those brands and institutions that have passed on, we can look at the above and always find the causes.

Study it. Learn it. Succeed. Or don't.