Why Sam’s Club is well-positioned as China faces consumer uncertainty

This report is from CNBC’s The China Connection newsletter this week, delivering insights and analysis on the powerhouse of the world’s second-largest economy. You can subscribe here.

Latest data from China showed a key indicator of consumption has fallen to its lowest level in nearly three years. But that doesn’t capture the whole story.

America’s membership warehouse clubs tell a more nuanced story. They say they are successful in attracting consumers who are willing to pay high membership fees in exchange for premium products at reasonable prices. Additionally, these stores offer a no-frills “treasure hunt” shopping experience to sweeten the deal.

Sam’s Club, Walmart’s membership warehouse retail division, opened a new store in Beijing last month, followed by a new store in Shanghai on Tuesday. Large crowds gathered, traffic jams continued for hours, and consumers waited in long lines.

Walmart plans to open 10 new Sam’s Club stores in China this year, its fastest expansion ever, and is on track to reach that goal with a 10th store scheduled to open in Guangzhou next week.

Warehouse stores like this one have long been known as places to buy household essentials in bulk at low prices.

Although less common in China, where grocery habits have historically skewed toward high-frequency, small-volume purchases, this retail model is starting to find customers.

“They’re buying here because of the value and the niche product,” said Cameron Johnson, a Shanghai-based senior partner at consulting firm Tidal Wave Solutions. He said residents on his property often ask in group chats if others would like to split an extra-large pack.

Sam’s Club is leaning toward a proposition that combines a different shopping experience and product lineup than traditional supermarkets and online retailers, with annual membership fees ranging from 260 yuan to 680 yuan ($37 to $97). Shoppers can receive modest discounts, but the bigger draw is access to hand-picked products that can’t be found anywhere else.

“It’s a membership model where consumers pay the membership fee upfront, and as a result, they receive a full set of services,” said Weiwen Han, a Hong Kong-based partner at Bain & Company.

walmart success

Walmart entered China in 1996, opening its first hypermarket and Sam’s Club warehouse chain in Shenzhen.

However, the hypermarket format, which combines a supermarket and a department store, is losing momentum with the spread of digital retail. Vast online marketplaces including: alibaba and JD.comhas crowded out traditional grocers and foreign companies such as France-based Carrefour with aggressive discounts and convenience.

Walmart has closed about 150 hypermarkets in China since 2020, with just 279 stores open as of July, down from 412 in 2020.

But Sam’s Club proved to be an enduring strength for the company. The chain has turned its warehouses into both shopping destinations and e-commerce distribution hubs, stocking shelves with products that consumers can’t easily compare and shop elsewhere, such as its own Member’s Mark brand and exclusive Marketside products.

In addition to online grocery ordering and delivery, Han said each club offers an offline experience where shoppers can browse and go on a “treasure hunt,” something local e-commerce players have struggled to replicate.

The gamble is paying off. Sam’s Club has become one of the fastest-growing foreign retailers in China, with 56 stores nationwide, compared to Costco’s seven stores in the country. This market also helped drive Walmart’s global net sales growth. Walmart’s net sales in China increased 21.9% year over year to $6.1 billion in the third quarter, outpacing the broader Walmart International segment’s average growth rate of 10.8%.

“Let’s go to Disney”

The combination of curated merchandise and digital convenience helps explain why this model is gaining traction among affluent shoppers, and why a single store visit can lead to multiple online orders.

Many shoppers don’t visit the store frequently in person. Customers will make one trip to browse and then rely on mobile apps for five to 10 deliveries from the same store, said Curtis Alan Ferguson, former president of Coca-Cola Greater China and Korea and now managing partner of Ventec China, a venture capital firm focused on consumer startups.

For some, the appeal is the outing itself, a well-designed and predictable version of discovery shopping. “Here it’s more like… ‘Let’s go to Disney,'” Ferguson said.

Aside from the physical shopping experience, speed is also part of persistence, Walmart says. “Our teams in China deliver extremely quickly, with nearly 80% of digital orders delivered within an hour,” Walmart CEO Doug McMillon said during the company’s third-quarter earnings call.

Ferguson said suppliers also like working with Sam’s Club. The reason for this is that it allows them to justify the amount of unique packaging and size required. “People will bend over backwards to give (Sam’s Club) the quality they want,” he said. “If you have Sam’s or Costco pulling your brand, you have a different kind of prestige.”

Difficult to copy even if there are local muscles

Few local rivals can seriously challenge Sam’s Club and Costco in membership retail, but it’s not for lack of trying.

Freshippo, the grocery business of Chinese tech giant Alibaba, closed its last members-only store in August.

But Pandong Lai, a regional chain that started in the city of Xuchang in central Henan province, is widely considered to be an outstanding success.

Olivia Plotnick, founder of Shanghai-based marketing agency Y Social, said Pandongrai’s appeal is that it operates on a “people-first philosophy” that emphasizes emotional value and trust over scale.

But stores in Henan have struggled to expand beyond their home base. Plotnick said its unique culture and high operating standards can be difficult to replicate and uphold in larger, more competitive cities.

“Consumers who really want premium value are still willing to pay, but consumers who want reasonable, low-priced essentials are moving to discount formats,” Plotnick said.

As China’s consumer spending slump drags on, warehouse clubs have emerged as a rare bright spot in the sector, offering high-quality products at reasonable prices and an in-store experience that online competitors can’t easily match.

Zerlina Zeng, Head of Asia Credit Strategy at CreditSights, spoke about the reasons behind the strong performance of offshore Chinese renminbi bonds.

Alex Stamos, chief product officer at Corridor and former chief security officer at Facebook, joined “The Exchange” to discuss the future of AI regulation and why China is leading the way with its promiscuous AI model.

Chinese chipmaker MetaX soared nearly 700% in its debut. The company began trading in Shanghai on Wednesday, with shares rising to 829 yuan from 104.66 yuan ($14.86). MetaX Integrated Circuits develops semiconductors for AI applications.

The slowdown in China’s economy deepened in November. Growth in consumption, investment and industrial production was lower than expected and worse than in the previous statistics.

Young Chinese people flock to government jobs. Some 3.7 million applicants are vying for one of 38,100 entry-level government jobs starting next year. The downturn in private sector employment is drawing people to the civil service.

Chinese markets rose on Wednesday. Hong Kong’s Hang Seng index rose 0.82% and the mainland’s CSI 300 index rose 1.83% after Chinese chipmaker MetaX Integrated Circuits surged nearly 700% in its market debut.

The Hang Seng Index is up about 26% year-to-date, while the CSI300 Index is up 16.39% over the same period.

The offshore yuan was most recently trading at 7.0421 yuan against the dollar.

December 20: 1-year and 5-year loan prime rates.

December 22-27: 19th National People’s Congress Standing Committee