Why Can't Costco Cross India's Coast?

Millions of items you could think of, from all possible categories, say domestic, groceries, personal care, and food, collected in an unorganised layout is how a shopaholic’s paradise looks like. It’s also the structure of Costco’s warehouses. 

Reputed to be the 5th largest retailer in the world, Costco Wholesale Corporation is an absolute favourite to-go shopping centre for Americans. Large warehouses with items in bulk have brought Costco the 11th position in the Fortune 500 list of the largest US Corporations in terms of total revenue. Now, Costco, trading name COST, is on its way to completing 40 years. That’s right, a Ruby Jubilee celebration is on the way for the high-on-demand value retailer! 

Whenever an American or a Canadian thinks of saving up on domestic purchases, their first choice is to visit a nearby Costco store. And no, you won’t have to travel tens of kilometres away to find a Costco store, as there are more than 400 locations in America alone. Apart from the USA, Costco has made its presence known in 14 countries, including Korea and Japan.

While searching for Costco’s and India’s connection, the only thing you will find is Ubuy’s website, with Costco’s products available at ridiculous prices. Despite bagging so many achievements, why is Costco facing difficulty in entering our motherland? 

Let me take you on an in-depth evaluation of “the great” Costco’s shortcomings and the many reasons behind its failure to enter Indian lands.

Costco Business Model

A retailer provides a large variety of products in different categories at comparatively lower prices. This allows them to retain their customers and also helps the companies or brands (whose products they sell) to improve their revenue. Costco, being a value retailer, does this but in an untraditional sort of way. Instead of opening its gates to any and all customers, Costco plays in the member-only category. 

Might seem biased to many, but that’s Costco’s business model for you. High-volume sales, systematic inventory management (a wonder, in my opinion), and membership-based revenue make up Costco’s business model.

Membership-only scheme is the core business of Costco. This has taken them from opening a warehouse in Seattle to 847 warehouses in 14 different countries. Imitating their then-competitor Price Club, Costco started working in the big-box retail business. After a few years of establishment, in 1993, both Price Club and Costco merged to become the now-present Costco Wholesale Corporation. 

Offering two types of memberships, Basic & Executive, Costco succeeded in reaching its loyal clientele of around 120 million members today. The Basic membership costs $60 a year, taxes aside, whereas the Executive membership costs $120. Both Basic and Executive membership cards are available in separate versions for individual customers as well as businesses.    

Costco Basic Membership Card

Also known as the Gold Star Member card, Costco charges $60 per year for this membership. This card comes with a free household card, which is a kind of supplementary card designed for a family member or relative. Thus, one Gold Star membership can be utilised by two different individuals in a household. The only requirement is that both individuals should have the same residential address. 

This membership comes for both individuals and businesses. The price for businesses is also the same, a $60 annual charge, but you would need to submit an identification such as a business license. Through this membership, businesses can purchase and resale for both personal and business uses. Sounds wonderful, right?   

Costco Executive Membership Card

If you think the Gold Star membership was full of perks, then you will fall in love with this next one. Costco’s Executive Membership comes with additional benefits like two supplementary household cards and a 2% reward on qualified Costco purchases. Not only this, but the executive members get the option to enjoy Costco savings as well as Costco Travel packages. All of this is available at the price of just $120 per year. Even the Gold Star members can upgrade their accounts to Executive ones and enjoy large savings on qualified purchases such as groceries, furniture, and more. No biases for members!

Costco only manages big warehouse-type stores where you can find everything, literally everything, from a 22-pound Chocolate bar to whole rotisserie chicken boxes. The only thing to keep in mind is everything available on their shelves is present in bulk amounts. In short, Costco is not for people who have a small shopping appetite or people who prefer shopping for groceries every other week. They highly play with the base of loyal customers repurchasing their annual subscriptions and being a one-stop shopping destination for many.   

How Does Costco Earn Money?

Dedicated to providing cost-effective products to customers, looking at Costco’s business model made me wonder, how exactly do they earn? If you see their annual report for the year 2022 and 1st quarterly report for 2023, you will find a bullish pattern in annual revenue. Jumping from $226.9 billion in 2022 to $234.06 Billion in 2023, Costco earns from a long list of loyal consumers who renew their subscriptions every year without fail. 

Daily-use items are available on Costco’s shelves at such low prices that people keep on repeatedly buying them. You can get a whole chicken at only $4.99 (that’s like a bumper sale to me)! And it seems like they are bringing their friends and relatives with them because Costco’s members are increasing as we speak. 

A Business Model Not Fit for India?

Despite being such a huge success in countries like the USA, Canada and even an East Asian country, Japan, Costco is still not available in India, which is a favourite location for foreign businesses.  At one time or the other, especially during 2007, one hears the news of Costco’s arrival in India. From talks about purchasing land for warehouses to looking for Indian partnerships, Costco is on and off every year in the market news. But that’s all one can get in the name of Costco in India. 

Costco’s Failure in Entering Indian Lands

Even when Costco is the sixth largest retailer in the world with such a promising market share touching 20%, what could possibly be the reason for Costco’s failure in forming roots in India? 

Here are a few reasons for this unexpected delay in Costco’s India arrival. 

India’s FDI Policy

One of the biggest reasons for the absence of Costco from Indian markets is the country’s FDI policy. In India, foreign brands need to give the maximum stake of their businesses to an Indian organisation. This means that a foreign company looking to establish its branch in India cannot hold more than a 49% stake here. Along with this, there are many formalities to take care of, such as filling Form FC-1 & FC-2 to the ROC as well as following environmental and regulatory laws. And let’s not forget the presence of CSR (Corporate Social Responsibility) activities as well. 

Plus, India has a politically unstable environment, and the legal ramifications here are way more complex than in other countries. Thus, companies like Costco, with a well-based business model, might face difficulties in entering India.

Membership Dependency

Despite changing the complete definition of retailing with a membership-based business model, Costco got 200,000 memberships in just one year and became public in 1985. After that, in just three years and six years, the mark of $1 Billion and $3 Billion in sales was crossed, respectively. This proves that the unusual way of doing retail business worked very well for Costco. 

From seeing the numbers, one might think that Costco can easily enter Indian lands and set up a promising branch. But, despite a few rumoured attempts, the warehouse chain hasn’t been able to establish a single store in our motherland. Their heavy dependence on memberships is one of the big reasons for this delay. People in India do not like to pay for services prior to their usage. And the memberships at Costco are present on an annual basis only. Although the membership card brings many benefits with it, paying such a large price at once might seem like an unlikely option to many. 

So, Costco will have difficulty getting good revenue in India if it wishes to follow the membership-based business model. 

Bulk Purchasing Business Model

The business model that gave Costco recognition around the world is the prime reason why it won’t work in our country. About 1 in 3 people in India spend their livelihood following the paycheck-to-paycheck funda. By the start of the month, we receive our income, and all the expenses are thus planned accordingly. This includes grocery shopping, bill payments, and other leisurely spending. This fact is true for almost everyone. 

We Indians have the mindset to save money in the present. The concept of bulk purchasing groceries and other domestic items is a foreign idea in India, practised hardly by 10% of the population.

Let me explain this via a simple example. 

Suppose a 5kg bag of flour costs ₹200, whereas a 10kg bag costs ₹350. Most citizens with a 1-4-member middle-class family would buy the 5kg bag. Despite the saving amount of ₹50 with the 10kg flour bag, the 5kg one would be the first choice for most people. The reason behind this choice is pretty simple and wonderfully Bhartiye. One, it represents saving that additional ₹150, which can be utilised for other expenses of the month. Another is the thought process of connecting a 10kg bag of flour as an extra expense when the 5kg bag is sufficient. Told you, we live month-by-month, which works well with the basic wage most middle-class families earn for survival.
 
This living style that citizens follow is completely opposite to the in-bulk purchasing business model that Costco follows. 

Delivery Dilemma

If you live in one of the metro cities in India, such as Bangalore, then you must be well acquainted with the dilemma that is parking. People are in such a plight that they are reduced to parking their automobiles 4-5 buildings away from their destination, which can be more than 40-50 meters in distance. Even the Costco stores in the USA, such as the one in West Henrico, Virginia, are reviewed to have the worst parking lots. Although the parking slots are spacious, with ease to open and close doors, this has led to much fewer lots for customers to park in. 

Another issue is the store’s vicinity to other establishments. Indian cities are overcrowded because of their vast population of 1.4 billion and counting. In such a location, finding huge spaces for warehouses a moderate distance away from other busy establishments would be difficult. 

The only good thing in this scenario is the daily exercise one gets from all the walking, which makes me wonder if that’s Costco’s hidden agenda behind the business model. No??? Okay, then! 

But one thing’s for sure, nobody would be interested in weightlifting along with the unwanted walking parade. Since Costco promotes bulk marketing, people would have to lift 4-5 heavy shopping bags to and fro the warehouses and the parking location. And using expensive delivery services while shopping online is out of the question if one wishes to save a few pennies.

Competition with Existing Retail Chains

Just as America has Costco, we have DMart. Costco’s business model was a big inspiration for our country’s popular hypermarket chain, DMart. Radhakishan Damani scooped the business model of Walmart (Sam’s Club), Costco, and IKEA and then created DMart. Today, people shop from DMart stores which specialise in varying product assortment and impeccable shelf spacing. Thus, Costco is likely to face issues from the presence of DMart and other existing retail chains. 

Plus, the presence of digital options available in the retail market is already engrained in Indian citizens' lifestyles. As per 2021 data, more than 185 million people in India partake in online shopping on an annual basis. Breaking this habit of ease in people’s minds, that too with a new brand, would be a challenging task. I mean, let’s be honest: shopping from the comfort of our cushy couch is way more appealing than finding required items in large warehouses.

Read the blog on Radhakishan Damani’s Success Story. 

The Bottom Line

The concept of 100% is impractical. No matter how good a company is, there are bound to be weaknesses causing issues in its pathway to global domination. The same is the case with Costco. 

But, there is a possibility of Costco’s slightly easier acceptance by Indian citizens, especially the GenZ crowd. After all, we are quite familiar with the concept of annual subscriptions due to OTT platforms. So, here’s a tip from Insider to Costco, you should use the hammer when the iron’s hot.

If you are interested in reading about various Business Models and Success Stories, then click on link to read about it.