I have just come back from an intense trip to Asia – including visiting Shenzhen for the first time in over a decade. Last time I was in Shenzhen, the city was, in almost every way overshadowed by its neighbour, the then regional super-power, Hong Kong. Today however, the tables feel like they are very much starting to turn – and Shenzhen now boasts a booming population (nearly 20 million inhabitants), futuristic skyscrapers, and has solidified its status as China’s Silicon Valley. Indeed, Shenzhen today is home to powerhouse companies ranging from Tencent (WeChat) to Huawei to BYD.
In years gone by, those that lived on the Chinese mainland would travel to Hong Kong to shop – including for staples. For example, Chinese residents would regularly cross the border to buy baby milk formula because of concerns around the safety of domestically produced products in mainland China. Likewise, they would flock to luxury retailers, including Department Stores like Lane Crawford, to buy brands that were harder to access in China.
Rarely, however, would Hong Kong residents travel to China to shop. Why would they? They had better brands, better availability and better convenience than their Chinese neighbours. Now, however, the tides have started to turn – and last year, Hong Kong visitors made 93 million visits to Shenzhen – that equates to 13 visits for every resident of the island! Many would visit regularly, often weekly or monthly, for affordable food, haircuts, massages, groceries and other services.
“To put into perspective how popular these stores have become, estimates for FY2025 show that Sam’s Club sales volumes will have reached over RMB 90 billion (roughly £9.6 billion) from around 58 locations.”
One retailer driving a significant volume of Hong Kong residents to Shenzhen is Sam’s Club.
Owned by US-multinational retail corporation, Walmart, Sam’s Club uses a membership-only model that sells world class brands – like luxe skincare Drunk Elephant and Crème de la Mer; alcohol that includes brands such as Jonnie Walker Blue Label and £10,000 bottles of wine; and tech brands like Dyson – all at competitive prices. To put into perspective how popular these stores have become, estimates for FY2025 show that Sam’s Club sales volumes will have reached over RMB 90 billion (roughly £9.6 billion) from around 58 locations while competitor, Hema Fresh – a high-tech supermarket chain operated by Alibaba – recorded RMB 75 billion (approximately £8 billion) from over 400 stores – nearly seven times more locations.
For those of you who have been following Walmart’s entry into China, its success with Sam’s Club seems to be somewhat surprising as, for many years, Walmart struggled to gain traction in the region with their Supercentre format.
First entering China in 1996, Sam’s Club hit a moment which, despite being a time of rapid economic expansion, was also a period of significant regional disparity where the gap between rich and poor was growing. The membership model didn’t manage to capture the consumer’s imagination when set against this backdrop, because, despite around 10,000 SKUs being sold at wholesale prices, there were too many products, and the company didn’t feel as though it was offering true value for money for its target demographic. Missing the mark when it came to localisation, translating Sam’s Club to the Chinese market proved to be a tricky task: the brand struggled to build trust with Chinese shoppers. So, after eight years in the market, any further plans to expand on the four stores that already existed were halted due to a ‘lack of sufficient members’.
Fast forward to 2012, and the focus of the company had shifted to quality over quantity, and SKUs were cut in half in order to allow for better price negotiations with suppliers, which, in turn, led to better value for customers. Although somewhat controversial, the company also decided to raise the membership fee from RMB 150 to RMB 260 (the current equivalent of a £16 increase), the first time this had changed in 20 years.
However, making these changes to its range of products, and raising the membership fee made a clear statement – Sam’s Club knew who its target customer was and, in the words of its then COO Andrew Mills, “if someone doesn’t accept this figure, they are not our target customer”.
The decision to really hone in on the middle classes was the turning point for the business, especially because, over the last decade or so, this section of Chinese society has grown significantly. These very consumers have also ended up differing from those who are now engaging with major e-commerce platforms which have become the dominant force in the Chinese retail market.
But why has Sam’s Club’s membership model been so successful? Fundamentally, it seems that Chinese consumers feel as though they are getting value for money. Indeed, in China, its members have access to high quality products at prices that make the membership fee worthwhile and – crucially – there are a whole range of products that are exclusive to these stores. Although the brand struggled to connect with customers when it first entered the market in the mid-90s, Sam’s Club is now able to offer enough value and range to encourage loyalty.
The introduction of membership-based hypermarkets like Sam’s Club did not go unnoticed in neighbouring Hong Kong and, like their Chinese peers, Hong Kong residents are now flocking to become members of Sam’s Club.
Indeed, Walmart last month reported that revenue growth was up 5.8% while Sam’s Club recorded a more than 6% year-on-year rise in transaction growth during the quarter and added around 10 new stores in the past 12 months.
It is not, however, just Sam’s Clubs bricks and mortar stores that are booming – digital is too, as Douglas McMillon, outgoing CEO of Walmart, said during a recent earnings call: “The team in China is delivering orders fast. Nearly 80 percent of digital orders arrive in under an hour. In digital retail, China is more advanced than any other market we operate in.”
“Although the brand struggled to connect with customers when it first entered the market in the mid-90s, Sam’s Club is now able to offer enough value and range to encourage loyalty.”
Sam’s warehouse network – offering high repeat purchase rates, high basket sizes and low operating costs – has become a key differentiator. Its infrastructure enables profitable online fulfilment, broadens geographic reach and boosts membership renewal and engagement by increasing purchase frequency, and increases penetration of private label (its Marketside brand recently unveiled a full brand refresh, releasing nearly 1,000 new or upgraded products).
Supercentres are the major source of revenue for Walmart worldwide – however, the mass-appeal format simply didn’t resonate in China. Now, by focusing on urban middle-income households and single consumers through their Sam’s Club format, as its core customer groups in China, Walmart’s business in the region is thriving.
Ironically, their major competitor in China isn’t local powerhouses like Freshippo (Hema) (Alibaba’s platform) or online platforms like JD, Pinduoduo – rather, it is Sam’s Club’s closest competitor in the US – CostCo, now with RMV 10 billion revenue in China, trading from seven stores (and growing).
With stores up to 20,000 square meters in size, land-constrained Hong Kong will find it hard to introduce a Sam’s Club or equivalent into their own market. Until they do, however, expect affluent Hong Kong citizens to continue to make the trip to Shenzhen – the appeal of Uncle Sam is too great!
