Costco Wholesale (NASDAQ:COST) is already a $27 billion business, but that doesn't mean it's done growing. And what better way to do so than to enter one of the world's largest and fastest growing consumer markets? On Tuesday, Costco announced that it will do just that by entering China for the first time -- though not in the way you might think.
Costco won't be building any of its flagship brick-and-mortar warehouses in China. Instead, it's opening an online store through the Tmall Global e-commerce platform. Tmall is China's largest third-party platform for brands and retailers, and -- to borrow Costco's words -- "allows overseas brands and retailers to establish a presence on Tmall.com without the need for physical operations in China."
Costco executive VP Jim Murphy elaborated:
Costco sees tremendous growth opportunities in China, especially in light of Chinese consumers' increasing appetite for imported products. We have chosen a great partner [...] for the official launch of Costco's Flagship Store. Our Tmall Global flagship store will give Chinese online shoppers a channel to purchase directly from Costco.
On one hand, this means Chinese consumers won't be able to enjoy the full Costco experience, including everything from the $1.50 hot dogs to the treasure hunt-style atmosphere that keeps people coming back for more. On the other hand, this should be a great way for Costco to at least get its feet wet and give Chinese shoppers a small taste of what it has to offer.
Costco is starting small for now, saying it will "carefully select the most suitable products and brands" for Chinese consumers at "highly attractive prices." Over time, Costco intends to continue introducing new brands and products on the site.
Why investors should be rejoicing
That's not to say Costco hasn't performed well, given its current strategy. During its most recent quarter, Costco saw net revenue jump 9% year over year to $34.8 billion, capped by an impressive 7% increase in comparable-store sales for the month of August. That marked its best comps result since December 2012. In addition, Costco grew net income by 13% year over year to $697 million, helping it exceed analysts' expectations for the first time in over a year.
But if untapped growth opportunities present themselves, why not take advantage?
In fiscal 2013, for example, online channels represented only 3% of Costco's more than $100 billion in consolidated net sales. That's not a terribly surprising statistic, considering Costco only had websites at the time for the U.S., Canada, and the U.K., and it just added Mexico to the mix earlier this year. At the same time, Costco's international operations were responsible for only 28% of consolidated net sales last year.
By adding an e-commerce platform in China, Costco can kill two birds with one stone by diversifying into an online, international market with staggering growth potential. Remember, as of the end of 2012, China's consuming class was estimated to be around 300 million, or roughly the same size as the entire U.S. population. As the disposable income of China's middle class continues to climb, that number is expected to double to 600 million by 2020.
In the end, if Costco can use its new e-commerce platform to grab any meaningful slice of that burgeoning market, there is every reason to believe China can have a significant positive impact on Costco's long-term growth. When that turns out to be the case, Costco investors will stand to be handsomely rewarded.