Costco: APAC & China Store Growth Potential

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In the US, if you look at the overall employee cost, salary plus benefits, let's say it's 100%. What percentage of that is healthcare benefits? Is healthcare about a third of what Costco pays all-in per employee?

It runs between 40% and 30% depending on certain areas, but yes, it is about a third of their cost, and it's a big hit. It's a huge hit. In Asia, we didn't have to deal with it that much. In each country, there's a cost for national healthcare. In some countries like Taiwan and Japan, the company pays a third of that cost, but that cost is fractional compared to the US. The US has a huge hit, and it's not a big hit against the company in Asia. In China, there isn't any hit; the Chinese government provides everything.

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Let's talk about the international expansion itself. It's usually difficult. There was a case study on Walmart's international expansion and its difficulties. At that time, 30, 20 years ago, the takeaway was that the core competencies didn't translate internationally because they didn't have the same scale. Costco's international expansion has been a runaway success in some countries like China, Iceland, and Korea. Perhaps less successful in some other locations, and we'll get to those, but what drives their ability to execute so well internationally? It's the execution element I want to probe right now.

It's easy to answer that. I opened Korea in 1994, and Walmart came in about the same time, and I thought, wow, they're going to be very successful here, and they're going to knock these guys around, and they didn't. Over the years, I’ve watched this phenomenon constantly and dealt with it in China because I worked with Walmart there. Walmart opens with a team of expats; they get the program up and going, and then, to reduce costs, they throw many of the expats out and use local teams to run the business. All of a sudden, your Walmart starts looking like any hypermarket in China because that's what the local guys know. That's what happened in Korea. They ended up being nothing special. They weren't different. They did the same thing in China, and I've seen a lot of companies do that.

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What people consume in China is vastly different from what one might buy at a Costco in New Jersey; there's a need for different products. How do you square this consistent look with a need for different stuff? We don't eat as much kimchi in the US as folks do in Korea. But we can always get the best price on Adidas sneakers, branded, at any location?

Their local products run at about 40% to 50% of their offering, and they only sell local products where they can make a difference. If they're going to be the same products as everybody else and can't bring value, they don't tend to sell them. So they don't get caught up. You go into a hypermarket or Walmart, and it's 90% local products. But Costco does the best it can to offer foreign products. People are funny; you go into a market, and everybody's very proud of their country. They're proud of themselves and their businesses. But they sure love imported products, and some countries don't even want to admit it. It was like nobody would ever admit that they prefer foreign products, but the foreign products, especially the Kirkland products, are a huge draw, a big part of their success.

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