Costco's Retail Dominance Powered by Strong Store Brands

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April 27, 2010

As the nation’s third largest retailer generating annual U.S. sales of $58 billion from only 414 warehouse stores, Costco’s Kirkland Signature store brand accounts for $11.6 billion, or 20 percent, of those sales, a figure that has grown steadily since the brand launched in 1995.

While most CPG companies are accustomed to competition from store brands at retailers such as Walmart, Target and drug stores and grocery stores, Costco is one of the few with the brand muscle to charge higher prices than national brands in certain categories, according to a summary of the consultant’s white paper on Seeking Alpha.

Although Kirkland prices are typically 10 to 15 percent lower than national brands “this focus on value has evolved to position Kirkland Signature products as slightly more expensive in many categories than comparable national brands, including canned tuna, salsa and pet snacks, the consultant wrote. “There are instances where Kirkland Signature can command a premium in specific categories by introducing a quality product. If Kirkland Signature leapfrogs a CPG company in perceived quality and associated premium pricing, it becomes extremely difficult for the CPG vendor to reestablish category momentum at Costco.”

L.E. K.’s white paper calls on CPG companies to alter their mindset and focus more on total sales volume rather than gross margins. They should also explore opportunities to supply Costco with stores brands to be sold under the Kirkland label.

“Costco will never deliver the same gross margin as grocery or mass retailers, but it can deliver large sales figures,” L.E.K. wrote. “One of the overlooked benefits of Costco is its size and scale as a national retailer. Some of L.E.K.’s CPG clients actually sell more at Costco than at Walmart.”

Interestingly, Costco derives only 21 percent of sales from food compared to 65 percent at BJ’s club stores, L.E.K. noted. Unlike BJ’s, whose stores are clustered in the northeast, Costco’s national footprint is growing and is expected to continue expanding globally as well.

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• Costco Kirkland Brand to Explode Over the Next Two Years
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