Private Label Program a Key Driver of Strategy for Costco

by: Research Recap

Powered by a strong private label program, Costco Wholesale (NASDAQ:COST) is becoming an increasingly dominant force in the US retail landscape, according to L.E.K. Consulting.

In a new paper on the warehouse club sector, L.E.K. highlights Costco to illustrate the dynamics of the sector:

Key findings:

Costco is an increasingly dominant force in the U.S. retail landscape. As the nation’s third largest retailer, Costco generated nearly $58 billion in U.S. revenues during the 2009 calendar year, ranking ahead of Target (NYSE:TGT), Walgreens (WAG), Home Depot (NYSE:HD) and other well-known retailers. It continues to expand its footprint by adding to its 57 million consumer and business members globally, and its 414 U.S. warehouses.

While there are commonalities in the warehouse retail market,each of the big-three vendors has distinct characteristics and strengths. Analyst firm Wall Street Strategies notes that Costco generates just 21% of sales from food, compared to 65% from BJ’s (NYSE:BJ-OLD). Geography is also a factor as Costco owns a robust nationwide footprint and is eyeing continued global expansion. Sam’s Club (NYSE:WMT) features 600 stores domestically and nearly 130 locations worldwide. Conversely, BJ’s 180 clubs are clustered in 15 Eastern states. (Click to enlarge)


Consumer products goods (CPG) companies face private- label competition at many major retailers including Walmart’s GreatValue,Target’s Archer Farms and CVS’s (NYSE:CVS) branded product line. Costco’s strong private label offering, Kirkland Signature, competes with brands in an ever-expanding range of categories. Many private-label brands provide consumers with economical options for their shopping lists, and Kirkland Signature is typically 10-20% lower than its branded counterparts.That said, Kirkland Signature also competes directly with many national CPG firms on quality.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

Since its launch in 1995, Kirkland Signature has been a centerpiece for Costco,and now generates approximately 20% of the company’s sales.

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.That said, Kirkland Signature’s dual focus on price and quality creates opportunities for CPG companies to supply Costco with private-label products under the Kirkland Signature label.

L.E.K. calls for a change of mindset for CPG companies, from a focus on percent margins to total dollars earned. “Costco will never deliver the same gross margin as grocery or mass retailers, but it can deliver large sales figures. 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.”

Disclosure: Long Costco