Retailer of the Year

COSTCO Whole sale - Retailer of the year

April 1, 2004
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COSTCO Whole sale - Retailer of the year

by Jill Bruss
You do the Math — Costco's Strategy Adds Up
Ten percent wouldn’t cut it on any exam. It wouldn’t cut it in your workplace effort where you’re usually asked to give 110 percent, and it wouldn’t cut it for any sports statistician. But there’s one place where 10 percent seems to be doing the trick, so far. This year’s Retailer of the Year – Costco Wholesale – says private label only accounts for about 10 percent of total SKUs in a given warehouse, 10 percent of shelf space and 10 percent penetration. In this instance, 10 percent is enough to put Costco’s Kirkland Signature private label brand at the center of any discussion of successful, innovative and award-worthy private label programs.
“Thrilled and honored” to be named PL Buyer’s Retailer of the Year, Costco opened its doors to us, pointing out its strengths on the shelves and its ample opportunities to grow. And while the magic number is a bit higher than 10 percent, with its Kirkland Signature brand standing on extremely strong legs, the mass merchandiser is in no rush to reach a higher penetration.
“We’re still very much a branded company, we still place a huge value on brand merchandise,” says Tim Rose, senior vice president of food, sundries and fresh products. “If you don’t have national brands, how can people determine if you’re a good value. If everything is private label, what do they price it against… Our goal is only about 20 percent of total sales for private label, and now we’re about 10 to 11 percent of sales. There’s no big hurry, we don’t have a mission to hurry.”
Within the four walls
When the over-sized glass doors swing open to the entrance of a Costco Wholesale, on average, the building is 136,000 square feet, housing 4,000 SKUs. With 432 warehouses across the globe, the company rang up $41.7 billion in sales last year. And Kirkland Signature plays a statistically small, but mighty role because of its high-quality reputation and prominent position up and down the aisles of the warehouse.
All private label in Costco’s program falls under the Kirkland Signature brand, following the tenet of President and Chief Executive Officer Jim Sinegal to keep it consistent across the warehouse.
“The reason why Kirkland Signature is on every item is because we want to keep that consistency throughout the building,” says Bill Hanson, general merchandising manager of foods and sundries in the Midwest region. “We’ve been able to ensure we’re delivering quality, and over the years, Kirkland Signature has become a brand. We’ve done so well because we’re putting the very best quality in the package. Jim Sinegal feels that instead of fragmenting private label, we should use it as one label. And we’ve been able to instill in people’s minds that when they’re looking at Kirkland Signature, they’re looking at the best quality you can buy at the very best prices.”
“We want people to see Kirkland Signature on anything in Costco from food to meat, to clothing and hardware,” Rose adds. “They can recognize it as a name they trust, and that trust will bridge all categories.”
One of Costco’s first private label products, Simply Soda, is currently being transitioned to the Kirkland Signature brand as it was the lone exception to the Kirkland Signature umbrella approach.
Private label spans the warehouse, with the Kirkland Signature name and guarantee on traditional products such as detergent, canned tuna, olive oil and batteries, as well as more unique products such as sets of pots and pans, patio heaters, socks and cashmere sweaters. Spanning nearly the entire back wall of the warehouses are Kirkland Signature Delis — boasting scratch bakery products, fresh-cut meats and fish, ready-to-eat and ready-to-cook entrees, side dishes and desserts, all substantiating the quality and value proposition of Kirkland Signature and the private label program overall.
“The whole idea of the deli is to have premium, crème de la crème products presented under the Kirkland Signature brand,” Hanson says, pointing to homemade pies, seasoned filets, salads, fresh-cut meats and seafood.
Private Label Stands Alone
Because Costco has experienced such success with Kirkland Signature, there are a number of areas where no national brand is offered. Maintaining Costco’s position as a branded company first, Hanson emphasizes that even still, some Kirkland Signature items have done so well they are the only item available. This strategy works especially well with Costco’s particularly disciplined approach to SKU counts — a warehouse will only have about 4,000 SKUs at any time. (For a means of comparison, Wal-Mart could carry as many as 100,000!)
Items such as the Kirkland Signature Trash and Lawn Bags basically own the category, with only a few stores on the East Coast still carrying a competitive national brand, Hanson says. Kirkland Signature’s Cranberry Juice also stands alone.
“The single-strength cranberry juice has a little better quality than the branded product, and it actually started to outsell the branded product to the point where we took the branded one out,” Hanson says. “Over time our juice has continued to grow and grow — like what happened with our trash bags — and it was far out-selling the national brand.”
A new introduction within the past month is a Kirkland Signature Scotch-Brite Wet/Dry Mop product, similar to the nationally branded Swiffer. With strong consumer reaction early on, Costco already discontinued carrying the Swiffer product and only offers its own – co-branded with well-known and admired Scotch-Brite and heavily merchandised on endcaps. Costco offers the starter pack, as well as the wet cloths and dry cloths refills.
Kirkland Signature products may also claim exclusivity on a category if there is no clear national brand leader, Rose says. For example, Kirkland Signature Sunshine Candy Mix stands alone. Because the product offers such good value, Kirkland Signature snacking nuts are typically only joined by a leading regional brand that may do a more specialty product, despite the strength of national brand leader Planters. In the Midwest, for example, Kirkland Signature mixed nuts and cashews are predominantly merchandised on endcaps with a Fisher Honey Roasted Peanut nearby.
Close Attention to Quality and Cost
Considering the success with the Kirkland Signature brand so far, it’s no surprise that constant attention to quality is paramount to anything else, according to Rose and Hanson. Often the impetus for entering a new category or launching a new item is dissatisfaction with what the national brands are doing. Costco buyers will work closely with suppliers, outlining the goal with Costco-defined specs.
“The first thing we work on is the quality aspect,” Rose says. “We ask suppliers for products that are quality — take out the price factor, and we’ll worry about that later. Produce the best quality product for us first, without concern for cost or sell price.
“Vendors want to come in and price from retail down, instead of cost up. That’s my job to figure out what I want to sell it for. They’ve been so conditioned to hit a price point, but what I want to know is ‘what does it cost you to manufacture with this quality?’”
The overall business strategy at Costco maintains a maximum markup of 14 percent – for branded and private label products. Private label items, Rose says, are to present at least a 20 percent savings vs. the leading national brand, and are not to be used as margin boosters.
“Nothing is marked up more than 14 percent,” he says. “That’s been our discipline since day one. Private label isn’t any different.”
Once a product is developed and launched, the attention to detail does not diminish. Quality standards are continually monitored and buyers regularly work with suppliers to identify any ways in which quality can be improved. To ensure that Costco members always get the freshest product, Costco code dates all products, whether fresh, refrigerated, frozen, dry, pharmaceutical or health and beauty aids.
“We don’t put a lot of time on any of them because of the velocity of the items we do,” Hanson says. “We do a good job rotating product, and our biggest concern is that members get the freshest product, even when it’s frozen. We don’t want any product just sitting around.”
Notable newcomers
Kirkland Signature Canned Albacore Tuna is the perfect example of Costco’s quality- and value-focused mission. Dissatisfied with the consistently declining quality of canned tuna in the national brands, Costco confronted the national brand leaders — Bumble Bee, Starkist and Chicken of the Sea.
“They all agreed that the [tuna products available] weren’t the best,” Rose says. “One of them agreed to work with us to create a better albacore tuna — it was Bumble Bee. We created a private label tuna that was more expensive than the national brands, but that was OK with us.”
The partnership between Costco and Bumble Bee resulted in canned tuna product that had more fish, less water and better quality thanks to the focus on fillet-cut tuna. And it also resulted in Bumble Bee launching a premium-tier tuna under their own brand, using the Costco-defined specs.
“Many of the national brand manufacturers have gained a great respect for the quality of Kirkland Signature products,” Rose says proudly.
Other new product introductions include butter in quarters and solids, Kirkland Signature milk sold exclusively nationwide, and a new cheese program currently being rolled out, which includes basic cheddars in shredded and sliced, as well as mozzarella. Costco is dabbling in Kirkland Signature wines, and Rose says the only area off-limits to private label is tobacco.
“We don’t have new product introductions constantly flowing through,” Hanson says. “We’re not out there with any set number to aim for. It’s a matter of recognizing a category and developing an item, getting authorization and rolling it out.”
Hanson emphasizes that a critical part of new product development is to stay particularly focused on the item at hand. Coming back to the limited-assortment philosophy and the disciplined approach to SKU counts, Hanson says Costco has established a rapport with suppliers in which they present items, not categories.
“They know we buy items, we don’t buy programs,” he says. “It makes us more efficient, and we’re able to get the right items and max out on them. We don’t have ‘bad items,’ we have ‘good items’ that are selling — ones that we have the space to merchandise properly and drive the sales.”
Costco also takes a delicate approach to entering new territory with its Kirkland Signature brand.
“If there’s no history, and it’s unlike anything we’ve done before, we’ll work with our vendors and put product in a few buildings to see how it does,” says Bonnie Busch, assistant vice president, general merchandising manager for non-foods. “We don’t want to put the burden on both of us and take such a chance. It’s a partnership, and as we build relationships with vendors, they’re very glad to try new items with us.”
Most of the time new introductions succeed, Hanson and Busch agree, but both also recognize the chance to fail. “We have a lot more winners than losers,” Hanson declares. “But from time to time, we get a ‘bad’ item. The way we look at it is if sometimes you don’t have failures, you’re obviously not taking chances. One of our strong points is that we’re creative and eager to try new and different things. That’s what’s enticing to our members, and gets them in here. We’re creating a treasure hunt atmosphere for them.”
Co-Branding Comes Naturally
“Co-branding immediately brings recognition to the product when you are introducing a new Kirkland Signature with a name brand on it that has been in the marketplace for 40 or 50 years,” Rose says. “That brings a lot of loyalty, and brings something important to the table. People see two great brands.”
Costco has been able to reap the benefits of co-branding considerably more than any other retailer, industry observers say. From Jelly Belly to Paul Newman and Starbucks, there are a handful of Kirkland Signature items in the warehouse proudly boasting a major name brand logo adjacent to its own. Starbucks actually created a unique roast for Costco, so on the shelves in any given warehouse is the co-branded lineup of coffees and whole beans, as well as Starbucks’ own French Roast. With the quality levels to that of a national brand or higher, Rose says, many manufacturers are happy to co-brand with Costco. Some still aren’t, but with the likes of Quaker Oats and Tyson on its team, Kirkland Signature is reaping the rewards.
Kirkland Signature’s tag-team with Tyson on its skinless, boneless chicken breasts goes down in Costco’s history as a big move, and a big success. A $100-million item now, the chicken breasts had a number of quality upgrades and went from being Tyson skinless and boneless chicken breasts to Kirkland Signature, co-branded with Tyson.
Where in The World in The Warehouse
When standing at the front of Costco Wholesale, the view can be overwhelming. High ceilings with racks and pallets towering overhead, rows and rows of merchandise to explore — center store with books, DVDs, clothing, candy, office supplies and much more; food items from institutional-sized ketchup to novelty snacks and high-end specialties, liquor, frozen and refrigerated, deli, fresh produce and more; and non-food OTC products, health and beauty aids, luggage, dishes and Kirkland Signature/Whirlpool appliances, to name just a few. And while the warehouse is designed to ensure there is enough inventory on the floor to meet the demands of the busiest day, there is also clearly merchandising method in action.
“The placement of items on the endcap is obviously very important because we do so much of our business on the ends,” Hanson says.
Well-stocked endcaps create a strong presence for many of Kirkland Signature’s most renowned items — snack nuts, canned tuna, salmon and chicken, as well as batteries, proudly pitched against a leading national brand so that the value-proposition comes in loud and clear.
“Batteries are one of our highest volume non-food items,” Busch says of the 1,900 to 2,000 non-food SKUs in the warehouse. “We only have AA batteries because they’re basically 50 percent of a battery business, and they offer great value — 48 Kirkland Signature batteries for $9.88 vs. 28 national brand batteries for the same price. On the tiered approach of good-better-best, the Kirkland Signature batters are the ‘very best’ from our vendor.”
Much beyond the basics
Outside of food, fewer opportunities arise to bring in Kirkland Signature products, however, where there is a place, it’s usually a really strong one, Busch says.
“To have a vendor go through the time and expense to develop an item, it has to stick,” she says. “We don’t do this for an in-and-out item. Non-foods is constantly changing so there are going to be fewer items that make sense.”
At A Glance
COSTCO wholesale
Headquarters: Issaquah, Wash.
SALES: $41.7 billion
Store count: 432 total – 319 in United States; 63 in Canada; 15 in the United Kingdom; 3 in Taiwan; 5 in Korea; 4 in Japan; and 23 in Mexico
AVERAGE WAREHOUSE SIZE: 136,000 square feet
SKU COUNT: Approximately 4,000 total
PRIVATE LABEL SKU COUNT: About 400
PRIVATE LABEL SALES PENETRATION: 10 percent
PRIVATE LABEL SHELF SPACE ALLOCATION: 10 percent
EMPLOYEES: 102,000 worldwide
TOTAl BUYERS IN ALL CATEGORIES: 500
TOTAL PRIVATE LABEL BUYERS: 15
No. 1 selling item for entire company: Kirkland Signature Toilet Paper – more than $200 million in sales a year.
Web site: www.costco.com
High-volume items such as batteries are great propositions for the Kirkland Signature line, she emphasizes, and some others such as floor mats and a high-end patio heater capture specific niches. Kirkland Signature Floor Mats offer great value at $19.99, while the Kirkland Signature Patio Heater generates a lot of volume and is the only item like it in the warehouse.
While buyers were not satisfied with the Kirkland Signature line of diapers once carried in the warehouse, currently baby formula and baby wipes are huge drivers. Busch says Kirkland Signature Baby Wipes are the biggest seller in the non-food private label lineup.
New to the non-food assortment is a line of Kirkland Signature men’s undershirts and briefs. “Since we’ve gone into this in the past six months, our business has increased tremendously. The quality is better, the standards are higher, and it’s done very, very well,” Busch says.
Representing half of the non-food Kirkland Signature items, health and beauty aids and OTC pharmaceuticals are extremely high-volume destination categories. Unlike some of the food items that capture all the business, however, private label OTC products typically introduce new buyers, rather than convert existing ones.
“When we put in our own brand, we seldom see much of a difference in the sales of the name brand,” Busch asserts. “We’ll have the name brand customer and the one that feels confident to buy Kirkland Signature. In this area, we feel we’ve added purchases.”
OTC offerings under the Kirkland Signature line run the gamut from cough and cold to pain relief, sleep aids, acid reducer, vitamins and children’s remedies. And Costco, of course, stays up on current trends, as one of its Midwest stores has a prominent endcap loaded with Kirkland Signature Glucosamine, a supplement aimed at improving joint health and surging in popularity as the population ages.
Staying in touch with current trends and adapting programs to meet consumer needs is always at the forefront of effective retailing. And Costco Wholesale is no exception. With a total of 500 buyers keeping tabs on the inventory, a team of 15 buyers focus entirely on private label. Costco has set up eight regional buying offices across the country to keep close tabs on different market demands in the food categories. Attention to maintaining the quality and value proposition is unyielding. When asked how online auctions have affected Costco’s mission, Rose says the percent of business in online auctions is not even measurable. He says they have participated in a handful of auctions over the years, but only with very specific specs on a product and then full audits of vendors before proceeding.
“I’m not a big proponent of online auctions,” he says. “I’m not just looking for the cheapest product I can sell. People come to Costco to buy things cheap, not cheap things.”

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