Kirkland Signature: This may be the largest private label brand in terms of global sales.
By Wang Ziwei @ Retail Wei Observation
If you are one of the nearly 120 million Costco members worldwide, you are likely to love its private label brand Kirkland Signature (often referred to as "KS"): for example, you can buy a 1.75-liter bottle of French vodka for $19.99, a $4.99 roasted chicken, and so on.
Although these products are priced attractively, their quality is not compromised. In fact, Kirkland Signature consistently receives good ratings in many blind tests, which explains the continuous growth in sales of KS products.
According to Costco's annual report, KS product sales were $52 billion in the 2020 fiscal year, $59 billion in the 2021 fiscal year, and although the sales figures for the just-ended 2022 fiscal year were not directly stated in the annual report, Costco's CFO Richard Galanti stated in the earnings conference call:
"Many of you have asked about the current situation of private label brands in the inflationary environment, whether people are reducing their purchases, etc.? Of course, our response is that their transaction volume has not decreased - their transaction volume is increasing, or at least remaining stable."
"As for the penetration rate of KS products, excluding gasoline and other businesses with the Kirkland name, the penetration rate of its products has increased by less than 1% compared to a year ago. This year, our KS product penetration rate is about 28%. This is similar to historical trends, and it is growing slowly and steadily over time. Therefore, there is no significant change compared to the past."
Interestingly, even if we only look at the $59 billion sales scale in the 2021 fiscal year, Kirkland Signature is already the highest-selling private label brand in the United States - even higher than the total revenue of many consumer brands that have already gone public.
What's even more interesting is that Kirkland has a large number of loyal fans - something that is not common for private label brands. There are even die-hard fans who have tattooed the Kirkland Signature logo on their arms and held their 27th birthday party at Costco's food court - where they can treat their friends with a $1.50 classic hot dog combo. These friends are truly amazing.
It is indeed surprising that a private label brand can be so successful. After all, according to traditional beliefs, cheap goods are not good quality - of course, there are many retailers who have become giants by selling "cheap goods," such as Dollar General, which Retail Wei Observation has previously written about, a dollar store giant that has achieved sales growth for more than 30 consecutive quarters; and German Aldi and Japanese business supermarkets are also leaders in this regard.
So, back to Costco, how do they manage to offer good quality products at low prices?
The method is to have the best manufacturers in the world produce their own brands, even if their brands are already on the shelves at Costco. Although consumers may not know, many KS products are actually produced in the same factories as well-known traditional brands.
This is not a recent trend. According to an article in the Harvard Business Review in 1996 titled "Brands Versus Private Labels: Fighting to Win," half of the brand manufacturers started producing private label brands for retailers in the 1990s.
Why would manufacturers compete with their own traditional brands by producing private label brands? The reason is simple. On the one hand, Costco has excellent sales capabilities, and on the other hand, their equipment would otherwise be idle. Increasing production can improve equipment utilization - so what difference does it make whether they put their own brand on the products or not?
Of course, some manufacturers produce private label brands as a way to give back, hoping that retailers can provide better shelves and positions for their products.
The only common point is that manufacturers are secretive about producing private label brands for others, especially private label brands that compete with their own traditional brands. After all, this is somewhat contradictory.
【One】The Origin of Kirkland Signature
Let's first talk about the origin of Kirkland Signature.
Costco was founded in 1983, and Kirkland Signature appeared nine years later in 1992.
In 1991, an article in Forbes magazine greatly inspired James Sinegal, the CEO and founder of Costco at the time. This article explained how top consumer goods companies like Heinz achieved profit margin improvement through "private label" brands.
The article stated, "Consumers are starting to turn to private label brands... This trend has just emerged, but its growth is significant." So, Sinegal drew a line at the key points and forwarded it to some of Costco's top partners.
In fact, at that time, Costco was expanding internationally, and the private label brands in these countries had better quality and were more popular than those in the United States. At that time, most private label brands in American retail stores were white-label "knockoff products."
So, Sinegal told his top partners that he wanted Costco's private label brands to have the same quality as these brands overseas, and all private label brands should use the same logo.
In 2019, Sinegal explained this by saying, "Traditionally, we should have different names for different categories of products, but in so many countries, we have so many products that we would need a room full of lawyers, so we decided not to do anything and just wanted to get rid of these different names."
From a macro perspective, listed large retailers are under great pressure to meet consumer demands and Wall Street's growth expectations. At that time, many retailers were forced to respond by raising prices.
In actual operation, Sinegal found that product prices fluctuate - they may decrease in some years and increase in others. So he created a "protective umbrella" for prices, and that is Kirkland. However, it was not until 1995 that the name was officially determined and all products were placed under this name.
As for the origin of the name Kirkland, it actually came from Costco's original headquarters in Washington state. In 1994, Costco moved to its new headquarters in Issaquah, but Sinegal said, "No one can spell Issaquah, so we just continued to use Kirkland."
Now, 30 years have passed since 1993, and Kirkland has become the most well-known private label brand. You could even say that Kirkland Signature, with its annual sales of over $60 billion, is enough to go public on its own.
【Two】Better than the Best by 1%
According to Sinegal, there are three criteria for creating Kirkland:
First, it must be at least as good as the best traditional brand.
Second, the price should be 8 to 85% lower - note that this is based on the price of the product at Costco, not the price at other retailers!
Third, the product must be very important to consumers and something they want to buy.
Although Costco has never specified which supplier produces Kirkland, there have been discussions about this on social media platform Reddit, which can serve as a reference:
"I used to work for a large company that supplies Costco. If they think your product is one of the best on the market, they will ask you to create a Kirkland Signature equivalent. Costco's condition is that KS products must be at least 1% better than your product. This is not a joke. They will set a benchmark to ensure that their KS brand products are slightly better in quality than your market-leading products."
"As a supplier, you do this because the data is clear that it greatly increases your sales. In most cases, your product is right next to theirs on the shelf. So consumers have two choices. Your product or your product."
【Three】The Success of Kirkland Signature
Sinegal once mentioned in a speech that he was proud that Costco had "absolute pricing authority." After all, the overall business model can be divided into two categories: the first is to make consumers willing to pay a premium, such as Apple, Starbucks, Lululemon, which play the logic of high-profit margins; the second is to provide low prices for consumers, such as Costco, Gillette razors, which is a typical high turnover logic.
For private label brands, there are usually two pricing models:
The first model is the low-price model, where the quality is not inferior to traditional brands (National Brands, commonly known as "NB products"), but the price may be directly 70-80% of the price at Costco. Kirkland Signature is a typical representative of this logic.
The other model is the high-price model, which means that when traditional brands are selling for $100, you may sell for $120, but your value is much higher than what traditional brands offer. A classic example is the private label brands 7-Premium and 7-Gold created by 7-Eleven in Japan.
At the same time, private label brands can also be divided based on the number of categories:
One is when all private label brands use the same brand, like Costco's KS.
The other is when retailers have multiple private label brands, which is more common. For example, Aldi, where private label brands account for 90% of sales, has a variety of logos and brands. Similarly, Target, Walmart, and Kroger supermarkets have more than 30 private label brands, and even e-commerce giant Amazon has over 400 private label brands. So, think about how much momentum and trust Kirkland Signature has accumulated over the past 30 years.
Costco has built a moat for Kirkland Signature with low prices and consumer trust, and Kirkland's success is of great value to Costco.
First, when Kirkland Signature appears in a certain category, the corresponding traditional brands on the shelves usually reduce prices or increase advertising/marketing/promotion to "ensure" that they can withstand the invasion of KS, otherwise they will be removed from the shelves. After all, for brands, they cannot afford to lose Costco's offline channels - it is worth noting that in this process, Costco has done almost nothing and can still enjoy the dividends it brings.
Regarding this, Sinegal once said that KS can suppress traditional brands. Of course, this is also related to a characteristic of the United States in the 20th century: for a long time, consumers were loyal to specific brands, which led to brands suppressing channels - this is a problem that a retailer must solve.
Second, private label brands are a very important source of product differentiation because they are rarely found in stores other than the brand's own stores. Therefore, consumers are willing to visit the store to purchase private label brands, making them excellent "magnet products" and traffic drivers.
Third, what is worth noting is that the markup for traditional consumer goods at Costco is generally not more than 14% (in fact, Costco stated in its 2018 annual report that the average markup is 11%), while the markup rate for KS products is 15%. This means that Kirkland itself contributes a significant amount of gross profit, rather than just breaking even!
As for how Costco views Kirkland, we can look at their financial reports. In the risk section, Costco wrote:
"We sell many products under the Kirkland Signature brand. Maintaining consistent product quality, competitive prices, and availability are crucial for developing and maintaining member loyalty. The profit margins of these products are generally higher than those of traditional brands and account for an increasing proportion of our overall sales. If the Kirkland Signature brand loses recognition or confidence from members, our sales and gross margins may be adversely affected."
Costco is truly unique in being able to create such great value with its private label brand.
"Retail Wei Observation" focuses on the latest strategies, tactics, and thoughts in the field of new retail and new consumption from a global perspective. It has in-depth research on super membership systems and domestic and international new retail cases. The platform's founder, Wang Ziwei, is an independent retail analyst.
This article was first published on the WeChat public account "Retail Wei Observation" on February 18, 2023.