Kirkland Signature: This may be the largest private label in terms of global sales.
By Wang Ziwei @Retail Observer
If you are one of the nearly 120 million Costco members worldwide, then you are likely to be a fan of its private label, 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 attractively priced, their quality is not compromised. In fact, Kirkland Signature consistently receives high 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 have been no major changes compared to the past."
Interestingly, even if we only look at the $59 billion sales scale of the 2021 fiscal year, Kirkland Signature is already the highest-selling private label 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 labels. 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 classic $1.50 hot dog combo. These friends are truly something.
The success of the private label is indeed surprising. After all, according to traditional beliefs, cheap goods are not good quality - of course, joking aside, there are many retailers who have become giants by selling "cheap goods," such as Dollar General, which Retail Observer 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 have good quality products at affordable prices?
The method is to have the best manufacturers in the world produce their private label products, even if their own brands are already on the shelves at Costco. Although consumers may not know it, many KS products and the well-known traditional brands next to them are actually produced by the same factory.
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 labels for retailers in the 1990s.
Why would manufacturers compete with their own traditional brands by producing private labels? The reason is simple. On the one hand, Costco's sales capabilities are excellent, and on the other hand, their equipment is idle. Increasing production can improve equipment utilization - so what difference does it make whether they put their own brand on it or not?
Of course, some manufacturers produce private labels as a way of giving 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 labels for others, especially private labels that compete with their own traditional brands. After all, this is somewhat contradictory.
[One] The Origin of Kirkland Signature#
Let's talk about the origin of Kirkland Signature.
Costco was founded in 1983, and Kirkland Signature appeared 9 years later in 1992.
In 1991, an article in Forbes magazine greatly inspired James Sinegal, the then CEO and founder of Costco. This article explained how top consumer goods companies like Heinz achieved increased profitability through "private labels."
The article stated, "Consumers are starting to turn to private labels... This trend has just emerged, but its growth is significant." So, Sinegal drew a line at the crucial point and forwarded it to some of Costco's top partners.
In fact, at that time, Costco was expanding internationally, and the private labels in these countries were of better quality and more popular than those in the United States. At that time, most private labels in American retail stores were white-label "knockoff products."
So, Sinegal expressed to his top partners that he wanted Costco's private label to have the same quality as these brands abroad, and all private labels 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 focus on eliminating these different names."
From a macro perspective, listed large retailers are under great pressure to meet consumer demands and Wall Street's growth expectations. Many retailers are 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 "price umbrella," which is Kirkland. However, it was not until 1995 that the name was officially established and all products were placed under this name.
As for the origin of the name Kirkland, it actually comes 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 decided to continue using Kirkland."
Now, 30 years have passed since 1993, and Kirkland has become the most well-known private label. You could even say that Kirkland Signature, with its annual sales of over $60 billion, is enough to be listed on its own.
[Two] Better Than the Best by 1%#
According to Sinegal, there are three criteria for creating Kirkland:
First, it must be as good as the best traditional brand on the market.
Second, the price must be 8-85% lower - note that this is in comparison to 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 topic on social media platform Reddit, which can serve as a reference:
"I used to work for a large company that supplies to Costco. If they consider your product to be 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 consumers with low prices, such as Costco, Gillette razors, which is a typical high turnover logic.
For private labels, 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 original price. Kirkland Signature from Costco is a typical example 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 labels 7-Premium and 7-Gold created by 7-Eleven in Japan.
At the same time, private labels can also be divided based on the number of categories:
One is to use a single brand for all private labels, such as Costco's KS.
The other is when a retailer has multiple private labels, which is more common. For example, Aldi, where private label sales account for 90% of total sales, has a wide variety of logos and labels for its private labels. Similarly, Target, Walmart, and Kroger supermarkets each have more than 30 private labels, and even e-commerce giant Amazon has over 400 private labels. So, think about how much momentum and trust Kirkland Signature has accumulated over the past 30 years.
Costco has built a moat for Kirkland with its low prices and consumer trust, and the success of Kirkland is of great value to Costco.
First, when Kirkland Signature appears in a certain category, the corresponding traditional brands on the shelf usually lower their prices or increase advertising/marketing/promotion to "protect" themselves from the invasion of KS. After all, for brands, they cannot afford to lose Costco's offline channels - it is important to note that Costco has done almost nothing in this process but still enjoys the benefits it brings.
Regarding this, Sinegal once said that KS itself 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 labels 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 products, making them excellent "magnet products" and traffic drivers.
Third, it is worth noting that the average 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%. In other words, 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 writes:
"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 truly stands out as the retailer that has created such great value with its private label.
"Retail Observer" takes a global perspective and focuses on the latest strategies, tactics, and insights in the new retail and consumer sectors. 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 Observer" on February 18, 2023.