Shopping at Costco can feel like the next best thing to
shoplifting! Here's why Costco's Kirkland Signature products are such a steal!
Contrary to popular belief, Costco just doesn't slap its "Kirkland Signature" label on any and
every product it can get its hands on. The warehouse famously only sells about
3,800 products at any given time, with that number including a combination of Kirkland
Signature and name-brand products. Even a similar wholesale club like BJ's typically
has nearly double the number of products on its shelves at a given time. It means
that every Kirkland Signature product that ends up on the shelves was carefully thought
out and researched before the store decided to sell it in bulk. That also ends up translating
to customers trusting the brand, because Costco has taken out the guesswork for
them by telling them that anything with the in-house label is a high-quality product.
The attention to detail goes even further, particularly when it comes to keeping supply
chain costs as low as possible. That was the thought process behind the 2014 decision to
change the shape of Kirkland Signature cashew jars. By switching from a round
container to a square-shaped jar for the nuts, the manufacturer could fit a larger amount of
product onto every truck. It may seem like a small detail, but it has a big impact on
Costco's yearly profits and the amount of money its loyal customers can save.
"'Cause at Costco, you…save…money!"
Kirkland Signature is a humble brand in appearance and has been a staple on
the shelves since Costco began selling all of its privately labeled products
under the brand name in 1995. The name pays homage to Kirkland, Washington,
which was the original location of Costco's headquarters. The decision to create one
cohesive brand helped with brand recognition among Costco customers and was a money-saving measure.
Costco only has to have one uniform packaging for everything, forgoing the need for large
marketing strategists and designers. Additionally, Costco doesn't need to
fund extensive legal operations for trademarking and approving different brand names for products
in various categories. It's one brand that attempts to appeal to all members,
and it's a method that's succeeding, considering Kirkland's $59 billion in sales in 2021 alone.
There's also a psychology behind keeping the customer's options limited. By only
offering one or two options for items in most categories like cereal or dish soap,
customers are encouraged to buy more. They don't have to put much thought into every purchase,
taking some of the work out of a mundane shopping trip. Additionally, research shows that customers
are more often unsatisfied with a purchase if they had to choose from a wide variety of brands.
A huge portion of the products customers will find on Costco's shelves are simply labeled
with the Kirkland Signature brand like typical "generic" products at any average grocery store.
But certain items are often labeled with both Kirkland Signature and a large name-brand company
to create a quality product for a low price that is exclusive to customers who are Costco members.
One of the easiest partnerships to recognize is Starbucks' Kirkland Signature House Blend,
which is sold in two-and-a-half-pound bags. Some of the other co-branded products include
Reynolds aluminum foil, Jelly Belly jelly beans, and Ocean Spray cranberry juice.
These types of partnerships ultimately help Costco save on shelf space by offering a
name-brand and generic version of a product all in one. It's a far cry from the early iterations
of generic store products seen in the 1970s that weren't marketed to customers as trusted items,
giving them the stigma of being low-quality products in comparison to familiar names.
Costco doesn't see sales split between two different brands and gives the customer one
single option to pick up while perusing the aisles. It also helps boost Kirkland
Signature's credibility by co-branding with an already well-trusted and profitable brand.
The limited number of products at Costco compared to the average grocery retailer
impacts the specific products that get the Kirkland Signature label. As we said,
Costco doesn't just label anything and everything with the coveted "Kirkland Signature" name.
"They sell baby formula and they sell coffins. You
can literally buy everything you need from birth to death.”
In 2021, the average supermarket sold more than
35,000 given items at a time. That makes Costco's fewer than 4,000 items seem like next to nothing,
even though anyone who has visited a store warehouse knows that it certainly
doesn't feel understocked. Costco's CFO Richard Galanti told the Wall Street Journal in 2017.
"We try to be agnostic on [the Kirkland Signature brand]. We try it like any other brand."
Costco offers a limited number of products, and only a fraction of them are under the Kirkland
Signature label. It's a delicate balance, as Costco knows even its best efforts just
can't compete with solid brand recognition. For example, you won't find Kirkland Signature cola
on the shelves anymore, as the brand decided that Pepsi and Coca-Cola have cornered that market,
and the majority of customers aren't interested in exploring a third option.
The major appeal for any retailer to invest in creating its own private brand are the general
profit margins. Low prices are part of the ethos of Costco, and co-founder Jim Sinegal
has always prioritized this factor. It's why one of his steadfast rules for Costco has been
that no item in the store can be marked up by more than 15%. That includes alcohol,
which isn't a typical pricing point by any means. In comparison, as of 2021,
Walmart's average price markup was 32% and Target's was 46%. Realistically,
Costco could be making more money on some of its cult-favorite items, but it's not part of
the business model. That commitment helps to further boost the trust among its customers.
The success of a private label like Kirkland Signature helps
Costco stick to this pricing model. The company saves money through the private
brand by purchasing products directly from the supplier rather than dealing with any
middleman. This is a factor that typically drives up costs for the average retailer,
which needs to source tens of thousands of products to fill up its shelves.
It's not a surprise that the majority of Costco's spending ends up going toward
its Kirkland Signature brand. Costco, unless it partners with other brands,
is solely responsible for the packaging, sourcing,
supply chain management, marketing, and more of every product under that umbrella.
Costco's commitment to the Kirkland Signature brand is also a key indicator of the way private
store labels have impacted the shopping market, and how public opinion toward generic brands
has shifted in recent decades. In 2022 more than ever, in an attempt to save money wherever they
can – with inflation and supply chain issues – people are opting for generic store labels
that often boast the lowest price. In the case of Costco, Kirkland Signature as a brand is a draw
to people paying for annual memberships. The low price is what first appeals to customers,
but the high-quality products are what keep them coming back for more.
Another factor that helps Costco's profit margins significantly is its commitment to buying in bulk
for its Kirkland Signature brand, just like its loyal customers do at the end of the supply chain.
"I feel so calm here. Just knowing the bulk deals are waiting."
The bulk factor is a major draw for suppliers to be incorporated into the brand's private label,
especially in sectors like wine that typically aren't bought or sold in massive quantities. Those
manufacturers may be able to sell their products, like bottles of wine, for more on their own if
they didn't opt to be labeled as the generic brand. However, Costco signs massive contracts
committing to purchase bulk amounts from suppliers for its Kirkland Signature label, likely making
those suppliers more money in a shorter amount of time than they would with traditional sales.
When brands like wineries partner with Kirkland Signature, they are ultimately introduced to a
massive and committed customer base in Costco stores. If those customers are particularly
satisfied with a product, like wine made by a specific variety of grapes, they may be
interested in seeking out higher-priced options from the original retailer in the future.
Costco also has the added benefit of almost guaranteeing that its customers are going to
buy large amounts of its products, likely more than they would at a typical grocery store. It
sells nearly everything in bulk for that reason, which also benefits its profits in the long run.
Customers approach a shopping trip to Costco differently than the average grocery store. There
is the mentality to "stock up" on items because they are cheap, which can lead to overbuying.
"An entire case of mushroom soup for 4.99! Dammit Costco, you've done it again!
As DealNews editor Benjamin Glaser told The Motley Fool,
"Great prices are why you walk in to buy milk, and walk out with a big-screen TV."
"I thought I would only spend $25, and I ended up spending over $700."
And Kirkland Signature's low markup prices are often a culprit. Even the sheer amount
of toilet paper Costco sells is astounding. Back in 2012, a CNBC report determined that
Costco sold one billion rolls of toilet paper in a single year. It's enough to go around the
earth 1,200 times. This was nearly a decade before the great toilet paper shortage of the
2020 COVID-19 pandemic, so we can only imagine how high those numbers are now.
A major factor in Costco's ability to keep prices low is the membership fees. Costco
members pay between $60 to $120 a year to shop at the wholesale club, in comparison to the typical
catch-all store that costs nothing to walk through the doors. Those fees end up accounting for more
than half of the company's profits. It's not a total shock that those fees rack up quite
a profit for the brand, as Costco has more than 90 million loyal members who shop at its stores,
according to a 2018 CNN report. Costco members are incentivized to pay the annual fee in exchange for
the ability to access the chain's low prices and exclusive Kirkland Signature items.
Because Costco can rely on annual fees for such a large percentage of its profit, it's able to
apply cost-saving measures for those members. For example, Costco has famously always sold its
rotisserie chicken for $4.99, which is oftentimes less than half the price that other grocery stores
label their home-cooked birds. The price tag doesn't generate any profits for the company,
but it isn't designed to. The purpose of the low price is that it encourages members to come in for
the deal, and potentially purchase more than just a $5 chicken during their shopping trip.
It's not often that you flip on the TV and see an advertisement for Costco's low prices and
famous food court. That isn't just a twist of fate — it's because advertising isn't a
focal point of the wholesale brand's overall operation. Another benefit that those loyal
Costco members get is that the brand doesn't have to work overtime trying to attract new
customers to shop in its stores. It means that members can enjoy all of the best prices
whenever they enter a Costco without being bombarded with advertisement deals regularly.
Even decades ago when Kirkland Signature was still a relatively new brand on the shelves,
Costco never paid for billboards and commercials to attract new
members into its stores because it just wasn't necessary. The decision
helps the retailer to save 2 percent or more a year in costs, and it's one
of the savings that is reflected in the low price tags of most of the brand's products.
Costco also saves money by not hiring employees to unpack boxes, stock shelves,
and set up elaborate store displays to attract customers to pick up a new item. Anyone who has
been to a Costco knows it's a unique experience that is comparable to a treasure hunt.
"Oh, I love this place. I'd love to get lost in here! Wouldn't it be something?"
The store is full of industrial shelves and massive boxes of bulk products for eager customers
to find and throw in their carts. An added benefit to keeping the store plain and simple is that
Costco also doesn't have to pay money for research and supplies to keep the design on trend. Costco
warehouses often don't even have windows inside, let alone decorated spaces. Aesthetics just aren't
a factor, and they're another reason that the brand can pass along savings to its members.
In fact, Costco makes a whopping $1,200 per every square foot of its store,
which is double that of the average grocery store. The added gimmicks and
displays aren't necessary. The brand can turn over its select amount of products,
many of which are under the Kirkland Signature brand, much faster than other competing retailers.