(CNN Business) — Costco’s Kirkland Signature brand is perhaps America’s strangest private label. You can put Kirkland Signature AA batteries together with Kirkland Signature Cashews in your shopping cart.
It is also surprisingly successful.
Kirkland brought in $58 billion in sales during Costco’s last fiscal year, accounting for regarding a quarter of the company’s total revenue. Kirkland is America’s largest consumer packaged goods brand measured by sales. It’s bigger than Hershey, Campbell Soup or Kellogg’s.
But it was not always like this. It took a couple of decades for Costco to succeed with its Kirkland strategy.
If you shopped at Costco in America three decades ago, you’d find regarding 30 different Costco brands along with big-name food and household essentials.
There was Simply Soda. Chelsea toilet paper. Ballantrae wine. Clout detergent. Nutra Nuggets dog food. These brands were sold only at Costco, which was then called PriceCostco, following Price Club and Costco merged in 1993 (Costco dropped ‘Price’ from its name four years later).
Costco introduced the Kirkland Signature brand in 1995.
But Jim Sinegal, Costco’s co-founder and CEO at the time, decided these brands were forgettable. He sensed a great opportunity to review the company’s private label strategy.
Sinegal was inspired by a 1991 Forbes article on the rising profit margins of major consumer goods companies of the day, such as General Foods, HJ Heinz and Nabisco, and the emerging growth of private label brands. Consumers are “beginning to switch to house brands… The trend so far is just a drop, but it shows signs of growing pretty fast,” the article said. Sinegal underlined key passages from the article and sent it to top Costco merchants.
At the time Costco was also expanding internationally, including in the United Kingdom and Canada, where private store brands were of better quality and more popular with shoppers than in the United States. Most of the US chain’s private label brands had been boring, white-label knockoffs.
“We found that there was a resurgence of private label products, and that was largely driven by the fact that the prices of branded products were growing so rapidly,” Sinegal said. in a talk in 2019 at Georgetown University. Rising prices from big brands “created an umbrella” for Costco to develop its own brands 15% to 20% below brand-name alternatives, he said.
Sinegal told Costco merchants that he wanted the quality of Costco’s private labels to replicate those found abroad. And he had an unusual request: a name for all of them.
“Conventional wisdom was that you had to have a different name for every kind of product you had, Sears Roebuck-esque with Kenmore appliances and DieHard batteries and Craftsman tools,” Sinegal said in 2019. “We looked at it and said, You know, we’re in so many countries and we have such a wide range of products that we’re going to have a room full of lawyers doing nothing but trying to clear these names.”
Sinegal asked staff for suggestions for a name, and someone pitched Kirkland Signature, a twist on the location of the company’s headquarters in Washington state, and came up with a design for executives. (“Seattle Signature” was also considered, but Costco was unable to trademark the name).
“We liked it,” Sinegal said. “We approved it for every country and every product category we had. That made it simple.”
So in 1995, all those private labels disappeared at Costco and were replaced by a new logo with a simple black, white and red design that read Kirkland Signature.
Although Costco soon moved its headquarters to nearby Issaquah, the Kirkland name stuck: “Nobody might spell Issaquah, so we kept it.”
“KS”
Kirkland Signature, known as “KS” at Costco, would soon be featured on everything from diapers to tires to golf clubs.
Last year, Costco introduced a 24-pack of 12-ounce Kirkland hard seltzer and a 750-ml rosé Prosecco. This year, Costco will add Kirkland cauliflower pizza, oven filters and a set of sauté pans, among other items.
The only private label at Costco is an essential part of the retailer’s positioning with customers and a way for Costco to stand out from the competition.
Kirkland, which is exclusive to Costco, lures members into the warehouses and leads them to renew their annual memberships of $60 and $120 each year. Perhaps more important to the company, Kirkland helps Costco cement its image as a value store with quality products, analysts say.
“Kirkland is a representative brand for Costco. It really means Costco,” said Christopher Durham, president of the Retail Brands Institute, a trade group representing the private-label industry. Kirkland is designed to appeal to all demographics, he said, unlike many other retailers’ assortment of private labels, each of which is aimed at a specific segment of shoppers.
Having a name indicates consistency for shoppers, exactly Costco’s goal, and also creates cost efficiencies for the low-cost retailer. Costco doesn’t have to pay for different packaging and can put all of its supplier purchasing power behind Kirkland. A single private label is emblematic of Costco’s broader approach to merchandising in stores: fewer options, better.
“Kirkland has a one-note strategy and he’s really good on that note,” Durham said. “It creates a reason and a point of differentiation for people to buy there.”
“Don’t get it wrong”
Many retailers have made developing their own brands a priority in recent years. Store products have higher profit margins than national brand products and do not have the same costs.
But Costco’s approach is novel. It is still one of the only major retail chains to carry all of its private label brands under one banner. Costco’s rival, Sam’s Club, in 2017 it simplified its 21 private brands on your Member’s Mark.
Kroger says it produces and sells its private brands at three “tiers”: premium primarily under the Private Selection label, an intermediate brand called Kroger, and value brands like Big K and Heritage Farm. Kroger also makes a natural and organic brand called Simple Truth.
Costco is unusual in its approach to developing private labels.
Most supermarkets adopt a similar tiered strategy, known as “good, better, best,” said Scott Mushkin, a retail analyst at R5 Capital. But Costco has “positioned Kirkland as a premium brand at affordable prices.”
Other retailers also sell a wider variety of labels in an effort to target different types of consumers for various products.
Walmart carries more than a dozen private label brands, including Great Value home essentials and George men’s clothing. Target has dozens like Cat & Jack children’s clothing and Good & Gather food. Amazon has over 400 different private brands, according to estimates.
Betting on the Kirkland label remains a risk for Costco.
“Maintaining consistent product quality, competitive pricing and availability” of Kirkland products is “essential” to keeping members loyal to Costco, the company says in its annual filings. If Kirkland “experiences a loss of member acceptance or trust,” sales and profit margins may suffer.
“If you say 99 things right and one thing wrong, people will remember one thing. So you don’t get it wrong,” Costco CFO Richard Galanti said. “From an opportunity standpoint, Kirkland is known. It’s a brand.”
