A private label success story

DSN Retailing Today, Dec 19, 2005 by Mike Duff

Private label has been a tough go for many retailers in the United States, but Costco has turned Kirkland Signature into one of the most successful own-brands in the country. Target may come out with a new private label every week and IKEA may have made the retail and product brand one, but no other retailer has come as close to developing a successful private label across categories.

To be able to successfully sell national brands and private labels together hasn't been easy for U.S. retailers. Some notable successes have been in general merchandise, particularly at Sears. But no U.S. retailer of real size has been able to build a private label that commanded enough trust from shoppers to make it a hit throughout the store, both in durable goods and consumables, above the opening price point.

The fact that Loblaw sat right across the U.S. border with President's Choice, taunting American retailers from Canada with its storewide success, was even more galling. Yet, even when U.S. retailers licensed the President's Choice program, they couldn't make it work nearly as well as it did in Canada.

Kirkland, built methodically over many years, now is widely accepted throughout the store by Costco customers. From Seattle to Sarasota, Kirkland hamburger patties are a barbecue staple in the United States today, just one example of the line's successful products.

Costco's private-label development rested on a quality proposition, one in contrast to the usual store-brand versus national-brand relationship.

"For years supermarkets demanded price points," Richard Galanti, Costco's evp and cfo, pointed out. "You take something as basic as a can of tuna: throughout the '80s and '90s every time the cost went up, [the manufacturer would] make it a 5.1-ounce can instead of a 5.2-ounce can. [Grocers said] 'Let's do less filet and more of a chunk because we've got to sell something 3-for-$5 on a special.'"

Costco approached the proposition differently. "We upped the quality," Galanti said, "upped the price above the branded item and we're selling more units. Because it's the best tuna you could buy."

While many Kirkland products might be priced below those of national brands, they also can be priced above, like the tuna, particularly as over time Costco demonstrates that its label delivers a better-quality proposition.

"We think that way. We've done that so much we've attracted a customer that understands that, too," said Galanti.

As a result, Costco doesn't sweat the switch from a national brand to Kirkland. "If they see it, they buy it and they know that the price is great and the quality is great," Galanti said.

Just because the program is successful, however, doesn't mean Costco is content to leave it be.

For years, Kirkland had been paired with a national brand as a product that had a contrasting value proposition based on price, size or ingredients. Yet, in many categories, particularly where there are no strong national brands, Costco is establishing Kirkland on its own as the key product in the category, further evidence of the confidence Costco has in the brand.

Neal Stern, an analyst with McMillan/Doolittle, noted that Costco's private-label program had to be good, and that helped to drive its success. Establishing itself as a trusted buying agent for its members, Costco could hurt its relationship with its customers if it offered an average product in an own-brand. Further, Stern said, in a retail format with a relatively limited product assortment, "SKUs and space are precious at Costco. They couldn't afford to put out a 'me-too' private label and take shelf space from something productive."

Another factor in Costco's success is co-branding. Bringing respected manufacturers, such as Michelin in tires and Borghese in HBA, into its own-brand program boosts the quality perception of products.

"It's an incredibly clever 'almost-way' to get around some of the restrictions suppliers and manufacturers put on product," Stern said. "Co-branding with Kirkland, the idea with Costco was: Do you really trust Kirkland to make good tires? Well, maybe. But you do trust Kirkland and Michelin. It's a way to work with manufacturers such as Whirlpool with refrigerators and Paul Newman with juice where you need some legitimacy and credibility. It allows Costco to go to a top-tier supplier and co-brand with someone who has respect. It's an unbeatable combination."