Costco CEO Breaks Down How a Kirkland Product Gets Made | WSJ

Key Concepts:

• Employee retention
• Kirkland private label brand
• Costco's culture and values
• Pricing strategy
• Supplier negotiations
• Product development process
• Quality vs. price point
• Volume-based buyer rewards
• Kirkland brand expansion

1. Employee Retention and Company Culture:

• Costco's employee turnover rate is approximately 8.5% after one year, significantly lower than competitors.
• Ron Vachris emphasizes that the low turnover rate is primarily due to the company's culture, which provides opportunities for advancement.
• Many of Costco's leaders have risen through the ranks, starting in entry-level positions.
• Costco's average hourly wage in the US is around $31, higher than the retail average and Sam's Club.
• Vachris's father's advice: "Take the worst job in a great company and the rest is up to you."

2. Kirkland Brand Strategy and Impact:

• Kirkland is an $80 billion brand that drives sales and builds member loyalty.
• Kirkland products create a "halo effect" by putting downward pressure on national brand prices.
• Suppliers are often wary of Kirkland entering a product category due to its potential to disrupt the market.
• The rollout of Kirkland golf balls demonstrated the brand's ability to offer high-quality products at lower prices, leading consumers to question whether they had been overpaying for national brands.

3. Pricing and Margin Philosophy:

• Costco maintains a maximum margin of 15% on Kirkland products.
• Buyers are rewarded based on the volume of items sold, not the margin percentage on each item.
• This incentivizes buyers to focus on high-volume products that offer value to members.

4. Kirkland Product Development Process:

• Buyers monitor commodity markets to identify opportunities for Kirkland products when national brands are increasing prices despite declining input costs.
• Buyers analyze and partner with manufacturers willing to accept lower margins in exchange for high volume.
• Management reviews and approves Kirkland items, with the CEO having the final sign-off.
• Ron Vachris has rejected Kirkland items that did not meet his standards for differentiation or quality.

5. Example of Product Improvement:

• A bacon, egg, and cheese breakfast sandwich was initially rejected because it only matched the protein content of the national brand equivalent.
• The buyer worked with the supplier to increase the bacon content by 40%, exceeding the national brand's protein level while maintaining the price.

6. Supplier Negotiations and Buyer Expertise:

• The Kirkland product development process equips buyers with extensive knowledge of production processes, making them more effective in negotiations with suppliers.
• Buyers are expected to know the details of the entire production process and the reasons behind specific manufacturing choices.

7. Products Not Pursued:

• Costco has avoided entering certain product categories, such as razors, where they felt they could not match the quality of national brands.
• Consumer electronics has been a challenging category to develop a successful Kirkland product.

8. Costco's Unique Approach to Private Label:

• Costco prioritizes quality over hitting specific price points or margin targets.
• This approach distinguishes Costco from other retailers that may focus primarily on price in their private label strategies.

9. Future of Kirkland:

• Kirkland currently accounts for about one-third of Costco's sales.
• Costco expects Kirkland's share of revenue to continue to grow, but at a measured pace.
• The company is focused on continuous innovation and expanding Kirkland into new areas, such as the sushi program being rolled out across the US.

10. Notable Quotes:

• Ron Vachris: "Take the worst job in a great company and the rest is up to you."
• Ron Vachris: "We love the phrase you came in for rotisserie chicken and you spent $300."
• Ron Vachris: "Ours has always led with quality. So if quality can't be met first, we're not even gonna talk about value."

11. Technical Terms and Concepts:

• Private Label: Products manufactured by one company for sale under another company's brand.
• Commodity Inputs: Raw materials or primary agricultural products used in manufacturing.
• Margin Percent: The percentage of revenue remaining after deducting the cost of goods sold.
• Halo Effect: The tendency for a positive impression in one area to influence opinion in other areas.

12. Synthesis/Conclusion:

Costco's success is rooted in its commitment to employee retention, a unique company culture, and a strategic approach to its Kirkland private label brand. By prioritizing quality over price points and empowering its buyers to develop high-volume, high-value products, Costco has created a loyal customer base and a formidable competitive advantage. The company's focus on continuous innovation and measured growth suggests that Kirkland will continue to play a significant role in Costco's future.