Why Costco Went All in on Kirkland — and How It Paid Off | WSJ Case Study

Key Concepts

Kirkland Signature, private label, limited SKU environment, negotiation tool, profit margins, brand loyalty, green ink meetings, Costco's business model, competition with name brands, supplier relationships.

Costco's Private Label Strategy: The Kirkland Signature Case Study

Origins and Early Challenges

Costco, founded in 1983, initially focused on selling a limited selection (around 4,000 SKUs compared to the typical 140,000) of name-brand products at high volumes. However, the rising prices of these name-brand items, despite decreasing manufacturing costs, presented a challenge. Co-founder Jim Sinegal recognized an opportunity in the growing popularity of private labels in Europe, as highlighted in a 1991 Forbes article. This article spurred internal discussions about leveraging private labels to improve profit margins.

The Shift to Private Label and Initial Fragmentation

Costco's initial foray into private labels involved creating multiple brands like Chelsea, Cloud, Traditions, and Pinnacle. This approach, however, led to internal confusion, as illustrated by the warehouse manager who couldn't identify the "Pinnacle" legal tablets as a Costco product.

The Decision to Consolidate Under Kirkland Signature

Recognizing the need for a unified brand, Costco decided to consolidate all its private labels under a single name: Kirkland Signature. This decision went against the conventional wisdom of the time, which favored multiple private labels to avoid negative brand association across different product categories. The name "Kirkland" was chosen because Costco's headquarters were located in Kirkland, Washington, at the time.

Kirkland Signature's Impact and Competitive Advantage

The introduction of Kirkland Signature created a highly competitive environment for suppliers. With a limited SKU environment, the addition of a Kirkland product could significantly impact a name-brand's sales, potentially leading to its removal from Costco's shelves. This dynamic gave Costco significant leverage in negotiations with suppliers.

Example: Kirkland Diapers

Costco approached both Proctor & Gamble (Pampers) and Kimberly Clark (Huggies) to manufacture Kirkland diapers. Kimberly Clark ultimately won the contract, and for many years, only Huggies and Kirkland diapers were available at Costco. This example demonstrates how Costco uses its limited shelf space as a powerful negotiation tool.

Ongoing Monitoring and Vendor Selection

Costco's buyers closely monitor commodity inputs and raw ingredient costs. This knowledge allows them to switch Kirkland vendors if they believe they can obtain a higher-quality product at a lower price. Recently, Costco shifted its Kirkland diaper manufacturer to First Quality (Cuties) for this reason.

Kirkland Signature's Success and Market Position

In 2024, Kirkland Signature achieved $86 billion in sales, surpassing the sales of major brands like Proctor & Gamble and Kraft Heinz. Sales for private labels like Kirkland grew about four times faster than national brands.

Replication Challenges and the Club Channel Advantage

While other retailers, like Sam's Club (with Member's Mark), have adopted a single private label strategy, replicating Kirkland's success is challenging. The club channel model, with its membership fees, fosters greater customer loyalty and a willingness to trust the store's brand. This environment gives Costco and Sam's Club an advantage in the private label food and beverage space.

Strategic Use and Future Expansion

Costco continues to strategically use Kirkland Signature to ensure competitive pricing on name-brand products and to offer better quality alternatives. The company plans to expand its Kirkland offerings, such as Kirkland Sushi, while maintaining a focus on quality and value.

The "Green Ink Meetings" and CEO Approval

Since 1995, every Kirkland product has required final approval from the CEO. These approvals were historically signified by the CEO initialing the product proposal in green ink during "green ink meetings." While the green ink pen is no longer used, the process of CEO approval remains in place, underscoring Costco's commitment to quality control.

Conclusion

Costco's Kirkland Signature is a prime example of a successful private label strategy. By consolidating its private labels under a single brand, leveraging its limited SKU environment as a negotiation tool, and maintaining a strong focus on quality and value, Costco has created a powerful brand that resonates with its loyal membership base. While replicating this success is challenging, the Kirkland Signature case study provides valuable insights into the potential of private labels in the retail industry.