Costco, the warehouse club known for its value-driven approach, has carved out a unique niche in the retail sector where few consumers are willing to pay an annual membership fee. What makes Costco such a beloved retail destination?
A significant contributor to Costco’s success is its Kirkland Signature brand, often heralded as the “king of private labels.” For consumers, private label products typically offer a lower-cost alternative to national brands. However, Kirkland products are perceived to be both affordable and of exceptional quality.
Kirkland’s performance is impressive, generating $56 billion in annual revenue, accounting for about a quarter of Costco’s total sales. If you factor in Kirkland-branded gasoline, that figure rises by an additional $24 billion.
What are the keys to Kirkland’s success? First off, Costco has streamlined its sourcing by consolidating numerous private labels into one. This means they no longer need to order from 30 different brands, allowing them to focus their investments on a single brand and, in turn, enhance quality while reducing costs. Kirkland products often retail at prices 20% lower than those of well-known brands.
Secondly, Kirkland boasts a diverse product range of around 550 items, including pork chops, dog beds, and underwear. It’s quite rare for a single brand to offer such variety at competitive prices without compromising quality. The secret? Costco partners with major brands for manufacturing.
While Costco keeps the identities of Kirkland’s manufacturers under wraps, it is widely known that some Kirkland coffee is produced by Starbucks. Other suppliers reportedly include Duracell for batteries, Kimberly-Clark for paper products, and Ocean Spray for juices. These leading brands are willing to remain anonymous due to the substantial revenue potential that comes from Costco’s massive reach.
Moreover, Costco rigorously ensures the quality of every Kirkland product to maintain its reputation for high value. Ida Mow, a sales executive at Costco, emphasizes, “We don’t just slap our name on any product. Every new item has to be approved by the CEO’s office.”
For consumers who appreciate Kirkland products, shopping at Costco becomes essential, which fosters a loyal customer base. UBS analyst Mike Lasser highlights Costco’s customer loyalty as the highest in the retail industry.
Additionally, the membership fee itself acts as a loyalty booster, contributing to what’s known as “sunk cost,” encouraging paying members to shop more frequently. Given that most retail stores do not require a membership fee, customers must truly love shopping at Costco to continue paying for their membership. Costco excels in this regard, boasting a remarkable renewal rate of 92.9%.
