By Sarah Nassauer
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 11, 2017).
ISSAQUAH, Wash. -- Costco Wholesale Corp.'s chocolate-dipped,
slightly salty Kirkland Signature Nut Bars became a hit at its
stores earlier this year.
Unfortunately for Kind LLC, that meant its own best-selling,
chocolate-dipped, slightly salty Kind Bars now faced cheaper
competition on Costco's shelves.
Kirkland Signature, Costco's store brand, is challenging
manufacturers hoping to earn or retain a coveted spot at the
warehouse retailer. Since 1995, Costco has used its Kirkland
products to attract shoppers, building a reputation for quality and
low prices on milk, toilet paper, men's shirts and golf balls
bearing the unassuming red logo. About a quarter of Costco's $118.7
billion in annual sales come from Kirkland Signature products, and
the percentage is growing, company executives say.
LaunchPad Inc. founder Jeremy Smith, who works with food brands
seeking Costco shelf space, tells clients: "Assume a 'KS' version
of your product will come into the market." When that happens, he
said, savvy manufacturers offer Costco new versions of their
product, tweak packaging to highlight what's better about their
brand or spend more on marketing -- all costs Costco doesn't incur
with Kirkland.
At Costco, negotiating for a spot in stores is a complex dance.
Brands fight for space at the retailer's cavernous warehouses,
which on average carry only 3,800 products. The typical supercenter
sells over 100,000. Adding to the pressure, Costco often introduces
a new Kirkland product when its buyers or executives believe a
brand isn't selling at the lowest possible price.
Today, Costco's nut aisle is almost entirely made up of Kirkland
Signature products, including single-serving packages sold in boxes
of 30, bags of almonds and nut clusters. Over a decade ago, what
was formerly called Kraft Foods lost spots for its Back to Nature
fruit-and-nut mix single-serving packages and several varieties of
Planters nuts, said a person familiar with the change.
Leading up to the Kirkland introductions, Kraft raised the price
on several nut products without showing the direct justification
Costco demands, like an increase in nut prices, and declined
Costco's offer to make Kirkland products, the person said. Since
then only a handful of Planters products have been sold at Costco,
currently two varieties in some stores and on Costco.com. Because
of Costco's size, the retailer can sometimes buy commodities like
nuts at lower prices than consumer-goods companies.
A spokesman for Kraft Heinz Co. declined to comment.
The pressure manufactures face from private brands is set to
increase.
Building successful store brands is a priority at Wal-Mart
Stores Inc. and Amazon.com Inc. as they battle to boost margins and
attract shoppers. After Amazon acquired Whole Foods, it quickly
added the grocer's store brand, 365, to its online food offerings.
Wal-Mart and its warehouse chain, Sam's Club, are reworking and
adding to their store brands.
Though Costco's stock price has suffered amid investor fears
that its e-commerce operations aren't ready to go head-to-head with
Amazon, the retailer has kept sales growing, in part by using
Kirkland to pressure manufacturers to lower prices and bring
products to shelves that can't be purchased elsewhere.
"If you have something unique, it's un-Amazonable," said Simeon
Gutman, a retail analyst at Morgan Stanley.
Still, Costco doesn't aim to become a store that only sells
Kirkland products, said Costco finance chief Richard Galanti.
Shoppers expect to find brands they know at Costco, and Kirkland
looks like a better value next to a higher priced branded version,
he said. Often Costco collaborates with brands on products, like
its Starbucks-roasted Kirkland coffee beans.
If a Kirkland product doesn't sell well, it doesn't stay on
shelves, Mr. Galanti said. "We try to be agnostic on it. We try it
like any other brand." In the past, Costco has pulled the plug on
store-brand cosmetics, soda and toothpaste.
Some ideas never even hit the aisles, like Kirkland women's
jeans. "Never say never on anything," said Mr. Galanti, but "the
feeling was it wouldn't work."
When considering a new store-brand offering, Costco looks for
products that are top sellers and can be sold for at least 20% less
than branded versions without eroding profit or quality. Kirkland
gives Costco "leverage over brand manufacturers" and a product the
"competition can't get," said Mr. Galanti. Costco is generally
careful to make its products slightly different than branded
versions.
Buyers at Costco, who spend years at the company before getting
the job, "play fair ball, but hard ball" with suppliers, said a
food-company executive who has worked to get goods on Costco's
shelves. Before developing a Kirkland product, Costco usually gives
a brand-name supplier the chance to make the Kirkland version, too,
say company executives.
For years Costco asked Procter & Gamble Co. and
Kimberly-Clark Corp., makers of Pampers and Huggies, respectively,
to develop a Kirkland premium diaper, said Mr. Galanti.
Kimberly-Clark agreed, he said. Costco started selling Kirkland
diapers in 2005 and now Huggies are the only branded version sold
on Costco shelves.
"We have been pretty adamant across our lines that we don't
manufacture private labels," said a spokesman for P&G.
Kimberly-Clark declined to comment.
Brands often find ways to coexist with Kirkland. About three
years ago, Costco buyers calculated that a Kirkland bar similar to
a Kind Bar would be 30% cheaper, mostly by cutting marketing costs,
said Tess Wilkins, a general merchandise manager at Costco.
Kind Bars sold for about $18 for a pack of 18. "It was a very,
very good item for us, and to walk away from those sales, you
really have to think hard," she said.
When almond prices dropped in 2016, Costco decided to proceed,
Ms. Wilkins said. Over about five months, Costco developed the
Kirkland Signature Nut Bars, made by Leclerc Foods USA, which is
owned by Leclerc Group, a Canadian manufacturer, and now sells a
30-pack for $17 in stores.
Kind Bars are still carried at Costco, though mostly new
varieties, including fruit bars, mini nut bars and a peanut-free
bar. "We look forward to continuing to grow with them," a Kind
spokeswoman said.
Write to Sarah Nassauer at sarah.nassauer@wsj.com
(END) Dow Jones Newswires
September 11, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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