Investing in Costco: The US's Largest Warehouse Club Operator

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Part 8
Investing in Costco: The US's Largest Warehouse Club Operator PART 8 OF 23

How Kirkland Signature Contributes to Costco’s Top and Bottom Lines

Kirkland Signature is a key growth driver

Costco Wholesale (COST) has been increasing the penetration of its in-store brand, Kirkland Signature. The company categorizes it as a premium brand offered to members at a considerably lower price compared to their national brand equivalents. As such, it remains one of the most significant store attractors for Costco.

How Kirkland Signature Contributes to Costco&#8217;s Top and Bottom Lines

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Higher-than-average penetration rates

In fiscal 2014, Kirkland Signature products represented ~25% of Costco’s sales. That’s well above the average penetration rate of 18.1% for club stores (XLP), according to estimates from market research firm IRI in 20141.

Drug store retailer (XRT) CVS Health (CVS) estimates a store brands penetration rate of 22% of front-end sales in 2015. Rite Aid’s (RAD) private brands penetration rate came in at 18.5% in fiscal 2015.

However, Costco hopes to increase the penetration of its in-store brand even more for several reasons. Kirkland Signature provides Costco with a unique brand identity and a valuable differentiator versus the competition. This is particularly relevant given the company’s value-for-money philosophy and high product quality.

Profitability enhancer

Besides, private label brands typically earn higher margins for retailers, as is the case for Kirkland Signature as well. Part of the reason stems from the relatively higher control that private brands provide over their cost structure. Retailers also typically spend less on advertisement and building brand equity compared to national brands. As Costco’s pricing and margins tend to be highly competitive in comparison to peers, higher private label sales would enable Costco to improve its bottom line.

Products and channels

To aid in penetration, Costco has introduced new products under the Kirkland brand each year in categories as diverse as food, organics, apparel, optical, and pharmacy. Costco has also collaborated with several e-commerce delivery services like Google Express, InstaCart, and Jet.com to make Kirkland and other Costco products available through these channels. And although Costco doesn’t have a brick-and-mortar presence in China yet, its products, including Kirkland Signature, are available via Alibaba’s (BABA) Tmall Global website.

  1. Source: Foodnavigator-usa.com

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