Name: Why Costco Went All In on Kirkland — and How It Paid Off
Uploaded: 2025-03-31T04:01:00Z
Duration: 9 min 34 s
Description: Costco’s $86 billion Kirkland Signature brand went against industry standards when it was launched in 1995. WSJ breaks down why the private label is now the retail behemoth’s secret weapon.

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Costco’s $86 billion Kirkland Signature brand went against industry standards when it was launched in 1995. WSJ breaks down why the private label is now the retail behemoth’s secret weapon. Photo: Costco

https://m.wsj.net/video/20250328/1580cd71-a6ba-4963-9c94-85668d939604/1/hls/manifest-hd-wifi.m3u8

Costco’s $86 billion Kirkland Signature brand went against industry standards when it was launched in 1995. WSJ breaks down why the private label is now the retail behemoth’s secret weapon.

Why Costco Went All In on Kirkland — and How It Paid Off

Narrator: On any Costco aisle, next to a name brand item is often one with a slightly lower price tag and a label, Kirkland Signature.

In the industry, Kirkland Signature is seen as really a shining example of what a retailer can do with its house brand.

Narrator: Today, the Kirkland brand accounts for around one third of a company's sales, but the decision to create just one private label, 30 years ago was risky, especially in a world where the most successful ones were divided up by product type.

We were kind of flying right in the face of that success story.

Narrator: Here's the case study on how Costco went against industry standards and in the process created a negotiation tool that would forever change big box retail. When Costco first started in 1983, the premise was simple, carry a limited number of name brands in each product category, but sell a lot of them.

One of the significant disciplines of our business is the limited selection.

We weren't gonna carry all the SKUs the other retailers carried. We were only gonna carry the highest quality goods.

4,000 items as opposed to 140,000 items because everything that's presented at Costco is presented pretty big, hit you right in the face whenever you walk in there.

Narrator: But just a few years into this, data showed that the price of these name brand items were going up, even while the cost for brands to make them were going down

Every year, they had to raise their price to continue to satisfy Wall Street.

Narrator: But Costco co-founder, Jim Sinegal, saw an opportunity.

We were seeing articles being written about what was happening with private label.

Narrator: This 1991 Forbes article in particular outlined how consumers in Europe were turning away from name brand items and instead buying products manufactured by stores directly, known as private labels.

He wrote a whole bunch of his observations on this article and then asked all of his executives to kind of initial it to acknowledge they had read it. It's this moment where you can see his wheels turning, about, look their price increases are our opportunity.

Narrator: That opportunity came down to profit margins. While retailers typically mark up name brand items anywhere from 24 to 30%, Costco had a strict maximum markup of 14%, but with a private label, Costco could now control more of the manufacturing costs for a lower starting price, so.

We allowed it, private label to take one more percentage point higher in a markup.

Narrator: The private labels quickly started piling up.

We had Chelsea toilet paper,

Cloud detergent.

Traditions, Pinnacle.

We were just making up names as we went along,

Narrator: But then something happened that would change everything,

And I was in one of our warehouses down in Los Angeles and I asked the warehouse manager, did you get the new legal tablets that we had in private label? And he said, "no, I don't think so." So we went to the section and we had it under the Pinnacle name. So I showed it to the manager. I said, well, here it is right here.

He said, "I didn't know that was our label," and it was like a bell. Hell, if we don't understand within the organization what we're doing with our label, how are the customers gonna. We decided we need to get one name.

Narrator: Consolidating all of these labels under one brand would go against every proven best practice.

Retailers tend to not use one private label brand, because they're afraid that if you have a bad experience with one item, it might translate across the whole store.

If they don't trust the brand in the golf ball, they don't trust the mixed nuts.

You look at Sears, which was a successful retailer at the time. They had multiple brands, that were their store brands in different categories.

You can't argue with the success that Sears had, but that one warehouse manager who couldn't tell me where the tablets were, was an illustration of where you could go wrong on something like that.

And then the question was, what would that name be?

We thought Costco was not the right name to put on it, because we did so much business with other people and we decided on Kirkland name.

Claudine: At the time, the headquarters were in Kirkland, Washington.

And then, we promptly moved the home office to Issaquah. So nobody could spell Issaquah anyway, so we'll just keep Kirkland and we've used that same label ever since.

Narrator: Over the next few years, Costco slowly rolled out the Kirkland name.

I do remember when Kirkland Signature shampoo came out.

It was the first haircare that we did, and then we had some vitamins that came out shortly after that.

Narrator: Today, Kirkland has over 350 products across a variety of categories, but the company still operates with a limited selection in each of these, what the industry calls a limited SKU environment.

I think the limited SKU environment is a very misunderstood or understood secret of a lot of things about Costco, including private label.

Narrator: When a new Kirkland item hits the shelf, that category becomes even more competitive.

If you're a supplier at Costco, it's kind of existential. It could reduce your sales, it could kick you off the slot entirely. So it's a real moment of head-on competition for a supplier.

It's an $80 billion brand, so it drives a lot of sales. Nobody wants to be that dramatically higher price than them.

I see it as a tremendous negotiation tool.

Narrator: One of the clearest examples of this leverage is Kirkland diapers. Costco knew that they wanted to have a Kirkland version of a diaper.

Narrator: But because of its limited SKU environment.

We weren't gonna carry both Huggies and Pampers. We were gonna carry one brand and and a Kirkland Signature.

Narrator: To see who might make the Kirkland diapers, Costco approached two market leaders, Proctor and Gamble of Pampers and Kimberly Clark of Huggies.

There was a series of negotiations. Kimberly Clark agreed.

Narrator: And although Costco says Kirkland manufacturing negotiations are separate from conversations about shelf space.

There's always been only Huggies diapers and Kirkland diapers on Costco's shelves for many, many years.

It was decided on the basis of who came in and presented the best deal for the diapers.

Narrator: Even after a product is established, Costco buyers continue to monitor that category.

Our buyers are very aware of the commodity inputs, the raw ingredients that go into something. They know everything,

Narrator: And this knowledge can lead the company to change its Kirkland vendors. Recently, Costco shifted to the Cuties manufacturer, First Quality.

We felt like we could produce a higher quality product at a lower price for our members.

Having not that many products on shelves compared to other retailers is a huge benefit with Kirkland, because they can be very strategic about the fact that there's only a few slots. It allows them to dictate what they want for their shoppers.

Narrator: With Kirkland's name on hundreds of products, these negotiations are happening on almost every aisle of the warehouse.

When I look back at that Forbes article, one thing that really struck me is, wow, brands really had a chance to not charge more than they needed to, to give retailers kind of an in to create these really successful private label products, but that's ancient history, it's too late now. Consumers, again, have really turned to store brands.

Narrator: While national brands are still a bigger industry than private labels, in 2024, sales for private labels like Kirkland grew about four times faster than the national brands, hitting a record high and with $86 billion in sales last year, Kirkland is now a bigger brand than Proctor and Gamble and Kraft Heinz.

Is it the most significant thing for the company? I'd certainly say it's up there with the top three or four.

Narrator: But analysts say Kirkland success is hard to replicate.

There's a few retailers that have gone to one private label, not many, but a direct competitor like Sam's Club. More recently, 2017, they went to Member's Mark, which is their private label brand.

I'm guessing they got that from us.

Narrator: Since consolidating, Sam's Club private label sales have nearly doubled and when asked about its strategy shift, Sam's Club said in an email to the Wall Street Journal that one reason it simplified its products into a single brand was to reduce confusion for its members, but despite these successes, many big retailers aren't following Costco's lead. Target and Walmart have multiple private label brands.

They have to make that choice themselves. I mean, the choice we think, in retrospect was right for us, but it could have been wrong.

I think there's something also specific to like the club channel. Like a Costco or Sam's Club, you pay membership fee, so it's a little bit of a different environment. You're a little bit more bought in. You've already shown loyalty to what they have to offer in a way that's just a little bit different.

Narrator: Compared to other mass retailers like Target and Walmart, club channels like Costco and Sam's Club are winning the private label food and beverage space, shown in their growth over the last year.

We still wanna sell name brands. We think that shows value to the membership. So we really use Kirkland Signature strategically to make sure that we're priced correctly on brands and that we're offering a better quality.

Narrator: And the revenue from Kirkland is set to rise as the company looks to expand its offerings like Kirkland Sushi to its US stores.

I don't want to push our employees or our managers and our buyers to go out and hit quotas about number of Kirkland items I want developed out there. I want them to do it naturally as they go through their categories and look for those opportunities.

We don't need to put our name on a product, just to put our name, it's a lot of work.

Narrator: In fact, every Kirkland product ever made since 1995 has been signed off by the CEO directly.

The final approval on the products would come to me and I would initial it in green ink. Those were known as green ink meetings because they got the green ink to proceed. It was as simple as that.

Narrator: To this day, Costco still holds green ink meetings for all final approvals, even though that pen color is now retired.

I think I'm probably the only person that writes in green around here.

Why Costco Went All In on Kirkland — and How It Paid Off

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