How Costco Convinces Brands to Cannibalize Themselves

If you’re anything like the nearly 100 million people worldwide who have a Costco membership, you probably love Costco’s Kirkland Signature. You can get two dozen cage-free eggs for $6.50, or a 1.75-liter bottle of French vodka for $19.99. 

But despite these products’ exceptional prices, their quality doesn’t suffer at all. In fact, the exact opposite is true. Many of their products pass purity tests with flying colors. 

Kirkland also has a passionate and loyal fan base — not something you typically find with a private label brand. One guy even got a Kirkland Signature tattoo on his left arm and held his 27th birthday party at the Costco food court. 

Kirkland’s success defies our intuition and experience. Shouldn’t lower prices lead to lower quality products? How can they offer rock-bottom prices but still have some of the best products around? 

The answer is this: they get the best manufacturers in the world — who already have products on Costco shelves — to make Kirkland products. Yeah, you read that right. While customers might not know it, Kirkland products are often made by the same manufacturers who make the branded products that sit next to them on the shelves. 

And not only that, but according to a Reddit user who worked at a Costco supplier, Kirkland products have to be at least 1% better than the equivalent branded products (on some metric of their choosing). Costco forces manufacturers to compete with a better version of themselves.

But if Costco is pitting brands against themselves, why do the brands put up with it? The short answer is that they want to. Costco is one of the largest sales channels in the world and brands can still profitably sell their products under the Kirkland brand.

In this piece, we explore how Costco leverages their high volume and strong brand to convince suppliers to manufacture products for them, and why it actually makes sense for the brands to do it. Let’s dive in. 

The Beginnings of Costco

Costco was founded in 1983. It began as a business-to-business (B2B) retailer. They sold three categories of products: what businesses used in their business (food for a restaurant, for example), what businesses consumed in their business (such as toilet paper), and finally what the business owners used for personal consumption (a TV, for example). 

Kirkland Signature, their extremely popular private label brand, launched nine years later in 1992. Costco co-founder James Sinegal cited one main reason that launching a private label brand was a good idea: they could undercut the big guys. 

At the time, many large retailers were public companies and they faced pressure from Wall St to grow their stock price. With limited growth opportunities, they often gave into the pressure and defaulted to simply raising their prices. Sinegal saw years where commodity prices would fall, but product prices would rise. It created an “umbrella” for a private label brand to enter the market at a lower price point, so Costco launched Kirkland. 

Fast forward to 2020 and Kirkland is one of the biggest and most popular brands in the US. Not just compared to other private label brands — compared to any brands. 

Kirkland: 1% Better Than the Best

According to Sinegal, there are three criteria for creating a Kirkland product. First, it has to be as good (or better!) than the leading national brand. If Lipton has the best black tea, Kirkland has to be as good or better than Lipton. Next, it has to be sold for a 15-20% discount. Notably, this is a discount at the Costco price — which is already low — not the price at another retailer. And finally, the product has to be an important product for customers, something they want to buy. 

And while the company doesn’t say who manufactures Kirkland Signature products, there’s some information floating around the internet. For example, it’s rumored that Kirkland actually forces the manufacturer to make the Kirkland product better than the name brand product on at least one important metric.

I found a few Reddit comments that provide some more insight (thanks to Nikita Singareddy, investor at RRE Ventures for pointing it out). From user min2themax: