Costco Convinces Brands to Cannibalize Themselves
napkinmath.substack.com
napkinmath.substack.com
I haven't had 100% success with all of their products, but the vast majority of the time I do not regret my purchase. I know that I'm getting a solid (if not stellar) product in that segment, as opposed to, say, Amazon, which in 2020 is basically making me pay $120 for Prime for the chance to play Russian roulette with their products, even the name brand ones. I will probably cancel Prime since it encourages unnecessary consumerism (at least it does for me) and the price has gone up 200% since my student discount is no longer applicable. Long live Costco! :p
They finally enforced social distancing. They do crowd control, to limit the number of people allowed inside. Even the checkout lanes, are staggered to enable more social distancing between people.
Now, I can actually breathe while inside Costco, since not every single damn person inside with a buck, is up in my business and bumping me with their shopping carts.
I used to dread going to Costco, because of all the over crowding.
There are some silver linings to this pandemic, and this is one of them. I hope they continue to enforce these policies long after this pandemic is over. Give people some space!
If anyone reads this, and works for Costco, then I hope you can relay this message up to corporate and customer services.
Lots of other stores have a money-back guarantee on their private label stuff, but are you really going to return a bag of $2 chips to a grocery store? But you've probably returned some big-price item to Costco before, so you likely have experience with the process. And when your purchase is closer to fifteen bucks instead of $2, you're a lot more likely to want the satisfaction guarantee. Costco gives you that, and you know in your heart that you're likely to actually use it if the item really doesn't work for you.
As for curation and selection, there's no more than two choices at Costco for every product category. Instead of buyers checking every shelf and variety and sizing of 6 different brands of the same thing before they buy, they make only two binary choices: Do I need this? Do I want the cheaper one?
Conversely, this means that your manufacturer's coupons, your rotating sales, your TV spots are all practically useless for tipping this market segment your way. As a producer, only way in to this near-captive market is to already be the leader, or to agree to make the Kirkland. Wouldn't you rather try than to be shut out?
I'm now a high-earning adult who regularly goes to Costco with the original intent of buying two items, and leaving with a $200-$400 receipt. I know it's kind of pathetic, but spending money at Costco makes me really happy. I've spent an average of $5000 a year at Costco since I started working in tech. Easy to remember since I get roughly $100 back every year from the 2% on the Executive card. I've only returned like five products total ever, and none of them were pricy.
I'm going to be sad when Costco starts to suck. It can't last forever.
Costco seems to have a unique position among modern big box chains for having a good reputation on ethical issues like worker's compensation (at least pre-pandemic), and this seemingly agreeable business relationship with brands is another example.
I'm willing to bet it's true because I can't really name another french cookware company specializing in that sort of goods.
https://www.emilehenryusa.com/
No idea which Costco uses, but Le Creuset is definitely not the only French enameled cast iron manufacturer.
New Coke might be a better example since supposedly it was formlated to beat Pepsi in the sip test but failed miserably in the market.
And let's be clear, you cannot just group all vodka into one category. There is potato vodka, wheat vodka, rye vodka, and even other grain (and fruit!) types.
Belvedere is one of the most expensive vodkas yet has a somewhat particular taste due to being rye vodka. It's not my favorite but I appreciate it for its unique characteristic..rye vodka has an interesting and wonderfully complex taste. Rye whiskey is quite nice too.
Contrary to common perception, a good vodka isn't supposed to be tasteless - grain neutral spirit does not mean tasteless. It's called a spirit because even after the triple distillation, the "spirit" of the grain would still remain. And not every one is going to agree on which vodka tastes best because it's the same as if I tried to find the best flavor of ice cream.
More important than preference for taste, good vodka has more distillation, less impurities, and thus leaves less of a hangover due to less tax on the liver and other organs.
If you actually want a tasteless vodka you can buy what is termed an ENS, Extra Neutral Spirit. [1,2] Spirytus Wesoly is a very high quality ENS that sells for around $15 a liter. It is a potato vodka made in Poland, 192 proof 96% ethanol. The remaining 4% percent is almost entirely distilled water.
Similar American-made Everclear is 190 proof 95% ethanol produced from corn. In constrast, unlike our Polish competitor, Everclear is sweet, sticky, and has a hint of sickly corn syrup in its taste profile. That 1% difference combined with the choice of a sweet corn versus starchy potatoes, makes for a vastly inferior product. But corn is subsidized in the U.S, so it makes sense from a business standpoint.
If you wish to drink a 96% vodka without causing internal chemical burns, add some filtered water to dilute it to around 30%-40% ethanol. You should notice no grain taste at all - truly neutral. But not very enjoyable, at least in my opinion. It lacks character, rather hollow. Economical though..and has a range of other uses. I personally use it as a thinning agent in my custom e-liquid/vape-juice recipe that consists of about 20% ethanol, 70% vegetable glycerin, and 10% distilled water by volume. I also have it for use in making hand sanitizer and as a safe wound disinfectant.
I wrote a blog post [3] a while ago on how methanol and other alcohols can seep through skin and poison one's body. This is why, aside from ethical reasons, I no longer use deodorants like Old Space Classic, that are formulated with methanol aka denatured alcohol aka wood alcohol. Methanol isn't suitable for food or beverages, making it a cheap industrial chemical, a convenient substitute for ethanol if health is disregarded. Methanol and other alcohols like isopropyl get converted by the liver into formaldehyde and acetone respectively, among other toxic metabolites. Over time, if one continues to use methanol based cosmetics, they are effectively mini/micro dosing a toxin daily, by transdermal means. [4] Sure, for most cosmetics, whether it be hair spray, lotion, or deodorant, it is a rather small dose of methanol, but why consume toxins even in small amounts, if avoidable? The big businesses like P&G are just doing it to make even more profit at the possible expense of your health. Toms of Maine on the other hand, uses ethanol because they actually don't roll dice with their consumer's health. Big biz is always playing shell games with risk reward balances. It's death by 1000 paper cuts corporate directing.
For the same reasons, I highly suggest buying an ENS like Spirytus for use in your medicine cabinet in lieu of isopropyl which metabolizes into acetone. $15 for a liter of alcohol is actually not much more expensive than the price per volume for those plastic bottles of isopropyl. Mind you, HDPE (High Density Polyethylene) is chemical resistant, but lower density plastics, typically the more flexible kind, are vulnerable to reaction with strong solvents, acids or bases. Spirytus is sold in a glass bottle, entirely inert. Anyways, there's so many things wrong with the average risk most of us don't even know we've been subjected to. I think I've sold you on pure ethanol by now..
Hope you understand why vodka is made and marketed the way it is...
[1] https://en.wikipedia.org/wiki/Rectified_spirit
[2] https://www.ethimex.com/blog/2019/07/22/the-complete-guide-t...
[3] https://churchofthought.org/blog/2020/04/25/cruelty-free-deo...
[4] https://www.fda.gov/drugs/drug-safety-and-availability/fda-u...
Your opinion is irrelevant unless you were one of the judges in the many spirit competitions where grey goose was ranked one of the worst vodkas. It has literally never won a blind tasting competition, unlike Smirnoff and Tito's which win very consistently.
This French vodka maker doesn't quit selling vodka under their own brand. They just also sell some as Kirkland. So don't they have to keep doing a bunch of marketing so that their brand-name vodka keeps selling in all the other stores? How do they save any money on marketing?
I would guess the real reason it works is that it opens up a market of people who wouldn't buy name-brand vodka at (say) $29.99/bottle but will buy Kirkland vodka at $19.99/bottle, yet without cannibalizing their ability to keep selling it (in other stores and in Costco) to people who are currently paying $29.99.
Or another theory is that many Costco buyers aren't vodka experts, so there is some degree of randomness to how they pick vodka. If there are 10 brands of vodka, selling under the Kirkland brand and their own means they are 2 of the 10 brands instead of 1 of the 10, so to the extent that people pick randomly, they get picked twice as often. (It's like buying two raffle tickets.) A similar effect would apply to people who cycle through brands of vodka.
I'm not sure I'm convinced that per-unit is a great way to analyze marketing costs since if you air a TV ad, it reaches a segment, so to me it seems more like an annual cost or something. But I do get what it's saying now.
This is all to say that marketing costs are budgeted as incremental costs of sales. So, if you find a way to sell more product without increasing your marketing budget, that’s basically free money.
For marketing, let's assume that cost of maintaining the relationship and dealmaking is written off and 0. If you consider Costco/Kirkland marketing at least in terms of buyer awareness it may be a net gain as for $0 they get that Kirkland trust.
For white label, they may split production/sipping costs with Costco or just provide the final bottle with split profit. Either way, each bottle may return 50-60% as profit or about $12. I can't find anything in detail on how brands split profits or if Costco takes a flat cut though so let's say 50% cut to Costco
I also didn't find anything quick on if white label sales cut into private label but as the white label is only Costco I'd guess the impact is not severe and if the private label is known might even be a boost at outside liquor stores. Even with
For their own sales, take a bottle cost of $30 - $12 to produce for a net of $18. For white label, $12/2 or $6 in profit. So perhaps their private label is 3x the profit ($18 vs $6) so as long as the white label sales don't eat more than 1/3 of the private label sales (and I'd say across the nation it won't) then they come out ahead. But either way they make money and have a huge partner with massive sales to produce for which I'd take as a win for long term revenue stability.
https://www.lovebrewing.co.uk/guides/still-spirits-liqueurs/...
if your goal is to sell 20 million more bottles of vodka, you could use your existing unit economics and marketing campaigns to scale to 20M additional units
OR
you could manufacture 20M units with a different label and ship them to costco, investing no additional money on marketing for that effort in exchange for a lower wholesale price.
https://www.eater.com/2017/8/9/16099028/trader-joes-products
Same basic value proposition as Kirkland -- not name brand but consistently good quality.
1. Manufacturers that only produce private label products for others, and have no consumer brands of their own.
2. Manufacturers that only produce branded products, and (for either operational or strategic concerns) does not produce private label products.
3. Manufacturers that, either intentionally or incidentally, have spare capacity and are wiling to use it for private label production.
Mars Petcare is a good case study of all three[1]. They used to call into the third category and had several plants dedicated entirely to private label production. But for strategic reasons sold off their private label division and now fall into the second category, while the investment firm that bought those assets created a new company from them that falls into the first category.
There's also a variant of #2: private label brands that do their own manufacturing. Krogers is an example of this - they outsource a number of their SKUs to other manufacturers, but they also operate at least 38 manufacturing plants themselves (figure from 2018)[2].
For manufacturers that do both branded and private label production, the situation isn't as clear cut as relabeling the same product:
- Private label is an optimization, not a goal. For sufficiently large or mature manufacturers, this can mean your brand production runs happen on your state of the art production line or at your brand new facility, while your private label runs get the old stuff. This can create distinct differences in both the quality and capabilities of your branded vs. private label production. It can also mean you strategically reserve certain capabilities or innovations for your branded products, and don't make them available for private label clients.
- Private label buyers rely on your product expertise and production capabilities, but not the opinions of your brand management team, which may ultimately result in a wildly different set of product requirements and eventual bill of materials. For example, just think about the different optimization goals between a private labeled product for Whole Foods vs. Dollar General. The same manufacturer may produce both, but they may look roughly similar, but the bill of material (and price point) may be wildly different as Dollar General consumers expect their prices to be low above all else while Whole Foods consumers are willing to stomach higher prices but also have higher expectations around the ingredients/materials that go into the product. And the same manufacturer making both of those may have a branded product of their own, which has to fit the image/expectations of their brand while being suitable for consumers at all of the retailers that stock their product.
What's notable about Costco/Kirkland is that their set of requirements pretty much dictate that you have to treat the Kirkland product as a first-class citizen along with your own branded products. You can't hold back production capabilities solely for your own branded products, nor under-invest in the equipment/facilities that produce it. The "15-20% cheaper and 1% better in some metric of their choosing" aspect that's referenced in the article is less unique to Costco. That's likely the typical type of optimizations private label buyers request, a specific price point they know their consumers expect it to be and a product change that optimizes it by a metric valued by their particular consumer base.
[1] https://www.foodbusinessnews.net/articles/12512-mars-petcare...
[2] https://storebrands.com/kroger-manufacturing-it-takes-villag...
But no matter how your international impression of Aldi and Lidl is, in Germany a few (or a lot) of their products are exactly that, rebranded versions of stuff that would cost 50% more if it had the original packaging, in another supermarket.
Trader Joe's is well know for their store branded food items.
And most of the time they're not even checking, just looking for obviously sketchy low-hanging-fruit and spooking the half-hearted crooks.
if you paid for 6 loaves of bread, but you only have 4 in your cart that's also a problem.
"In a normal Costco purchasing example, a company might sell their product for $0.95 and Costco might retail it for $1.00. This would result in a 5% margin (in reality the margin is a bit lower, but let’s use these numbers for estimates)."
That just rings really false to me.
Page 28, gross margins are around 11%.
Costco is able to go toe-to-toe with Walmart and Amazon for a reason: they have the margins. And as another poster mentioned, they're a publicly traded company with SEC filings that discuss revenue, costs, and other details; we can check those numbers.
Costco has some unique frozen foods I like, and good prices on some fresh meat, but #3 above meant it was rarely worth going for more than 2 or 3 items, and #1 & #2 above meant it would always be a much bigger hassle than 5 minutes at the normal grocery store.
Although I fully recognize that the above times are probably highly dependent on the setup & how busy my local Costco stores are. If I could get in and out of Costco as quickly as the grocery store (I drive by both on my commute home) I'd still have a Costco membership.
ETA: I just checked online and they're only 10% off (both Xbox and PS).
I don't want to have to think about which brand at the regular grocery is best, I can just go to Costco, get Kirkland, and it will be the same price as name brands at the regular grocery but the quality is practically guaranteed to be superior.
(Trader Joe's works on a very similar principle)