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It's not uncommon for major supermarkets to have a house brand for their products, but few if any can match the brand loyalty or market share of Costco's (NASDAQ: COST) Kirkland brand. The company has turned Kirkland into an $86 billion retail powerhouse that offers an incredibly diverse product line that ranges from dress shirts to high-end liquor. The Wall Street Journal detailed how Costco turned what seemed like a big gamble into a master stroke.
The business model for most retail grocery outlets' house brands has typically revolved around offering a lower-priced option than major brands, but with a few notable trade-offs. For example, generic cola at your typical grocery store is cheaper than Coca-Cola (NYSE: KO), but it would probably not win a blind taste test against the major brand. Kirkland has defied that convention, and its products are on par with many major brands in terms of quality.
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There have long been rumors that Kirkland cuts private deals with major brands to supply its products, and many cocktail enthusiasts believe that Kirkland's French Vodka is Grey Goose in disguise. The Journal said that Kirkland now accounts for almost a third of Costco's total sales, but says Costco's original decision to create the brand 30 years ago carried a lot of risk.
That's because in the early 1990s, most of the world's biggest brands were segmented by product type. A soda brand like Coca-Cola makes sugary beverages and snack foods. It had strong brand recognition in that product sector, but the company never sought to branch out into household goods like laundry detergent and batteries.
Costco pressed ahead anyway and settled on "Kirkland" because the company is headquartered in Kirkland, Washington. Today, Kirkland has over 350 products on Costco shelves and generated $86 billion in sales last year. Incidentally, the presence of Kirkland products has also increased Costco's leverage in price negotiations on other products. What seemed like a big risk at the time turned into a master stroke, and Costco's stockholders are reaping the benefits.
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Costco's co-founder, Jim Sinegal told the Journal that the company's original business model was to offer a carefully curated set of brands in each consumer category at a discount and move the products in high volume. Sinegal said, "One of the significant disciplines in our business was to offer limited selection." CEO Ron Vachris added, "We weren't going to offer all the SKUs the other retailers carried. We were only going to carry the highest quality goods."