The Brand Price Is Right Thanks to Private Labels

Costco's treasure hunt atmosphere reveals so many surprises that most shoppers don't even attempt to draw up a list. And now thanks to price reductions handed down from suppliers, shopping at the wholesale club could become even more thrilling.

As was reported in last week's SN, supplier generosity may have been spurred by the success of Costco's Kirkland Signature corporate brand.

In the past, the chain's done some innovative things with the line, like forge exclusive co-branding arrangements with Martha Stewart for soups, appetizers, desserts and even a holiday ham. Who wouldn't want the aroma of one of her apple raspberry pies wafting through their kitchen during the holidays?

More recently, it's replaced nearly all of its branded spices with private labels, and completely done away with national brands in some categories. Its Kirkland Signature olive oil, for instance, is the sole representative of its category.

Smart moves like these helped spur an increase of between 10% and 15% in private-label penetration during the current fiscal year, according to Richard A. Galanti, executive vice president and chief financial officer for the chain. Those numbers are equal to the decline in sales of certain national-brand items, so consumers may be switching their allegiance.

“The branded companies are not passing all the savings back yet, but we're starting to see them do so, which is the right thing to do — and it's great for customers,” Galanti said.

The discounts could equate to noticeable savings for members, since the retailer averages a relatively low 8% to 10% profit margin on national-brand sales, and will not exceed 14% on any branded item, according to Patty Edwards, the founder of Storehouse Partners, who closely follows the company. Costco has a similarly prudent corporate brand approach. Although 10 percentage points usually separate profits realized on a national-brand and store-brand sale, Costco chief executive Jim Sinegal won't allow private-label profit margins to exceed 15%.

“I can't imagine how angry the man would be if they tried to sneak something past that,” Edwards told SN in February.

While this spells good news for Costco loyalists, Americans who shop elsewhere may have to wait for similar savings.

When asked about prices handed down from manufacturers, close to half of retailers (47.2%) polled by SN as part of its sixth annual Center Store survey said that prices had either increased significantly (23.6%), or increased slightly (23.6%) in the past six months. Just over two in 10 (21.8%) reported they stayed the same, 23.6% said they decreased slightly, and 7.3% didn't provide an answer.

Another interesting tidbit came to light when retailers and suppliers were asked whether private labels have replaced national brands during the past year, in any of the categories in which they compete.

Close to six in 10 retailer respondents (58.2%), and 58.1% of manufacturers, said they had.

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