Costco’s Challenge for CPG Vendors
By Tom Ryan
While the market potential for Costco is large, its SKU-constrained environment,
margin requirements, private label acumen, and regional buying prowess place
numerous challenges on CPG companies versus other channels, according to a
recent report from L.E.K. Consulting.
L.E.K. said many CPG companies focus their marketing and innovation planning
process around mass retail and grocery chains "with ‘alternative channels’
such as Costco addressed as afterthoughts. This orientation rarely leads to
success." Among the challenges for CPG vendors mentioned in the report:
1) Limited Selection: Costco’s focused SKU selection reduces
operational costs by streamlining its supply chain and simplifying in-store
management but this "limits the freedom available to CPG companies – many
of which are accustomed to owning prominent real estate in store aisles."
2) Price Conscious: While most other channels mark-up merchandise,
Costco can sell merchandise at close to break-even levels and gain a majority
of its profits through membership fees. L.E.K. said this results in Costco
placing relentless price pressure on CPG vendors to sell products at low profit
3) Private Label Power. Since Kirkland Signature was launched in 1995,
private label has grown to around 20 percent of its sales and its goal is to
reach 37 percent. In some cases, Kirkland Signature can command a premium in
specific categories through quality product. Wrote L.E.K, "If Kirkland
Signature leapfrogs a CPG company in perceived quality and associated premium
pricing, it becomes extremely difficult for the CPG vendor to reestablish category
momentum at Costco."
4) Distributed Purchasing. Costco puts a strong emphasis on addressing
regional preferences, such as a greater demand for salsa in the Southwest.
It also procures goods on a local basis and provides managers at each warehouse
with some discretion over what goods they carry. L.E.K. wrote that this "requires
CPG companies to sell to a myriad of Costco buyers across multiple levels,
which makes national clearance challenging for vendors."
L.E.K. then offered three tips to overcome common missteps. First, it advised
CPG makers to develop a "Costco-Specific Business Plan." L.E.K. wrote, "Costco
is a unique retailing environment and is probably among the most challenging
that CPG companies will face."
Second, CPG companies should focus on "margin dollars" over the "margin
percent" guideline it typically uses. Wrote L.E.K., "Costco will
never deliver the same gross margin as grocery or mass retailers, but it can
deliver large sales figures."
Finally, CPG companies should consider engaging club retailers early in the
product development phase and elicit feedback from them. More than other channels,
opportunities exist to be part of sampling programs. Wrote L.E.K. "Working
in conjunction with receptive warehouse club buyers, savvy CPG companies can
develop and trial warehouse products before launch to traditional channels
– the reverse of the common pattern between club retailers and CPGs."
Discussion Questions: What do you see as the unique challenges for CPG
companies in selling to Costco and other warehouse clubs? Would you add anything
to the suggestions offered in the article?
- Why Costco and Other Warehouse Club Retailers Matter – L.E.K. Consulting
- Costco Plans Additional Private-Label Consumables – Supermarket