
Costco Convinces Brands to Cannibalize Themselves - elsewhen
https://napkinmath.substack.com/p/how-costco-convinces-brands-to-cannibalize
======
zozin
Costco holds a special place in my heart. Even though I'm single I still get
most of my groceries there. I've been going to the same two locations for +3
years and I've seen very little employee turnover; the employees seem
genuinely happy to work there, as opposed to other big box retailers such as
Target or Wal-Mart, whose employees are often lackadaisical or barely out of
training.

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and the price has gone up 200% since my student discount is no longer
applicable.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

~~~
blackrock
I went to a Costco the other week, after all the pandemic policies were put in
place, and I love it!

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.

~~~
m463
sometimes. I've noticed they don't do the social distancing all day long.

------
niftich
Okay, sure, but Costco's real strength isn't people's abstract trust in the
quality of the Kirkland brand, but the fact that there's (1) heavy curation,
leaving very little selection, which limits consumer indecision and raises the
stakes for suppliers; and (2) an extremely accommodating return policy, so you
can truly rest assured that you're made whole.

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?

~~~
xenihn
I once left a $60 item in my cart in the Costco parking lot. It was a lot to
me at the time because I was still unemployed after college. I didn't realize
I had left it until I got home. I went back to Costco and looked around in the
parking lot to see if I could find it, then I went inside to ask if someone
had brought it in. I asked if they could refund it so I could immediately buy
another one, and they let me. I don't think any other store would have allowed
that.

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.

------
Apocryphon
Great topic to focus on. It's often said that Kirkland vodka is Grey Goose,
didn't know that about other products.

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.

~~~
gthtjtkt
Grey Goose is one of the worst vodkas on the planet according to most blind
taste tests.

~~~
goldenkey
I am an actual vodka drinker and disagree. Grey Goose is actually really good
vodka.

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](https://en.wikipedia.org/wiki/Rectified_spirit)

[2] [https://www.ethimex.com/blog/2019/07/22/the-complete-
guide-t...](https://www.ethimex.com/blog/2019/07/22/the-complete-guide-to-
neutral-spirits-for-beverages/)

[3] [https://churchofthought.org/blog/2020/04/25/cruelty-free-
deo...](https://churchofthought.org/blog/2020/04/25/cruelty-free-deodorant/)

[4] [https://www.fda.gov/drugs/drug-safety-and-
availability/fda-u...](https://www.fda.gov/drugs/drug-safety-and-
availability/fda-updates-hand-sanitizers-methanol)

~~~
ThePowerOfFuet
I found your comment really interesting; I'm replying to let you know that
Tom's of Maine was acquired by Colgate-Palmolive in 2006, so keep an eye on
the labeling.

~~~
goldenkey
Thanks for the heads up. I wasn't aware of that acquisition.

------
adrianmonk
I don't understand the section on how the economics work.

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.

~~~
megablast
He is working out marketing costs per item sold. The marketing costs for the
white brand is almost 0, since Costco does it.

~~~
adrianmonk
Yeah, that must be what the article means to say. I think I was just stuck on
phrasing like "brands don’t have to spend nearly as much money on marketing".

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.

~~~
URSpider94
The underlying theory behind marketing is that more marketing = more sales.
With the exception of brand-building marketing (like CSX railroad sponsoring
the PBS news hour), which is more aimed at boosting stock prices, product
marketing is generally based on a cost per impression, with impressions
converting to sales at some fixed rate.

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.

~~~
jbay808
But if those sales are displacing sales of your own products, which is the
premise of the article, is it really free money?

~~~
charwalker
Depends on if the money saved on marketing and gained by white label sales (if
the bottle cost more than $19.99 to make they probably wouldn't do so) minus
the money from lost sales to the white label. The site below lists most 5ths
(750ml) at under 3 pounds or under US$4, even for top shelf. Say that is
doubled by transit costs or tripled after marketing/etc to about $12, it's
still about half the white label cost so I'd argue they don't lose money
making bottles for Costco.

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/...](https://www.lovebrewing.co.uk/guides/still-spirits-
liqueurs/cost-of-producing-spirits-liqueurs#.XxhsKflKiiM)

------
luhn
Isn’t it pretty common for food manufacturers to white label their product for
generic brands? IIRC this is hardly specific to Costco/Kirkland.

~~~
mark-r
The difference is that other white label brands aren't expected to maintain or
increase the quality from the name brand. It isn't unusual for white brands to
be absolute trash in comparison. I have a friend who refuses to buy the Target
store brands because he's been burned so often.

~~~
Azurin
Target brand is trash, Safeway brand is trash, and WholeFood's 365 is trash
(also other wholefoods brands but I haven't verified those)

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mmmpetrichor
It's a good story, but the whole premise seems to be based on a couple of
anonymous reddit comments..

~~~
dhosek
I've seen similar things reported in other venues that weren't sourced from
reddit.

------
mark-r
Costco has done a fantastic job of product selection. I've never been unhappy
with anything I've bought there. If it's on the shelves, I'm going to trust
that it's a decent quality for the price, no matter what brand is on the
label. That consistency is key to making the private brand strategy work.

------
wink
Never been to the US or Costco, so can't comment on the quality there.

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.

~~~
graton
The US now has Aldi and Trader Joe's here. One is owned by Aldi North and one
is owned by Aldi South. I forget which is which.

Trader Joe's is well know for their store branded food items.

------
jb775
The one thing about Costco that's annoying is how they double check your
receipt on the way out and kind-of make you feel like a criminal that can't be
trusted.

~~~
Fezzik
I find it nice that they do it - one of the things they check for is items
that you purchase via cardboard card (laptops, gift cards, gym memberships,
etc...). I'm always surprised that people find it so offensive that someone is
double checking that you got all your items while double checking that you
aren't stealing. I've never once felt like a criminal. Proud member since
2001.

~~~
kevin_thibedeau
They're checking for theft no matter what they claim.

~~~
blaser-waffle
For sure. But they're checking _everyone_ , and mostly for optics. They're not
singling you out, and it's not like waiting in line for 45 minutes for the TSA
to frisk you.

And most of the time they're not even checking, just looking for obviously
sketchy low-hanging-fruit and spooking the half-hearted crooks.

------
pravda
Are we sure this is not a Submarine (PR-placed) article?

"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.

~~~
mdorazio
They actually list their margins in their normal SEC filings. For merchandise
it's usually around 11% on average. Obviously it will be higher or lower than
that for specific products. Costco is able to have margins way lower than
retail average (Target runs around 28% for comparison) by having much lower
per-revenue dollar operating costs and by doing an absolutely stupid amount of
revenue per location (a single location will average close to $200M in sales
per year).

~~~
Animats
Costco has been annoying the drugstore industry by marking up the drug section
at the same markup as the rest of the store. Markups at CVS, etc. are much
higher. Costco has a smaller selection and only sells the big sizes, so it
works out well for them.

------
ineedasername
I stopped going to Costco when I realized 1) I couldn't get a parking space
without 10 minutes of driving around looking and waiting for someone to pull
out. 2) I couldn't pay for my items without waiting on line for 10 to 15
minutes and 3) Most items are a little bit to a lot cheaper at normal
supermarkets if you wait for a sale and stock up.

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.

~~~
crooked-v
The real value of a Costco membership is in the ancillary non-grocery stuff,
like cheap glasses and contacts, discounts off high-end electronics, money
back on plane tickets and rental cars, etc.

~~~
timeinput
Yeah the PS4 and XBox gift cards tend to justify the membership cost on their
own for me, so everything else feels like a bonus, and I don't feel bad about
wasting money buying something somewhere else even if it's a bit more
expensive since the Costco membership is already paid for.

~~~
voltagex_
Huh. I think we get 10-15% off iTunes cards sometimes, but not Xbox. I would
say the bifurcation into Gamepass vs Xbox Gold may reduce the value of any
discount, though.

~~~
timeinput
It's been quite a while since I last used the deal since I've not been in the
store. I think the last time I used it was something like $80 for $100 in
playstation store gift cards, but I think I'm more used to the 10% off as the
general rule for their gift cards.

ETA: I just checked online and they're only 10% off (both Xbox and PS).

