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What Does Amazon Want With Costco's Kirkland Signature Private Label?

By Motley Fool Staff - Jul 23, 2017 at 7:00PM

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Stranger things have happened in the battle for online retail market share.

The "Kirkland Signature" private label brand is one of Costco's (COST 2.16%) great success stories -- and with $30 billion in sales, a key driver of the business.

In this segment from Industry Focus: Consumer Goods, the team tackles a listener question regarding what appears to be a collaboration between Costco and (AMZN -1.73%) to sell Kirkland on the e-commerce giant's platform.

A full transcript follows the video.

This video was recorded on July 18, 2017.

Vincent Shen: Asit, our second question comes from Shubhra Garg, who wrote, "I was listening to a recent podcast where you had mentioned limits to Costco's growth and competition with Amazon. I wanted to get your perspective on the collaboration between these two companies. I'm a frequent buyer at both, noticed recently that Amazon was carrying the Costco local brand, Kirkland. Any comments on this collaboration and future potential?" Shubhra, you're definitely onto something here. I would probably stop short at calling this a true collaboration between the two companies. We'll get down to the details behind that but first a bit of context. If you're a Costco shopper, you'll know that the company has its own private label brand called Kirkland Signature. It's been around for about 20 years, and it now makes up about 20% of all products at Costco stores. Kirkland products encompass everything from packaged goods to apparel, food and beverage, even alcohol. They're known for offering high quality at a pretty good value. 

Kirkland also makes up 25% of company revenue. Keep in mind that Costco is one of the world's largest retailers. They had $125 billion of sales in the last 12 months, meaning that Kirkland itself is a $30 billion-plus brand, and some of its items generate annually $1 billion in revenue. That should give you an idea of how popular and massive this private label brand has become. This reflects, overall, a trend across the retail industry with grocery stores and retail pharmacies investing a lot into their private labels as well. Asit, you know the tie up here between Kirkland and Amazon probably has more so to do with some of the online efforts and distribution with Costco. Can you give us some high-level thoughts here, in terms of this potential for collaboration that Shubhra wants to know about?

Asit Sharma: Absolutely. Shubhra, your question brought two song titles to my mind. Everybody Wants to Rule the World by Tears for Fears, and Give Peace a Chance by John Lennon. There's very fierce competition between two giants, why can't everybody just get along? What we see between these two companies, if there's cooperation, it's really tentative, as Vince mentioned.

Mostly, it's third-party sellers which are selling Kirkland products on the Amazon site so far, as far as I can see. I certainly haven't read anything about any deeper cooperation. However, it's something that Amazon might have wanted to pursue over time, but I think the window on that is closing with this purchase of Whole Foods Market by Amazon. Whole Foods Market has its own private label brand that's called 365. The thing that listeners should remember here, and I have a hard time remembering this myself, private label brands like Kirkland and 365, they're not manufactured by these retailers. They're simply great deals that the retailers have struck with their suppliers, to put their own label on products, hopefully at a better margin. So if you visualize Amazon's ability to take 365 private label products by Whole Foods and sell at least the nonperishable food items which are household goods, sell them straight out of their warehouses with very few human touches -- because, remember how good Amazon is at robotics, fulfillment, logistics -- they can actually improve the margin that Whole Foods is already getting off of its own private label. And now that Amazon will own Whole Foods, it all hits their bottom line. Very small incentive left to try to do some deal making with Costco to push a lot of Kirkland products through their site. What are your thoughts on that, Vince?

Shen: The big thing that sticks out to me in terms of seeing these Kirkland products on the Amazon store is, keep in mind that Kirkland Signature, the private label is not exclusive in terms of where you can find those products, at Costco store shelves or on its own website. So I do have some numbers here for the first half of 2016, they're from data analytics company 1010data. They indicate that Amazon actually, not Costco, was the biggest online seller of Kirkland Signature products, with 70% share. Again, that was for the first half of 2016. Meanwhile, came in second with a 23% share. But as you mentioned, Asit, that 70% for Amazon comes from their marketplace sellers. It's not direct Amazon sales. So again, it's not really an official partnership but really a byproduct of the fact that we have Kirkland, a very large, popular brand, we have Amazon, one of the biggest marketplaces on the internet, and this is basically where they intersect. So the prospects for more collaboration between these two companies appears less likely, especially with the push that Amazon is likely to make with the Whole Foods buyout. 

The last note that I mention regarding Kirkland is that Amazon is not the only competitor carrying the private label. Even a direct rival in Wal-Mart (WMT 3.35%) ends up selling Kirkland Signature products through its business. There were some reports last month that Wal-Mart wants to wind down its sales of Kirkland products to bolster its own private label. They have their Sam's Club warehouse club, and its own private label is called Member's Mark. So my search this morning before coming into the studio still shows over 200 products available on the marketplace under the Kirkland Signature brand. But there are some additional numbers here from May from Slice Intelligence, a market research company. They show that has indeed reduced its share of online Kirkland Signature sales. Before, it was Amazon, Costco, and selling the most Kirkland Goods. Now it's Amazon, Costco, and Google Express. Any other thoughts from you, Asit, in terms of the dynamics here between how some of these competitors can end up, due to the popularity of these brands, coming together and carrying each other's product lines?

Sharma: It's good for all companies if they can distribute on each other's platforms. When you get into a product, your typical Kirkland product, it's basically packaged in a way so that you're buying in bulk, often excessive quantities. That's part of Costco's business model to get you into its store and offer you that product, where you're bringing home a lot of it. That doesn't work as well online, but Kirkland has proven over the years to be a somewhat popular brand. I think Costco would do better, though, as it moves forward, to emulate Wal-Mart, as Vince brought up. They should seek to buy something like a, although was maybe the last viable online retailer, and Wal-Mart took advantage of that. But Costco should try to copy Wal-Mart's playbook and find some ways where it can acquire more online presence. I'm not so sure that just using their own platform, they'll really be able to keep up with this aggressive pace that and Wal-Mart are going out with their marketplace purchases, Amazon buying Whole Foods, Wal-Mart buying Costco needs to up its game rather than look for a collaboration between these two, because that will be hard to come by.

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