A weaker environment for consumer spending is playing right into one of Costco ‘s biggest strengths: Kirkland Signature. A string of recent consumer and industry data shows that adoption of private label products has been accelerating, including at Costco, where its store brand is becoming a larger part of its overall sales. That’s great news for Costco investors because those Kirkland Signature products tend to carry a higher margin than other branded items — and Wall Street wants to see the company become more profitable to help boost earnings, without sacrificing its identity. “Costco, specifically, has been a leader in the private label arena with its Kirkland Signature brand,” UBS analyst Michael Lasser told CNBC at the firm’s consumer and retail conference in New York City earlier this month. “It’s found newer and newer ways to design and create products under the Kirkland Signature brand, and the consumer has responded well to it,” added Lasser, who has a buy rating on Costco stock. The economic picture has added to the appeal of store bands. In a recent survey, investment bank Stifel found consumer spending intentions in February and March weakened from where they were in January, even though they overall remained positive. A clear bright spot in the survey: willingness to spend on private label brands remained elevated. About 48% of respondents said they’re planning to buy more private label, based on a two-survey average, which is three percentage points above the 12-month average. In general, the respondents indicated they’re shopping most frequently at the largest retailers, including Costco, Walmart and Target. The Stifel data suggests a yearslong trend has not run its course with value-conscious shoppers whose budgets have been strained by years of high inflation. In 2024, sales of store brand rose to a record $271 billion, up 3.9% on an annual basis, according to the Private Label Manufacturer’s Association . National brands, meanwhile, saw a 1% increase in sales in 2024, to roughly $1.03 trillion. Store brands accounted for 20.7% of dollars spent in 2024, a record share of the market, according to the PLMA. That’s up from 19.1% in 2021. At Costco, Kirkland Signature continues to grow at a faster pace than its business as a whole —a positive for profitability while still being able to offer customers a great deal. Executives have said Kirkland Signature products “average 20% value” to the national brand. And yet, as the mix of Kirkland Signature sales grows, “it definitely creates some overall tailwind in our margin overall,” CFO Gary Millerchip said last fall on an earnings. Costco does not offer up private label penetration as an official metric, but it’s periodically discussed on earnings calls. Kirkland Signature products represented about a third of Costco’s sales, CEO Ron Vachris said in December on its first-quarter earnings call. On the prior in September, he said it was in the “high 20s” percentage — evidence of its growing slice of the pie. The majority of Costco’s private label sales fall into its “food and sundries” category, Vachris has said, which includes dry groceries, items in coolers and freezers, and liquor, among others. Fresh foods — meat, produce, bakery and the service deli — are in their own category, as are non-foods such as electronics, appliances, clothes and more. Joe Feldman, analyst at Telsey Advisory Group, estimates Kirkland’s penetration has been increasing by roughly half a percent or so each year. “The brand continues to grow at a solid rate, generally in line to a little faster than the company average,” he said. Costco’s net sales in 2024 were $249.6 billion. Using Vachris’ previous “high 20s” disclosure, that means Kirkland Signature sales might have been somewhere in the range of $67.4 billion to $74.6 billion. The low end of the range is derived from a 27% estimate, while the high end is based on a 29.9% estimate. For perspective, that far exceeds Coca-Cola’s revenue of $47 billion in 2024, and it is more than three times Colgate-Palmolive’s $20 billion in annual sales last year — granted the products sold by each company is not an apples-to-apples comparison. While inflation may make certain shoppers more receptive to store brands, part of the story also is about the products themselves. “Historically, private label in the U.S. has been synonymous with inexpensive,” UBS’ Lasser said, with consumers often turning to store brands when budgets are tight. However, he said that retailers like Costco are now making quality products considered on par with the brand names — yet sold at a lower price. It’s this “elevation of the quality of private label that has helped to stimulate adoption,” Lasser said. In other words, people are viewing private label brands as just as good or better than national peers in both quality and value. “We always like to say consumers are ‘trading up’ when they buy Costco’s Kirkland Signature products instead of brand names,” said Jeff Marks, the Club’s director of portfolio analysis. Recent data backs up Lasser and Marks’ comments. In a February survey of roughly 1,000 U.S. adults, roughly three out of four respondents said private label products are just as good as the name brand alternatives, according to the Ipsos Consumer Tracker . The appeal extends across income brackets, Ipsos found in a separate, mid-September survey. A third of respondents with household incomes above both $100,000 and $125,000 indicated they were upping their spending on private label. That’s almost on par with the 37% of respondents making between $50,000 and $100,000 who said they were increasing their store-brand purchases. How Costco does it Costco has successfully built up Kirkland Signature’s reputation over the years, but the company is hardly resting on its laurels — whether that’s on the kinds of products being offered, their design and, crucially, the price. Executives frequently talk up their close relationships with suppliers in these areas, and how important continuous innovation is to the brand. Consider the case of Kirkland Signature diapers. On its earnings call earlier this month, finance chief Millerchip highlighted improvements to the product after working with a new supplier. It now has a longer and thicker absorbent layer, a softer outer cover and twice the waistband stretch, he said. “As well as improving the quality of this item, we were able to increase the value by 11%.” A common refrain with Costco is that it’s the last retailer to raise prices when costs increase and the first to lower them when they can. Some Kirkland Signature products have seen price reductions recently, including a three-liter bottle of refined olive oil ($27.99 from $29.99) and a two pack of organic peanut butter ($9.99 from $11.49), according to Millerchip. Vachris, the CEO, said the biggest growth opportunity for Kirkland Signature is in non-food categories. That is an area where loyalty to name brands is considered to be strong. However, Vachris pointed to successful examples, such as motor oil, that support their push. Kirkland Signature motor oil has become the top-selling motor oil in all Costco warehouses, Vachris said, and its golf balls have also gained traction in a competitive, brand-loyal category. Still, Costco is “not in a race to develop hundreds of Kirkland items,” Vachris said on the March earnings call. “We look at it more of a strategic, item-by-item basis that when there’s an item with an opportunity, then that’s when they will go after that,” he said. Not every pursuit is a success. Costco is quick to remove underperforming items that don’t resonate with members or work with suppliers to make a better product. A clear example of this strategy is Kirkland Signature’s beer offerings, Vachris detailed during the company’s annual meeting in January. In 2014, Costco launched Kirkland Signature Light Beer that saw moderate but underwhelming sales, he said. A year later, Costco tried Kirkland Craft Beer, but it didn’t meet expectations either. Last year, though, a Kirkland Signature Lager debuted, which has “really hit the mark,” said Vachris. “Our members have spoken and the sales are outstanding in this item,” the CEO said. “So, very exciting seeing the tenacity of the buyers continuing to work on things until they get the right item.” Investors should be excited, too. (Jim Cramer’s Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Kirkland brand croissants for sale at a bakery inside a Costco store in Teterboro, New Jersey, US, on Wednesday, Feb. 28, 2024.
Stephanie Keith | Bloomberg | Getty Images
A weaker environment for consumer spending is playing right into one of Costco‘s biggest strengths: Kirkland Signature.