Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Costco's Kirkland Signature Rewrote Retail Pricing
Transcript
- Lucas: You walk into Costco on a Saturday afternoon. The place is a zoo. You grab a pallet-sized cart, you navigate the aisles, and somewhere between the rotisserie chicken and the seventy-two-pack of batteries, you see it — a bottle of olive oil that looks suspiciously like the premium Italian brand you buy at the specialty market, except it's under the Kirkland Signature label and it's about seven dollars cheaper. Luna: And you think — is this actually the same oil? Or is it close enough that you don't care? Lucas: Right. And that question is at the heart of what might be the most successful private-label strategy in retail history. Kirkland Signature is now a roughly seventy-five-billion-dollar brand. To put that in perspective, that's bigger than Nike's annual revenue, bigger than Coca-Cola. And it's owned by a single retailer that operates fewer than nine hundred warehouses worldwide. Luna: That's wild. Most store brands top out at maybe fifteen, twenty percent of a retailer's sales. Costco is over thirty percent and climbing. Lucas: Yeah, and the conventional retail wisdom has always been that private label is a margin play for the retailer and a discount option for the customer. You put your own label on a generic product, you undercut the national brand by twenty or thirty percent, the customer saves money, you make an extra five points of margin. It's a value play. Luna: But Kirkland doesn't always play that game. Sometimes it's priced at a premium to the national brand. Lucas: Exactly. And that's the interesting part. Costco prices Kirkland Signature to signal quality, not just savings. They want you to believe — correctly, in many cases — that Kirkland is actually better than the brand-name alternative. And they back that up with deliberate product strategy: limited selection, rigorous specification, and a willingness to drop suppliers who cut corners. Luna: So how do they decide which products get the Kirkland label and which don't? Because they don't cover every category. Lucas: They're extremely selective. Kirkland Signature only exists in categories where Costco believes it can deliver a demonstrably superior product at a lower price. They won't launch a Kirkland version of something just to fill a shelf. And once they commit, they go deep. Take the Kirkland Signature golf ball, for example — it's made by the same manufacturer that produces premium balls for Titleist and Callaway, but sold at roughly half the price. That's not a coincidence; that's deliberate sourcing. Luna: And that builds trust. When you buy a Kirkland product and it's genuinely good, you start to assume that everything under that label is a safe bet. It's almost a halo effect. Lucas: It is. And that trust gives Costco enormous leverage with national-brand suppliers. Because here's the thing: if a supplier tries to raise their wholesale price too much, Costco can simply say, 'Fine, we'll launch a Kirkland version in that category and compete directly with you.' And suppliers know that if Costco does that, they'll likely lose significant shelf space and volume. So Kirkland Signature functions as a pricing ceiling on the entire store. Luna: It's almost like a threat that's never fully spoken. The supplier knows Costco has the capability and the brand equity to go toe to toe. Lucas: Exactly. And this is where the pricing strategy gets really interesting. Costco is famously disciplined about its margins — they have a stated policy that no product can carry a markup higher than fourteen percent, and most items are closer to eight or ten. That's incredibly low for retail. But private-label products, including Kirkland, typically carry slightly higher margins — not because Costco is gouging customers, but because they're capturing the margin that would otherwise go to the brand owner. Luna: So instead of the supplier making thirty points and Costco making ten, Costco makes eighteen and the customer still pays less than the national brand. The pie is split differently. Lucas: Right. And that's the fundamental insight: Kirkland Signature allows Costco to deliver on its value promise while protecting its own financial model. The membership fee — sixty dollars a year for a basic membership, one-twenty for executive — that's where most of the profit actually comes from. Costco's merchandise margins are so thin that membership fees account for the vast majority of their operating income. Kirkland helps keep that model intact. Luna: It's also a retention tool. If you're a member who buys Kirkland products regularly, you're far less likely to switch to Sam's Club or BJ's. The brand creates switching costs. Lucas: That's a great point. And it's reinforced by the fact that Kirkland products are often exclusive to Costco. You can't buy that olive oil anywhere else. So if you want it, you have to keep your membership active. Luna: Let's talk about the hot dog and soda combo. It's still one-fifty, right? They've kept that price for decades. Lucas: Since 1985. And Costco's co-founder, Jim Sinegal, once famously told a CEO who suggested raising the price, 'If you raise the price of the hot dog, I will kill you. Figure it out.' They built their own hot dog manufacturing plant to control costs and keep that price fixed. That one-fifty combo is a loss leader, but it's also a powerful statement: if we can give you a hot dog and a drink for a buck fifty in 2026, imagine what we're doing on the rest of the store. Luna: It's a pricing anchor. It sets an expectation of value that colours everything else you see. Lucas: Exactly. And Kirkland Signature operates in a similar way. It's not always the cheapest option in the store, but it's always the best value. That distinction matters. Because if you price everything cheap, customers question quality. If you price everything premium, you exclude the core Costco shopper. Kirkland threads that needle. Luna: Before we go deeper on the supplier side, I want to step back for a second. We talk about pricing strategy on this show every week, and I know listeners get real value from these episodes. If today's conversation moved your thinking forward in some small way — maybe you're in retail, or marketing, or just a curious shopper — honestly, if today was worth a coffee to you, that's the link. It's buy me a coffee dot com slash fexingo. No pressure, no perks. Just keeps the show ad-free and independent. Lucas: Yeah, and that support genuinely matters. We don't run ads, we don't sell data, we don't have a corporate sponsor. It's just listener support and a lot of research. So if Kirkland's pricing strategy saved you a few bucks on your next run, that link is there. Appreciate it. Luna: Alright. So back to the supplier dynamics. You mentioned that Kirkland acts as a ceiling on pricing. Can you give a concrete example of a category where that played out? Lucas: Sure. Take laundry detergent. The national brands — Tide, Persil — they spend heavily on marketing and R&D, and that gets baked into the price. Costco carries those brands, but they also have Kirkland Signature laundry detergent, which is typically made by the same contract manufacturers that produce the national brands. The Kirkland version costs less per load, and it performs comparatively. That forces Tide to keep its pricing in check at Costco, because if Tide gets too expensive, customers will just switch to Kirkland. Luna: And the national brands can't exactly pull their products from Costco, because Costco moves enormous volume. They'd lose a massive distribution channel. Lucas: Exactly. So they're stuck. They have to compete on price at Costco in a way they don't at other retailers. And that's by design. Costco essentially uses Kirkland to commoditize categories where the national brand has historically had pricing power. Luna: But Kirkland isn't in every category. They don't have a Kirkland smartphone, for instance. Why not? That seems like a high-volume category. Lucas: Two reasons. First, the quality bar is extremely high for a product like a smartphone — you can't just contract a manufacturer and expect to match an iPhone or a Galaxy. The R&D and software integration are too complex. Second, Costco doesn't want to alienate Apple and Samsung, who are important partners. Kirkland works best in categories where the product is relatively standardized and the brand premium is mostly marketing — things like food, household goods, apparel, even luggage. Luna: So it's a surgical approach. They pick categories where they can genuinely offer a superior value, not just a cheaper knockoff. Lucas: Precisely. And that discipline is why Kirkland has maintained its reputation for quality. If they started slapping the label on low-quality items just to boost margin, the brand equity would erode quickly. Costco's management knows that. Luna: There's also an interesting psychological aspect: the packaging. Kirkland packaging is intentionally minimal — no flashy graphics, no celebrity endorsements. It looks almost utilitarian. That simplicity itself communicates value. Lucas: Yeah, the packaging signals 'we didn't waste money on marketing, we put it into the product.' It's a form of anti-branding branding. And it works because it's consistent with Costco's overall warehouse aesthetic — no frills, no music, no fancy displays. The environment reinforces the message. Luna: One more thing: the pricing of Kirkland relative to the national brand varies by category. Sometimes it's twenty percent cheaper, sometimes only five. How do they decide? Lucas: From what I've read, it depends on the competitive dynamics. In categories where the national brand has strong loyalty, Kirkland might price closer to parity and compete on quality. In more commoditized categories like paper towels or trash bags, they price more aggressively. The common thread is that Kirkland is always the best value, but 'best value' doesn't always mean 'lowest price.' Sometimes it means 'best product at a reasonable price.' Luna: And they update the pricing frequently. I've seen Kirkland prices shift quarter to quarter, depending on raw material costs and supplier negotiations. Lucas: They do. But they're also constrained by that fourteen percent markup cap. So if costs go up, they absorb some of it rather than passing it all through. That's a deliberate choice to maintain the value perception. In fact, in 2021 and 2022, when inflation was running hot, Costco delayed price increases on Kirkland items longer than most retailers did on their private labels. They used Kirkland as a tool to reinforce member trust during a period of price stress. Luna: That's a long-term play. Sacrificing short-term margin to deepen customer loyalty. Lucas: Exactly. And it's worked. Kirkland's market share within Costco has actually increased over the past five years. Members are buying more Kirkland, not less. And the brand is now strong enough that Costco has started expanding it into new categories like pet food, baby wipes, and even wine. Their Kirkland branded wines, by the way, have won awards and are often rated above bottles costing twice as much. Luna: I've had the Kirkland Prosecco. It's genuinely good. And it's like seven bucks. Lucas: That's the model. And it raises an interesting question: could other retailers replicate this? Target has Good & Gather, Walmart has Great Value, Kroger has Private Selection. But none of them approach Kirkland's revenue or brand perception. Why? Luna: I think part of it is that Costco has a unique cost structure. Their membership model means they don't need to make big margins on merchandise, so they can afford to invest in product quality without raising prices. Most other retailers depend on merchandise margins for profit, so their private labels are often margin-enhancement tools first, value plays second. Lucas: That's a big part of it. Also, Costco's limited SKU count — they carry about four thousand items versus a typical supermarket's thirty thousand — means they can focus on doing a few things extremely well. Each Kirkland product gets significant attention. You can't do that if you're trying to cover every category with a private label. Luna: And there's the culture. Costco's leadership — going back to Sinegal and current CEO Craig Jelinek — has always prioritized the member experience over short-term profits. That's not a strategy you can just copy; it has to be embedded in the business. Lucas: Right. And that's ultimately the lesson of Kirkland Signature. It's not a pricing tactic; it's a pricing philosophy that's integrated with the entire business model — membership, supplier relationships, product selection, store design. You can't just launch a private label and expect Kirkland-like results. You have to build the whole system around it. Luna: So what's next for Kirkland? Are there categories where you think they'll expand next? Lucas: I think you'll see more in health and wellness — vitamins, supplements, over-the-counter medications. They already have a strong presence there, but it's a category with big brand premiums. Also, I wouldn't be surprised if they push further into fresh foods, like prepared meals or even fresh seafood under the Kirkland label. That's tougher because of quality consistency, but the payoff is huge. Luna: And they'll have to navigate the tension between being a premium private label and staying accessible. As they move into more premium categories, the price gap with national brands might shrink. Does that hurt the brand? Lucas: Maybe, but only if the quality doesn't justify it. So far, Kirkland has been very disciplined about that. I think they'll be fine, as long as they remember that the brand is ultimately about trust, not just price. You can charge a premium for a Kirkland product if it's genuinely better. The danger is when you start charging a premium just because you can. Luna: That's a good note to end on. For listeners who want to dig deeper, I'd recommend reading Costco's annual letter to shareholders — they always discuss Kirkland performance in detail. Lucas: And next episode, we're going to look at a completely different pricing model: the economics of razor-blade pricing, and why it's not as simple as 'give away the handle, sell the blades.' That's a classic strategy, but it's evolving. Luna: Looking forward to it. Thanks, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.