How Sam's Club plans to take on Costco's Kirkland Signature

It's no secret that private labels have witnessed massive success in recent years. It's now a $236.3 billion industry, but one stands out from the rest. Kirkland Signature as one of the biggest and most popular store brands with more than 300 products from anything like vodka to laundry detergent, batteries and clothing. And its fans are fiercely loyal. I just got the first ever Kirkland Signature driver. Let's unbox it. Kirkland has a cult following. There's a reason why people buy the T-shirts with that brand name on it and shoes with the name on it. It's a little bit similar to what you see from shoppers at TJ Maxx that they they talk about, oh, I got such a deal like this is Kirkland brand. Though not a perfect comparison, in 2023, Kirkland Signature surpassed the combined net sales of Consumer Packaged Goods behemoths Kraft Heights and Kalanova. But nearing 3 decades old, the season label is facing an old competitor with a fresh approach, Sam's Club's members Mark Members mark is one of our catalyst for growth. You can now connect the entire life for our members. So we can feed you, we can clothe you, we can clean your home, we can style your home. And not a lot of brands can actually say that as a percent of sales members market is as successful as Costco in terms of overtaking it. Never say never, who knows, but I I think it's going to take a long time. While private labels have been around since the 1800s, they've really only entered the American consciousness over the past couple of decades. Historically, private label was always thought of as low level entry point. Cheap in terms of price point, but also cheap in terms of quality. People thought that private label was clearly, let's say, the sort of ugly cousin of the real stuff that those are the manufacturer or national branch. But the tables have turned. Sales of private labels increased 34% between 2019 and 2023. Some of the biggest companies have invested heavily in the category, like Amazon with its more than 100 private labels, plus it's Whole Foods 365 brand or ALDI, Trader Joe's and Wegmans. Today, many consumers consider private labels as good as or better than name brands. The competitive landscape has changed. You see a lot of European brands come into play like an all the little Trader Joe's and their whole value proposition is offering private label. And so that's changed the perception of the public. Customers tried these brands during the pandemic when they couldn't find their favorite national brand. And so in some cases they discovered they like the more. And then the third reason is inflation. As people look to get more for their money, they're trying the cheaper brand, and usually that's private label. It's difficult to compare private labels as a whole. Some are solely focused on one product or one category. Others thread many, like Costco's Kirkland. The company realized early on it could differentiate its private label. It launched Kirkland Signature in 1995 with 30 different products. Now there's more than 300. The warehouse typically carries 2 versions of each product, one national brand and one Kirkland product. Giving consumers only two choices is a good business decision. On top of it, the shelf space is limited. A typical Costco carries 3800 products, while a super center can carry up to 100,000. If you go into a club, you're you're going to get a great deal, You're going to get a high quality product at A at a good price because you're already paid membership. But there's really no expectation of a huge array of different choices. If you think about private label, it's really an exclusive product. It's an exclusive offering that you can't find anywhere else. People can easily cancel their membership, and so the stakes are always high to offer a brand that's above the rest. Today, Kirkland is one of the biggest singular private label brands in the country. While Costco doesn't report the brand's annual sales, the company did confirm that Kirkland sales were about $58 billion in 2023. Discount grocer ALDI, whose entire business model is private labels and is still expanding its footprint in the US, had about $26 billion in sales in 2022. Members marks were between 22 and $25 billion in 2023. They've had a head start because they've had a single brand right for 20 years. But for us, it started with us making the decision to have a single brand. And now that we've made that decision, we do have work to do from a marketing perspective. Sam's Club had more than 20 different private label brands at its peak in 2017. The company switched strategies by consolidating them all into one members. Mark, Sam's Club CEO, told CNBC that Kirkland was an inspiration to the brand revamp. We've seen some some great benefits from it. Brand recognition has gone up, member acceptance has gone up, and the business is in a much better place going forward. The company has moved quickly, revitalizing more than 1200 items since 2020, and as of June 2024, members market counts for 30% of Sam's sales and more than 1/3 in terms of units. That's a little higher than Costco's, though the two clubs have vastly different amounts of skews. One of the reasons why Costco has been able to get away with having fewer skews is because of the success in the cachet of Kirkland Signature. Sam's Club have tried to elevate the quality and again, they're using the branding across different categories as well, something that they haven't done as much of. Part of Costco's cachet using national manufacturers to produce many of its private labels for what it says is the same quality or better. Costco makes a deal with the national brand manufacturer. You manufacture our product and we will carry your national brands in our store. It has been widely rumored that these Kirkland diapers are manufactured by Kimberly-Clark as price of entry of Huggies into the Costco stores. Because Costco has a small assortment and is a huge retailer to be able to sell your Huggies, it's very good for business, especially if your competitor Pampers isn't there. That's intentional. This is also where Sam's and Costco diverge. Sam's declined to name any of its manufacturers, but admitted the vast majority were not big names, rather smaller suppliers that primarily work in the private label space. The company has used that to its advantage. Private labels can adapt and develop quickly, which is key. And members marks evolution. It launched a program where members can help Co create products. 50,000 consumers have already opted in, testing new products, voting on flavors and providing instant feedback. What we're doing is we're working with our members each and every day to say what do you want, what are you missing, what flavour profiles, what styles do you want? And we're finding that that connection with our members creates this really positive organic growth in Word of mouth for Sam's Club. Membersmark is a younger brand and so they're acting a little bit more like a startup as they test these products. If you're working more closely with shoppers and getting real time feedback, you're not going to crank out a bunch of products that just sit on the shelves. Sam's Club is prioritizing not only quality as it expands members Mark, it's also adding new categories and other products that it says separate it from Costco. I think we play in in pretty, pretty similar spaces. But as I think about our future HomeGoods, so in indoor furniture and small appliances, that's an area where we'll go deeper. We'll still continue to fight food inflation directly. So where our members tell us they want us to create new products, so where they want to help to bring prices down, we'll continue to do that by having a wider variety and a greater assortment. It could make them more of that lifestyle brand if they truly have the offering in the kitchen, in the living room, in the fridge, items for every part of the house. But strengthening Members Mark doesn't come without risks. If you do not deliver on the quality in one category, it may undermine the the confidence that your shopper has in the quality of your private label. Even Costco faces quality issues. Consumer Reports ranks many but not all Kirkland products higher than Members Mark and quite a number of cases Kirkland is, is close to, let's say the best in class national brand. But when it comes to things like paper towels, they're extremely far behind. Bounty, it's been around for a while and it's been successful and the quality is really good. Target, Walmart, those guys, their manufacturing is also higher quality. It just hasn't quite gotten to that level of trust from consumers yet. In a lot of cases, everyday consumers know the Kirkland Signature brand more so than they do the Members Mark branding right now. The potential is there though. Members Mark as we know it is relatively new. Walmart is a huge company with nearly $650 billion in revenue. With that comes a lot of resources. Sam's Club has 69 million members shopping at 600 US locations, compared to Costco's 73,000,000 worldwide. That's why Members Mark has been really deliberate in trying to get its own customers to help it develop new products, with the hope that those customers then become kind of product evangelist to their neighbors. In the meantime, expansion is top of mind. Sam's plans to open 30 new warehouses by 2028. They are opening new doors, but they're also going to have more product to put on shelves. And so that makes members more critical in attracting new members in those new markets. Because often times when the club channel moves into a region, it may be the second or third club player. So they are competing directly with households that have to decide. I may already have a Costco membership. Do I want a Sam's Club one as well? Still, Sam's has ways to go. Costco's domestic revenue is 2 times larger than Sam's Club's. Can they catch up? Maybe one day, but you know, not not in the next couple years. We think that's definitely a longer term potential. Costco has historically had a higher income customer than Sam's Club. Is that because they have the Kirkland brand? Is that because they have a strong following? It's hard to tease out what came from what. The real test will be up to the shoppers and I think that members Mark will have a pretty direct connection to whether or not people sign up for Sam's Club and renew their membership.