Target has changed its merchandise a lot in recent years, and in many ways, Walmart has followed suit.
Instead of its old model of having a traditional house brand for its private label products, Target pioneered the idea of creating distinctive brands to house different product families. Instead of being a classic generic private label, the retail chain has created product lines that have value beyond simply being a private label.
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The retailer's customers may not know that Everspring, a line of home essentials, or the sportswear brand All In Motion are actually owned by the retailer. It is a strategy where Target (TGT) has built product lines.
Basically, Target has invested in creating brands like Hearth & Hand with Chip & Joanna Gaines, Boots & Barkley (a line of pet products), and Auden, a collection of women's underwear that doesn't look like house brands. That gives the company control over more of its product line and allows it to rely less on outside suppliers.
That's a strategy that Walmart has also used, although to a lesser extent. Many customers may know they are purchasing a private label, which offers a better perceived value, but these lines, which span Target's entire inventory, are far from the generic private brands of yesteryear.
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Costco has a different plan
Costco hasn't followed the same private label program as its rivals. Instead, it has worked to offer the best possible prices on both its Kirkland Signature brand and the big-name products it sells.
That gives customers options, and now-retired CFO Richard Galanti shared some insights into how warehouse club members shop during their second quarter results call.
“There's not a lot of bearish trading,” he said. Although sometimes we have more control over certain private label CPG items and can generate more business. So sometimes we're seeing a higher penetration of that compared to some of the brands.”
That really gives Costco (COST) greater influence over its brand partners.
“That brings brands together to work and provide more value to the brand as well,” he added.
Costco wants its customers to have options and there have been times when its private label has seen an increase in sales. He noted that when inflation was between 7% and 9% and there were fears the country was heading into a recession, Costco saw an increase in Kirkland Signature sales.
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“It seems like every year we're increasing 0.25% to 0.5% penetration of Kirkland Signature. And then there was a year where we were asked a couple of years ago, it seemed like there was 1.5% to 2%, even 2% change in penetration,” he said. “So, in my opinion, people were changing a little bit. But that has changed. We don't see it as much anymore.”
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Focus helps boost Costco
Costco has a very limited selection compared to Walmart and Target. This increases your purchasing power and gives you greater influence with suppliers. It also allows the company's buyers to focus on driving low prices and value.
“At the end of the day, the focus of buyers, for example, is to find new ways to do things, to have great prices and to constantly improve them and to figure out how to do it with our global purchasing power,” Galanti shared.
The company's purchasing department has in-depth knowledge of each item the warehouse club sells.
“We have buyers who are in charge of 20 or 30 items, if not less, not 200 or 300 items in a category. In our opinion, they know much more about each component of the cost,” he added.
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Galanti, in his latest earnings call, made it clear that he sees this as a big advantage.
“And I think I feel very good because we do a very good job. I'm not suggesting that others don't, but I know that we do a very good job of getting on the phone right away and working on those issues. And as soon as we can save, we go out first and that's just our religion,” he shared.
