The Wall Street Journal - Costco CEO Breaks Down How a Kirkland Product Gets Made | WSJ
Costco's CEO, Ron Vachris, attributes the company's success to its strong organizational culture and opportunities for career advancement, which contribute to a low employee turnover rate of about 8.5%. This culture is supported by competitive wages, with an average hourly rate of $31 in the US, higher than the retail average and competitors like Sam's Club. The company's private label, Kirkland, plays a crucial role in driving sales and customer loyalty. Kirkland products are strategically priced to be competitive with national brands, often leading to lower prices across categories. The development process for Kirkland items involves careful selection of manufacturing partners and a focus on quality over margins, ensuring that products meet high standards before reaching shelves. This approach has made Costco's buyers more formidable in negotiations, as they prioritize volume over margin percentage. Despite challenges in certain categories like consumer electronics, Costco continues to explore new opportunities for Kirkland, aiming for gradual growth in its product offerings.
Key Points:
- Costco maintains a low employee turnover rate of 8.5% by fostering a strong company culture and offering career advancement opportunities.
- The average hourly wage at Costco is $31, higher than the retail average and competitors like Sam's Club.
- Kirkland, Costco's private label, is a key driver of sales and customer loyalty, with a focus on quality and competitive pricing.
- Costco's buyers prioritize volume over margin percentage, making them effective in negotiations with suppliers.
- Costco continues to explore new product opportunities for Kirkland, focusing on quality and gradual growth.
Details:
1. 📈 The Rise of a $400 Billion Company
- Ron Vachris's 42-year career progression at Costco from a forklift driver to CEO highlights the company's strong internal promotion culture, which aids in employee retention and loyalty.
- Costco's organizational culture is a significant factor in employee retention, evidenced by Vachris's long tenure and rise to CEO.
- Vachris's leadership philosophy, influenced by his father's advice, emphasizes taking challenging roles in strong companies to grow and succeed.
- The transition to CEO brought Vachris a greater sense of responsibility, reflecting the leadership challenges inherent in managing a large organization with a focus on employee welfare and company decisions.
- High employee retention rates at Costco are a strategic advantage, contributing to the company's operational consistency and customer service excellence.
- Vachris's career and leadership insights translate into Costco's strategic emphasis on employee development and internal promotion, which are key factors in the company's sustained growth and success.
2. 👥 Employee Retention and Culture
- The company boasts a low employee turnover rate, maintaining it below 9%, which is significantly lower than industry averages.
- Employee turnover after one year is approximately 8.5%, indicating strong retention strategies.
- The company attributes its low turnover rate to a robust organizational culture that emphasizes career advancement opportunities, evidenced by the leadership team's internal promotions.
- The company focuses on providing careers rather than just jobs, which is core to its retention strategy.
- Costco's starting wages are around $20 per hour, with the average hourly rate in the US approximately $31, surpassing the retail industry average.
- The cultural focus on career development, internal promotion, and competitive compensation are pivotal to its retention success.
3. 🛒 The Influence of Kirkland Brand
- Costco's community engagement includes fans who post online about their shopping experiences. This organic promotion plays a significant role in customer excitement and company reputation.
- The phenomenon of customers coming for a specific item like a rotisserie chicken and leaving with a cart full of $300 worth of goods highlights Costco's effective in-store marketing and impulse buying environment.
- A notable customer story involved a shopper who went in to fill a prescription and ended up purchasing a $100,000 piano, demonstrating Costco's ability to create an environment of unexpected purchases and high-value sales.
- Kirkland, Costco’s private label, is a substantial revenue driver, contributing $80 billion in sales, enhancing customer loyalty, and attracting members to Costco for exclusive products.
- The presence of Kirkland products exerts downward pressure on national brand prices, benefiting customers by providing high-quality, competitively-priced alternatives and creating a ‘halo effect’ that influences brand perception.
4. 💵 Kirkland's Impact on Pricing
- Suppliers often adjust their product strategies to deter Kirkland from entering their categories, indicating Kirkland's strong market influence.
- Kirkland's launch of golf balls led consumers to question the value of national brands, suggesting potential overpayment for branded goods.
- Costco enforces a strict margin policy of no more than 14% on products, while Kirkland maintains a slightly higher margin of 15%, affecting product selection and supplier negotiations.
- Costco incentivizes its buyers to focus on sales volume, such as achieving $4,000 per warehouse per week, instead of maximizing profit margins, aligning with their low-cost strategy.
5. 🔍 Crafting Kirkland Products
- Leverage commodity inputs and raw ingredients to maintain competitive pricing. For example, when coffee prices drop but national brands raise prices, Kirkland can capitalize on this by offering lower prices.
- Form strategic partnerships with manufacturing partners who accept lower margins in exchange for high volume, allowing Kirkland to keep prices low while ensuring quality.
- Enhance products to differentiate from national brands, such as increasing protein content in a breakfast sandwich by 40% without a price increase, leading to better market performance.
- The decision-making process involves multiple levels of approval, ensuring product improvements before final sign-off.
- Improve buyers' negotiation skills, making them more knowledgeable about product details and production processes.
6. 📉 Challenges in Product Quality
- The company struggles to achieve desired quality in certain products, preventing them from entering the market.
- Razors were identified as a product where technology limitations hindered matching national brand quality.
- Consumer electronics is a desired category for Kirkland, but consistent success in product development remains elusive.
- There is a commitment to persist in exploring opportunities within the consumer electronics category despite past difficulties.
- For the razors, the company needs to invest in advanced technology to meet market standards and compete effectively with established brands.
- In consumer electronics, strategic partnerships and collaboration with tech innovators could enhance product development success.
- The company recognizes the need for continuous improvement and innovation to overcome these challenges and expand its product portfolio.
7. 🚀 Future Prospects for Kirkland
- Kirkland prioritizes quality over price or margin targets, which is a distinctive approach in the private label industry.
- Kirkland's sales contribute to about one-third of the company's revenue, and this percentage is expected to increase over time, albeit gradually.
- The growth strategy for Kirkland focuses on natural development within categories rather than setting quotas for the number of Kirkland items.
- Kirkland is expanding its sushi program across the US, building on its success in Asia, indicating a strategic area for growth.
- Continuous innovation and the introduction of new items at great value are central to Kirkland's strategy for maintaining its competitive edge.