Target has greatly changed its merchandise over the past few years and, in many ways, Walmart has followed its lead.
Instead of its old model of having a traditional house brand for its private-label products, Target pioneered the idea of building distinctive brands to house different product families. Instead of being a classic generic house brand, the retail chain has built product lines that have equity beyond just being a house brand.
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Customers of the retail store may not know that Everspring, a household essentials line, or athletic apparel brand All In Motion are actually owned by the retailer. It's a strategy where Target (TGT) has built product lines.
Basically, Target has invested in creating brands like Hearth & Hand with Chip & Joanna Gaines, and Boots & Barkley (a pet products line), and Auden, a women's underwear collection that don't feel like house brands. That gives the company control over more of its product lineup and allows it to be less dependent on external vendors.
That's a strategy Walmart has used as well, albeit to a lesser extend. Many customers may know they're buying a house brand, which comes with better-perceived value, but these lines, which span Target's entire inventory are far from the generic house brands of old.
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Costco has a different plan
Costco has not followed the same private label brands program as its rivals. Instead, it has worked to offer the best possible prices on both its Kirkland Signature house brand and the big-name products it sells.
That gives customers options and now-retired CFO Richard Galanti shared some thoughts on how the warehouse club's members shop during its second-quarter earnings call.
"There's not a lot of trade down," he said. Although when we sometimes have more control over certain private-label CPG items and we're able to drive more business. And so we're seeing an increased penetration of that versus some of the brands sometimes."
That actually gives Costco (COST) added leverage over its name-brand partners.
"That gets the brands to the table to work to provide more value on the branded as well," he added.
Costco wants its customers to have a choice and there have been times when its house brand has seen an increase in sales. He noted that when inflation was running between 7%-9% and there was fear that the country was heading into a recession, Costco saw a rise in Kirkland Signature sales.
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"It seems like every year, we grow 0.25% to 0.5% of increased Kirkland Signature penetration. And then there was one year when 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 people were, in my view, switching a little bit out. But that's changed. We don't see that as much as anymore."
Focus helps drive Costco
Costco has a very limited selection compared to Walmart and Target. That increases its buying power and gives it added leverage with vendors. It also allows the company's buyers to focus on driving low prices and value.
"At the end of the day, the focus of the buyers, as an example, is coming up with new ways to do things, to have great pricing and to constantly improve that pricing and figure out how to do that with our global buying power with," Galanti shared.
The company's purchasing department has a deep knowledge over every item the warehouse club sells.
"We have buyers that are in charge of 20 and 30 items if not less, not 200, 300 items in a category. They know a lot more, in our view, about every cost component of that," he added.
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Galanti, in his final earnings call, made it clear that he sees this as a massive advantage.
"And I think I feel very good that we do a very good job. I'm not suggesting others don't, but I know we do a very good job of getting on the phone immediately and working on those issues. And as soon as we can get a savings, we're out there first. And that's just our religion," he shared.
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