Private-label booze sales boost Costco bottom line
Alcohol figures a bright spot in tough times
NEW YORK • The holidays didn’t go well for Costco Wholesale, whose profit during the period missed analysts’ projections by the most in at least a decade. But there was something to raise a glass to: booze.
Alcohol sales have surged at the warehouse-club chain, lifted in part by the cult status of Costco’s Kirkland Signature- branded liquors. Many customers swear by the private- label products, and some are even convinced that the spirits are actually top- shelf liquors such as Grey Goose and Tanqueray hidden behind Costco packaging.
That’s helped set Costco’s beverages apart from other private-label fare, said David Schick, lead retail analyst at Consumer Edge Research.
“They use very high- end producers — premium all the way up to super- premium and beyond,” he said.
Alcohol brought in US$ 3.8 billion for Costco in its latest fiscal year, with wine sales accounting for almost half of the total. The category has grown 46 per cent during the past five years, outpacing the company’s broader food and sundries segment, according to Chief Financial Officer Richard Galanti.
Kirkland Signature has been key to its success. The retailer began selling wine under the brand in 2003, followed by spirits in 2007. It also has a line of craft beers. Emphasizing private- label products has lowered Costco’s average retail prices, but surging demand has offset that impact on sales, Galanti said.
“Private label continues to grow as a dominant strategy in retail — especially when it migrates from being a ‘ label’ to more of a ‘ brand,’ which Kirkland has done,” said David Bassuk, managing director at consulting firm Alix-Partners in New York. “Now it’s a well- known name and gives the consumer a perception of value and a good deal.”
The sources of the beverages remain a mystery. Kirkland Signature items are produced by “various manufacturers,” said Annette Alvarez- Peters, who manages Costco’s beverage alcohol division, without naming providers.
Schick and other analysts calculate that Costco’s markup on its alcohol is in the range of 10 per cent to 14 per cent — extremely low by industry standards. In contrast, most retail liquor stores add from 25 per cent to as much as 45 per cent, especially for premium items, according to Schick.
“They’re doing the opposite of looking to cut corners,” he said. “They’re looking for maximum quality and min- imum markup to drive value for the member.”
It’s a bright spot at a challenging time for Costco. The company posted earnings of US$ 1.17 a share last quarter, far short of analysts’ projections for US$ 1.36. Industrywide food deflation and higher gas prices have brought a double- whammy to the retailer. Gross margin, another closely f ollowed benchmark, missed estimates by the most in more than four years. Even a highly anticipated membership fee increase did little to placate investors, with the shares tumbling after the results were released.
Of Costco’s 508 locations in the U. S. and Puerto Rico, it can sell beer and wine in more than 80 per cent of them, according to Alvarez-Peters. Hard alcohol is less common, due to tougher local restrictions. About 60 per cent of the stores offer spirits. In Canada, spirits, wine, and beer are available at some locations — for example, in Alberta — that are physically separate from the main store.
By comparison, Wal- Mart Stores Inc., the world’s largest retailer, sells wine and/ or spirits in about two-thirds of its 4,700 stores.
While Wal- Mart doesn’t break out those sales in its quarterly results, Piper Jaffray Cos. senior retail analyst Sean Naughton said he’d be surprised if Costco wasn’t the leader. “They’re taking share away from everyone because they can offer the lowest price.”