The Denver Post - - BUSINESS - By Molly Smith

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 ac­tu­ally are top-shelf liquors such as Grey Goose and Tan­queray hid­den be­hind Costco pack­ag­ing.

That’s helped set Costco’s bev­er­ages apart from other pri­vate­la­bel fare, said David Schick, lead re­tail an­a­lyst at Con­sumer Edge Re­search. “They use very high­end pro­duc­ers — pre­mium all the way up to su­per-pre­mium and be­yond,” he said.

Al­co­hol brought in $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 per­cent 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 AlixPart­ners 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 per­cent to 14 per­cent — ex­tremely low by in­dus­try stan­dards. In con­trast, most re­tail liquor stores add from 25 per­cent to as much as 45 per­cent, 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 min­i­mum markup to drive value for the mem­ber.”

It’s a bright spot at a chal­leng­ing time for Costco. The com­pany posted earn­ings of $1.17 a share last quar­ter, far short of an­a­lysts’ pro­jec­tions for $1.36. In­dus­try­wide food de­fla­tion and higher gas prices have brought a dou­ble­whammy to the re­tailer. Gross mar­gin, an­other closely fol­lowed bench­mark, missed es­ti­mates by the most in more than four years.

Of Costco’s 508 lo­ca­tions in the U.S. and Puerto Rico, it can sell beer and wine in more than 80 per­cent of them, ac­cord­ing to Al­varez-Pe­ters. Hard al­co­hol is less com­mon, due to tougher lo­cal re­stric­tions. About 60 per­cent of the stores of­fer spir­its. By com­par­i­son, Wal­mart Stores Inc., the world’s largest re­tailer, sells wine and/or spir­its in about two-thirds of its 4,700 stores.

While Wal­mart 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.”

Other re­tail­ers and gro­cers are try­ing to mimic Costco’s suc­cess. In 2003, Tar­get Corp. in­tro­duced a pri­vate la­bel — Tar­get Wine Cube — to tap into pre­mium boxed wines, and it’s cur­rently ex­plor­ing pri­vate la­bel op­por­tu­ni­ties in other al­co­hol cat­e­gories.

Whole Foods Mar­ket Inc. launched its Cri­te­rion Col­lec­tion wines in 2015 and now has 10 va­ri­eties of reds and whites.

With an aver­age of 250 items across the three al­co­holic bev­er­age cat­e­gories, Costco is se­lec­tive in what it chooses to stock. It ro­tates items in and out of the sys­tem in what it calls a trea­sure hunt. “With the limited-item as­sort­ment, we con­stantly eval­u­ate,” Al­varez-Pe­ters said. “Ev­ery item must per­form in vol­ume.”

The trea­sure hunt — along with the eco­nomics of bulk pur­chas­ing — are what keeps Costco mem­bers happy, Schick said.

Tim Boyle, Bloomberg file photo

A cus­tomer shops for wines at a Costco store in Mount Prospect, Ill., in 2012. Al­co­hol sales have been a bright spot for the com­pany dur­ing tough times.

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