josh whiteCostco's Lesson: Private Label Is Coming for Your Format, So Win on Trust and Fewer SKUs
Costco launched its own electrolyte stick packs in September, and if you sell a hydration powder (or honestly any supplement that comes in a stick, a gummy or a scoop) you should be paying attention. Inc reported that Kirkland Signature Hydration stick packs hit shelves after Costco CEO Ron Vachris teased the launch back in August, and that the sugar-free packets were already showing out of stock online. The subhead says Costco is taking on Liquid I.V. and LMNT "by focusing on one key benchmark," and I think you can guess which one.
What worries me about it is that the format a lot of wellness brands are built on is now something a warehouse club can make, put its own name on and sell to people who already trust it more than they trust you.
the format was never much of a moat
A lot of the founders I talk to describe their brand by its format. We're a hydration stick, we're a gummy, we're a powder you mix into water. That made sense when the format was new to a lot of shoppers.
Formats get copied though, and private label copies them faster than anybody because the retailer already has the sales data telling it which formats are working. By the time a Kirkland version shows up, the category has already been proven by you and your competitors, with your marketing dollars.
If the only real difference between your box and the Kirkland box is that yours came first, I'd be a little worried, and I'd start working on that this quarter.
why I'm still buying the Costco vacuum
I posted about this in October. Costco has four vacuums for sale right now, all the same brand, from $99 up to $399. The Amazon equivalents of the $199 one I wanted are arguably similar in function and cost about 40% less, and I'm still going to buy the Costco one.
Most people would say Costco wins on price. I'd say it wins mostly on trust, and on the fact that it doesn't make me become a vacuum expert to buy a vacuum. You want a vacuum, buy this one and go on with your day, and if you hate it you bring it back.
I think Kirkland Hydration sells for the same reason. The person grabbing a box at Costco isn't comparing sodium per stick across six browser tabs. They want electrolytes and they trust Costco, and that's pretty much the whole decision.
So the useful question for a small brand is what you can give a shopper that Costco can't. You won't out-trust Costco in general, but you can earn deeper trust with a much narrower group of people.
trust you can actually build
Some things I'd put money behind if I ran a powder or stick pack brand right now.
Be the brand for somebody specific
"Hydration for everyone" is the Kirkland lane and you're going to lose there. Hydration for people who work outside in a St. George July, or for endurance athletes who lose a lot of sodium, is a different product to the person buying it, even if the formula isn't wildly different. People will pay more when it's obvious you made the thing for them.
Show your work
Costco's name does the explaining for Kirkland. You don't have that name yet, so your product page and your box have to explain more, like why you landed on this sodium level and whether a third party tested it.
Make the guarantee as easy as Costco's
A big part of why I trust Costco is knowing I can bring it back. If your return policy has an asterisk on it, I'd fix that. A no-questions refund costs you a little margin, and it makes a stranger a lot more willing to try you the first time.
fewer SKUs, honestly
Costco carries one or two of most things and that's on purpose. Shoppers don't want 14 flavors, and every extra flavor is a bet you're placing with cash.
Each SKU you add needs its own inventory and its own minimum with the co-man, plus packaging and a slice of your marketing attention. I'd much rather see a brand with a few flavors that are always in stock than nine flavors where four are out and two are sitting in a warehouse getting close to their date.
Fewer SKUs also make the shopper's decision easier, which is the whole Costco thing. If someone lands on your site and has to study a comparison chart to figure out which product is for them, you're making them do the work Costco refuses to make them do. I'd pick a hero product and make it really obvious which one it is, and the rest can earn their spot over time.
When I'm looking at a SKU list with a founder, the question for each one is whether it brings in new customers at an nCAC that makes sense or gets existing customers to reorder. If it's doing neither, it's tying up cash and attention you could be putting into the hero.
what this does to your numbers
I'd expect private label in your format to show up in your numbers before you hear about it anywhere else.
nCAC (new customer acquisition cost, which is new-customer marketing spend divided by new customers) usually moves first. Some of the people who would've clicked your ad already have a cheaper box in their Costco cart, and the ones who do click are comparing you to it.
Payback stretches after that. Payback is nCAC divided by the monthly contribution margin a customer brings in, so if nCAC climbs and you respond by discounting to compete on price, you're hurting both sides of that math at once. You aren't going to beat Kirkland on price, and every discount you run trying to just makes payback longer.
What I'd do instead is look at payback by channel and by customer type every month. If the specific people you picked (say the endurance athletes) pay back in a timeframe you can live with and the "everyone" customers don't, that tells you where the next dollar should go.
if you already sell to Costco
If you're in Costco already, that's a different kind of worry, and I don't know how Costco decides what to private label next. I would model what your velocity and cash look like if a Kirkland version lands next to yours, and I'd do it before it happens.
If you want a second set of eyes on your SKU list or your payback by channel before private label shows up in your aisle, book a call and we can go through it together.
Kirkland launch details are as reported by Inc.
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