14 Feb 2023
“Costco is a channel unto itself like no other,” said Jeremy Smith, a specialist in Costco strategy, during last week’s SFA’s webinar “Succeeding at Costco and the Club Channel.” Smith is the president and founder of LaunchPad, a food brand strategy business, and has worked in strategic sales, branding, and marketing for over 35 years.
Costco has become a popular option for consumers seeking value and carries opportunities for specialty food businesses, but it tends to require more work than other retailers to drive success, Smith said. During the webinar, he provided insight into the steps food businesses need to take to determine if their product is viable for the space, and if so, how to launch a profitable strategy.
“The one retailer that can fundamentally impact the course of your company is Costco, but you also have to decide if Costco is the right fit for you,” Smith said.
Costco’s larger-format pack sizes and lower price points can make it difficult for an emerging brand to find its footing, as many specialty food items cannot be effectively sold in that format at a lower price. Smith explained that when it comes to “value-at-cost,” the brand must sell the items for at least 20 percent cheaper than if they were a distributor.
And once on the shelf, each category has a different weekly sales benchmark to continue working with the club. For example, to become a regular item in the yogurt category, the product must sell at least $1,500 a week per location.
Brands also need to be able to keep up with Costco’s velocity. Smith calls it “moving at the speed of Costco,” which refers both to following up with requests and information in a timely manner, as well as shipping items quickly and efficiently. The product’s supply chain needs to be in order.
Despite the difficulties in working with Costco, the benefits can be transformational. Smith mentioned a “sales halo effect” that occurs with products at Costco stores, wherein, retailers in the club’s area are more likely to want to stock the items as well. This can be helpful when launching specialty food in new markets.
Smith also mentioned how important taste is in Costco’s decision to strike a deal, as well as packaging design. Because Costco locations are warehouses instead of supermarkets and favor larger packaging, brands often must change their packaging strategy. In hotter areas and in states that experience heatwaves, like Texas, clubs often turn off the lights during the day, which poses an even larger problem for brands to communicate their product effectively.
Strong color blocking and visually arresting patterns that stand out on the shelves are good tools to consider when designing the packaging. Smith also advised keeping certifications like USDA Organic and GMO-free on the front, as they carry weight at the club. Its organic business generates $4 billion in sales annually, and is focusing on cleaner labels, banning ingredients like high fructose corn syrup from offerings.
To learn more about how to sell to Costco and other warehouse clubs, watch the webinar on demand in the SFA Learning Center.