Costco to Become a New Name in Battle of the Brews

Wholesale Chain Will Release Its Own Line of Beers

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CHICAGO (AdAge.com) -- The big brewers have fretted that decades of copycat, chucklehead advertising has reduced their biggest-selling brands to indistinguishable commodities in the eyes of many consumers. Now they may be reaping what they've sown: Costco, one of the nation's largest warehouse retailers, is readying its first line of private-label beers.
One analyst said said the rollout of Kirkland Signature Hefeweizen is most likely to hurt sub-premium brands.
One analyst said said the rollout of Kirkland Signature Hefeweizen is most likely to hurt sub-premium brands.

The retailer has filed label applications with the federal Tax and Trade Bureau for a Kirkland Signature Hefeweizen, amber ale and pale ale. The beers will be brewed by San Francisco-area craft brewer Gordon Biersch, which also brews private-label beers for the Trader Joe's supermarket chain.

Big-box stores such as Costco have been a lucrative source of case sales for brewers and any additional competition in the channel will not be appreciated at a time when those brewers are struggling to increase sales.

Who will suffer more?
Stifel Nicolaus analyst Mark Swartzberg said the rollout's impact is most likely to hurt sub-premium brands such as Anheuser-Busch's Busch and Natural Light, Miller Brewing's Milwaukee's Best Light and Coors' Keystone. That category of beers is underperforming overall as of late, he said. "It's a very cluttered space, and price and promotions tend to matter more there."

Still, while private-label brands generally tend to compete with the low end of their categories, sub-premium brands don't have much of a presence at Costco, which tends to sell higher-end items at bulk prices. Craft-beer styles such as Hefeweizen might appeal more to drinkers who would otherwise be buying Michelob or Sam Adams than they would to the typical purchaser of a Busch Light 30 pack.

That suggests that it's premium brands that might hurt more from the Costco entry. "If you ask the brand guys if they'd rather the private labels didn't exist, they'd say yes," said Mr. Swartzberg.

Could grow the market
Then there's the possibility that the new entry could simply grow the market. The presence of a private label might actually cause shoppers to buy more beer than they would have otherwise, he said.

A call to Costco's corporate office was not returned, but the retailer has been offering private-label wines -- including a Champagne and a New Zealand sauvignon blanc from the heralded Marlborough region -- and spirits for some time.

The Kirkland label application -- first reported by Miller Brewing Co's corporate blog, BrewBlog -- coincides with a court ruling against Costco yesterday in a long-running dispute between the retailer and Washington state beer wholesalers. A federal appeals court rejected a lower court's ruling that Washington statutes banning certain volume discounts and preventing retailers from taking beer directly from a warehouse. The decision strengthened the position of beer distributors, who have been in the somewhat awkward role of warring in court with their biggest customers.
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