Chic Costco Beauty Line Displayed -- In Cardboard

Warehouse Chain Offers Borghese, Undercutting Department Store Rivals

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When costco began exploring ways to merchandise Borghese, a high-end cosmetics line never before sold outside high-end department stores, several stores tried cardboard-shelved displays in the utilitarian manner the warehouse chain is known for.

Other test stores displayed the $9.99 blush duos and $14.99 age-defying lotions in glass displays alongside stylishly dressed staff, recreating the feel of traditional makeup counters at retailers such as Lord & Taylor.

Guess which display won out?

The glass "just wasn't us," said Joel Benoliel, who holds the top marketing post as senior VP-membership and marketing at the $52 billion warehouse club chain. "We can't lose sight that we are a warehouse store with concrete floors and steel racks and self service."

It's a notable choice, considering this is Costco's first-ever permanent cosmetics offering, though the chain has sold "whatever high-end brands we could get our hands on" in the past, Mr. Benoliel said.

The line was created via a co-branding partnership with the New York-based cosmetics brand under Costco's Kirkland Signature private-label brand (a brand created from the name of the now Seattle-based company's original headquarters in Kirkland, Wash.).

More than 400 Kirkland Signature products are sold at Costco, from diapers manufactured by Kimberly-Clark to bottled water, cashews and even hair-loss treatments offered at a minimum of 20% savings compared to Costco's prices for leading national brands, according to corporate reports. Costco plans to add several hundred more Kirkland Signature co-branded products in the next five years.

Founded in 1983, Costco has catapulted to the No. 1 position in the warehouse category, passing Wal-Mart's Sam's Club. In just five years, net sales jumped 51% to $51.9 billion by the end of fiscal year 2005 at 433 locations. Despite Costco's meteoric rise, Mr. Benoliel admits that convincing big brands to join the party hasn't always been easy.

"It's a continuing battle of ours to break down these barriers of perception about the club channel," he said.

In typical Costco style, the chain is promoting the Borghese launch through its monthly lifestyle magazine. The publication, distributed to its nearly 22 million warehouse members, is the company's only advertising vehicle.

In the publication's May cover story, a side-by-side cost comparison of the Borghese Kirkland Signature line with the same products offered by Borghese in department stores. For example, the Age-Defying Eye Cream two-pack at Costco costs $19.99, compared to $125 to $175 in department stores (see chart above).

In the article, Borghese's CEO Georgette Mosbacher said: "Make no mistake: Kirkland Signature by Borghese is Borghese through and through. As a matter of fact, the exclusive formulations, complete with botanical extracts, vitamins and skin softeners, are produced in the same U.S. facilities as classic Borghese. This guarantees the same exacting standards." Calls to Borghese for comment were not returned.

a Low profile

The cosmetic company's Web site does not promote the Costco connection. In fact, there's not a single mention on the site. Instead, the Web page highlights the glamorous lifestyle of Ms. Mosbacher and includes the photo spread from a feature on the red-haired executive in Harper's Bazaar.

Anna Wang, a consultant at Kline & Co. who specializes in the cosmetics industry, said Borghese is clearly trading in some of its prestige for the sales volume that will likely come from the Costco partnership. "The Borghese brand is not as well-known as other luxury brands that are out there," Ms. Wang said. "This is definitely a way for them to get their name out there to Costco shoppers, a higher-end consumer."

Costco shoppers in fact, are high income, with 13.2% earning $100,000 to $149,000. Their average income is $67,632, according to BIG Research.

Borghese's future on the shelves of department stores is clearly in question, according to Karen Grant, a beauty-industry analyst with research firm NPD Group. "To survive, they need to work with manufacturers that are exclusive to them so it's likely they will drop it," she said. "Department stores now want promises from brands that they will stay exclusive to them."

On a recent Saturday afternoon at a packed Costco warehouse in the suburbs of Cincinnati, a crowd of women didn't seem to mind the cardboard display. As their husbands stood in line manning carts piled high with bulk packages of toilet paper and water with the Kirkland Signature logo, they were loading blush duos, age-defying serums and night cream into the carts.

"This would cost $125 at Dillard's. It's exactly the same formula," a Costco associate said.
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