THE PRIVATE-LABEL POWERHOUSE

In a slow and measured cadence, Craig Jelinek, exec VP-chief operating officer merchandising at Costco Wholesale, methodically counted off the sales growth of the chain's famed private-label Kirkland Signature. The list was long and familiar: toilet paper, paper towels, laundry detergent, bottled water, coffee and more. As he presented the data to nearly 1,000 managers and buyers gathered earlier this August at a downtown Seattle convention center, the PowerPoint slides on giant screens to each side of Mr. Jelinek illustrated with a striking simplicity the growing clout and leverage Costco has gained over suppliers. The blue bar in Mr. Jelinek's graphs tracked the sales trends since 2001 for a national brand item; the red tracked the sales of the same item with the Kirkland Signature. Suppliers to Costco can guess which color dominated. This annual four-day gathering began more than two decades ago with just four managers and top management. Back then annual sales were counted in the millions; in 2005 Costco pulled in $52 billion. It is not some hokey rah-rah motivational exercise. And the matter-of-fact Mr. Jelinek, who oversees the chain's veteran buying team, is no cheerleader. But he did break the slightest of smiles in describing the soon-to-be launched Tide detergent. "We gave P&G a unique way to grow with Costco," Mr. Jelinek said, describing the deal with the Procter & Gamble Co. to create a unique formula for distribution only in Costco stores-an increasingly common demand Costco makes on suppliers. Advertising Age was given limited access to the internal corporate meeting and during Mr. Jelinek's presentation, Joel Benoliel, senior VP-membership and marketing at Costco, based in Issaquah, Wash., explained the Tide deal this way: "If they wanted to keep doing business with us, they had to give us a unique formula." Costco is rapidly becoming one of the most powerful retailers in the marketplace. Not only is Costco demanding, but it has no fear in not offering a national brand and no fear in "delisting" a major brand supplier when it refuses to met its demands. When cranberry-juice maker Ocean Spray refused to cut prices almost five years ago, Costco launched its own juice. And when the private label sold better, Ocean Spray got cut. Via e-mail, an Ocean Spray spokeswoman declined to comment because the company is "beginning a renewed relationship with Costco." It's a new level of power and clout for Costco, which in its early days often struggled to even get distribution of national brands. "We've gotten so big we can't be ignored," said Mr. Benoliel. And when it comes to the chain's Kirkland Signature products, national brands can't simply ignore the Kirkland Signature equivalent. It's the Costco way to always make it bigger, better and, although there are some exceptions, less expensive. Despite its nonexistent advertising, that's one message hammered home again and again to the chain's 36.6 million cardholders. word of mouth Often it's a message delivered by store managers and employees, which in part, explains why Costco bothers to gather its store managers annually to review new products. In the food section, buyers handed out samples of an organic-yogurt smoothie. Oddly, the slim, curvy blue and white bottle contains two brand logos-both the Stonyfield Farms brand and the black-and-red Kirkland Signature logo. Six years ago Stonyfield, the largest maker of organic yogurt, began selling its products regionally to Costco Wholesale. But what Stonyfield really wanted was chainwide distribution-not something Costco just gives to suppliers. After two years of negotiations between the research-and-development and marketing teams at both companies, Stonyfield is getting its much-coveted national distribution. "It's the only way they will work on a large scale with someone like us," said Gary Hirshberg, founder and CEO of the $250 million Londonderry, N.H.,-based company. So what would make Mr. Hirshberg give in to such demands, not to mention make additional changes on a finished product when Costco CEO Jim Sinegal "bounced it back a few times"? Quite simply, no other retailer can deliver the volume Costco does-an average of $10.2 million per SKU. "Suppliers are willing to go to the lengths they go to and to bend over backwards to makes these concessions because of the volume," said Kristin Badowski, a warehouse-club analyst at Management Ventures, a research firm based in Boston. And there's a rub. "It's what's scary about doing business with Costco. If you get delisted ... you could have a serious sales miss," said Ms. Badowski. Even so, Mr. Hirshberg of Stonyfield calls Costco a "super-fair and a super-reasonable partner," and he's not the first to give in to Costco's co-branding demands. Despite its unprecedented clout with brands, however, Costco is not without its vulnerabilities. "Costco's success appears to have awakened a sleeping giant in Sam's Club," wrote Morningstar analyst Anthony Chuckumba in a recent report. And Wal-Mart Stores' Sam's Club just completed an agency review and plans to jump media spending from $15 million to as much $100 million-a move Costco has vowed resolutely it has no plans to react to, sticking to its longstanding no-advertising policy.

THE PRIVATE-LABEL POWERHOUSE

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