Costco Buying Strategies & Supplier Relationships | In Practise

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Costco Buying Strategies & Supplier Relationships

Former Buyer at Costco

Why is this interview interesting?

  • Structure of Costco’s buying division versus traditional retailers
  • How Costco selects brands to drive volume
  • Sales per pallet targets for branded suppliers
  • How Costco works with brands to reduce unit costs
  • Kirkland strategy and Costco’s bargaining power
  • Private label manufacturing negotiations with brands

Executive Bio

Martin Dubreuil

Former Buyer at Costco

Martin has over 20 years experience at Costco. During his tenure, he was responsible for four food and non-food categories and has experience launching Kirkland products across the snacking category. He was accountable for product development, sourcing, negotiation, and inventory management. Martin also has 6 years experience at Metro AG as a Senior Category Manager in food categories and more recently ran Procurement at Marley Spoon, a leading meal kit provider.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Tell us about your role and responsibilities of a buyer at Costco?

I worked for Costco for 19 years, partly in operations but mainly in the buying organization at Costco Canada. I was responsible for both food and non-food categories including confectionery, snacks, frozen food, pet food and cleaning equipment. I also did consumer electronics, appliances and automotive, so I touched a wide range of categories during my 13 years in the buying organization at Costco.

How is the buying organization at Costco structured?

It is split into two segments, national and regional buying. Large countries, like the US or Canada, have both whereas smaller countries like Japan or Korea have only one. Canada has one central buying office which is primarily for non-food products. Food is separated into East and West coast because customer behavior and taste profiles differ and there are many local suppliers. The US have eight regions as well as a national buying organization who buy for the entire country.

Given Costco have less than 4,000 SKUs, does that change the organizational structure of procurement?

Quite a bit actually, because their model is based on their low cost of operations and includes the store, the staff and the buying organization. Buying less SKUs means you can dedicate more time to the details. A typical supermarket buyer manages 1,000 to 2,000 SKUs, whereas Costco buyers manage less than 200. Their buying team is also much smaller because they do not need 10 buyers for each category. Having one who buys 50 SKUs is more efficient.

Did you have 50 to 100 SKUs within food?

We had GMM’s (General Merchandising Manager) in our structure which is the equivalent of a VP of merchandising. There was one for non-food and another for food, and within food was an assistant GMM or assistant VP responsible for two or three categories. One would take fresh, another frozen and another dry goods, and below that level there were different buyers. There was one buyer for frozen food, one for confectionery and one for fresh dairy products. A handful of buyers made the decisions for everything you see in a Costco. Below that are inventory control specialists who were responsible for clerical duties such as reordering, contract management and system maintenance.

How would you compare the KPIs for a Costco buyer versus other retailers?

We had similar KPIs such as sales profitability and shrink inventory management, but the typical philosophy of Costco is managed mainly on sales which is king. If you had good sales and reached your target, profitability would come. Inventory manages itself if you have the basics right. Other retailers put profitability first, then sales, whereas Costco does the opposite.

It seems other retailers optimize profitability and lean towards increasing prices, whereas Costco does the opposite by reducing the price and driving volume?

Yes, their philosophy is different. Costco are successful because they are always the cheapest in the market. The question every buyer asks is not how much profit they can make but how low can they go. Typical retailers maximize by bringing new SKUs and trying to extract more money from suppliers, raising the price as high as they can as long as customers still buy it. At Costco even if my price is the cheapest, if I get a cost decrease from a supplier, I will go even deeper than that. Customers buy tons of product at that price, so if I can go lower than that, I will.

Costco has a fixed margin requirement of 14% maximum INU or profit. Having said that, if I maximize at 14% and get a cost decrease from a supplier or negotiate a better price, instead of maximizing profit, I decrease the price. If I pay 10% less, my customer also pays 10% less. Costco maximizes both sale volume and customer value.

How does that change the relationship with branded suppliers?

It changed in many ways. By now, all Costco suppliers know the operational model and what to expect. They know Costco want the best possible price and to move volume. The difference between a branded supplier selling to Costco versus Walmart, is that Costco includes everything in the price. In theory there is no marketing budget, trade marketing or listing fees. Costco has the best quality and price. It is mainly negotiated on other retailers who have listing fees, marketing and opening of new stores, and nothing is free in life. If you end up paying something on top, the customer has to pay for it.

It must be a breath of fresh air to suppliers who know what Costco want and that they will be one of few brands in store, versus other retailers?

Costco is about cost efficiency and saving and their suppliers also need to do that. They benefit because selling to Costco is easy. Most of the time you have one key account manager with almost no team behind them because they can manage it on their own. When selling to other retailers, full time marketing and logistics staff are required due to the complexity. Reducing the complexity reduces the cost to a supplier who passes that saving to Costco who get a better price. It is a ripple effect; the simpler the business and the people managing it, the cheaper the cost. Both Costco and the supplier know that, whereas 20 years ago, the concept was difficult to explain.

The rock bottom prices that suppliers give Costco equate to higher volumes and lower complexity, making the profitability of the account just as high as other retailers?

That is correct and companies love doing business with Costco, even though they are a tough negotiator and expect the best price in the market. Costco is always fair with suppliers. They try to extract the best from it, but still want to keep suppliers happy and profitable. Unhappy or unprofitable suppliers cut corners and people and, eventually, the business is no longer suitable. It needs to be a win-win but because of the simplicity and sheer volume, you no longer need to make 30% on a product. You can make 1% and sell 20 containers a week because you deposit money in the bank, not a percentage, so in the end you make it up on volume.

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Costco Buying Strategies & Supplier Relationships

July 26, 2021

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