Five Keys to Getting Into Costco
Many food brands covet a Costco rotation to help boost their revenue and brand awareness. But how do you get a brand into Costco and once there, how to insure success so that more rotations come your way? I’ll tell you what I know from my exposure to Costco first as a General Mills brand manager and since as an agency partner and fractional marketing leader. Here are my five keys to getting your product into Costco:
1. First, Grow Your Business Elsewhere
Costco has a publicly stated qualification that they don’t want to account for more than 20% of your company’s annual revenue. Let’s do the math on what that means in terms of dollar sales with the following inputs:
· A typical Costco rotation lasts 6 to 12 weeks though it can be shorter for seasonal rotations e.g. holiday items.
· The sales floor for a ‘successful’ item that could return for additional rotations is typically $1,500 per week or more depending on the product category. Some faster turning categories like frozen pizza may have SKUs that turn at $4,000 per week or higher.
· Costco operates by regions (8 of them in the US) and in the 13-state Midwest region there are 107 stores (591 in total US).
Add all that up and one successful Costco Midwest regional rotation could mean approximately $1 million to $6 million in sales. Sounds great! Now if you do the math on what size your company needs to be to stay under the 20% mark, it would need to be between $5 million and $30 million in annual revenue for a full regional Costco rotation.
What if your business isn’t anywhere near that size yet? There is a solution as Costco does like to support local products. Costco buyers may be willing to talk about a local rotation, for example in Minnesota (my home market) which has 13 stores. Even with that reduced store count I’ve been told Costco wants to see a minimum of $500K in annual revenue for your company, and more comfortably over $1 million before granting even a local rotation in their stores.
So what does that mean? Costco is not likely to be one of your first points of distribution. Grow your company first with more traditional grocery, convenience store, co-op and online points of distribution before pursuing a Costco rotation. Even foodservice revenue can count towards the total if you are selling products to schools, restaurants, hotels, airports and the like. The good news is that once you’ve grown sufficiently, Costco can be a great boon to the growth of your business as it gets into seven and eight-figures annual revenue.
2. Design your product specifically for Costco
As with all retailers, Costco is looking for products with a point of difference from what is out there in the marketplace already, and especially versus what they are already stocking. Costco only stocks 5-10% of the typical number of SKUs that a big box grocery retailer stocks, so they don't want duplicative SKUs or anything close to it. They also have a "treasure hunt" strategy that means they want to offer their customers products that they haven't seen elsewhere. So the objective is two-fold: how is your product different from your competition AND how is your offering at Costco different than what you're stocking at other food retailers?
Many products at Costco are simply a mega-pack, meaning a larger size format that meets Costco’s higher price point and value requirements. To add additional value and enticement for Costco, consider products like variety packs and perhaps a unique flavor within that pack that isn’t sold in other channels of trade. Entirely new and unique products that are produced only for Costco have become increasingly rare as Costco values products and brands that are already proven in the marketplace.
Beyond the product’s functional benefits, be sure to include any benefits pertaining to sustainability and social responsibility which are valued by Costco and their customers. Costco may even want to see a social audit of your business to ensure you are a responsible corporate citizen. If your company has B-Corp Certification that’s an advantage since you are already certified as a company that has a high degree of social responsibility.
3. Price your product under $20
The vast majority of food products at Costco are priced between $5 and $20, with occasional prices over $20. Note in this section I’m rounding up to the nearest dollar for ease of reading but like most retailers, Costco likes to end on a price just under the dollar or 50 cent mark. On the lower end you can get single-bag salty snacks, for example a 30oz bag of Doritos for $7. Sauces and dressings, canned vegetables, breads and basic baking mixes and breakfast cereals may also be in the less-than-$10 price range.
The sweet spot for value-added packaged foods like multi and variety-pack snacks, beverages, frozen and refrigerated items is between $12 and $20. For example, a multi-pack of 30 Nature Valley granola bars is currently $16. If you’re going over $20 you should have national brand awareness and be in a premium-priced category where prices over $20 are more regularly seen, such as energy drinks where 24 cans of Monster goes for $28 and 24 cans of Red Bull for $38!
Costco provides exceptional value to their customers in the price of their products. They don’t actually make much profit from the sale of products in their stores, but rather from the sale of memberships to access their store. As such their markups are much lower than food retailer average. Traditional grocery margins are often upwards of 40% while Costco doesn’t mark any food products up more than 14% and more typically it’s in the 11-13% range. They ask that vendors do their part to add to this value by providing a 15-20% discount on their price to Costco versus an equivalent amount of product in traditional grocery outlets.
How can you do that without losing money on your own products? One key to that has already been discussed – packaging and palletizing efficiencies. For example, instead of selling a product in several separate boxes, you are selling a mega-pack or variety pack in one box so you’re spending less on packaging. Then you’re selling those products in a palletized form instead of packing and shipping them in individual case cartons, another efficiency.
The other efficiency is referred to as Dead Net Pricing. At a typical grocery store you will pay additional monies for things like slotting fees and price promotions. Costco asks that you take all that money and simply put it into lowering the price of the product, since they won’t collect slotting fees and won’t run price promotions given the short duration of the rotation.
They will charge you to have their staff demo (sample) your product and I highly recommend you participate in their demo program. It will dramatically increase the chances of your product having a successful rotation, especially if it’s a great tasting product!
Don’t expect to make much net profit on your first Costco rotation. What you make at the gross margin level will go toward paying your expenses for designing the new product and packaging and clearing other qualification hurdles requested by Costco. That makes it all the more critical that your first rotation is a success so you can get back in for a second rotation, perhaps with additional store count, and then if you've priced appropriately you will start to make substantial net profit.
4. Design a three-side shoppable display pallet that meets Costco requirements
At Costco almost everything is palletized. Many shelf-stable items are simply dropped on the floor as a pallet and sold as-is. Ideally, Costco staff are just cutting the shrink wrap off your pallet and it's ready for sale. This means you'll need to utilize display cases that have a cut-out front for your individual product units to be seen and picked up by customers, or multi-pack display boxes that are individual product units unto themselves in the Costco environment.
Three-side shoppable means customers can shop it from three sides and can interact with product and benefit messaging as well. Costco talks about the 5x5 rule, meaning your display cases or boxes must explain what it is and why it's appealing from five feet away and within five seconds.
Refrigerated or frozen items will likely be unpacked from the pallet but will not be unpacked as individual units, so you will need cases that can slot into Costco's refrigerated or freezer doors easily and quickly with minimal labor involved.
5. Button up your supply chain
Costco will want to know that your products are produced in a manufacturing facility that will pass industry audits for food and worker safety. This means a certified facility, not a shared or cottage law kitchen. All products should be labeled with production dates and lot codes so that if there is ever a recall, Costco can minimize the amount of product being pulled off their shelves and minimize your own waste costs. You will need the required, up-to-date third party certification documentation for any claims you are making on the product like Organic, Non-GMO or Gluten Free. You will also need to have EDI (Electronic Data Interchange) and EFT (Electronic Funds Transfer) capability to make sales to Costco. They don’t send checks in the mail!
Bonus Item: Who to contact to begin your pitch?
To start the discussion regarding a Costco rotation for your product(s) you want to contact the food products buyer for your desired region of sale. If you don’t have that contact directly, it starts with calling the regional office and asking to be connected with the buyer. Most likely you will have the opportunity to leave a voicemail in which you will want to provide a succinct elevator pitch for your product as described above in the Product Offering section.
This will not be an easy sell-in and a member of the Costco merchandise team recently mentioned that less than 5% of products offered were granted a rotation because of Costco's limited SKU environment. To gain access to this environment you will have to be compelling and persistent with your pitch, and make it clear that you will be working with Costco to fit their needs and qualifications to have a solid chance for a successful rotation.
Interested in more help on your journey to getting into Costco? Let's chat about whether FoodFluent Marketing might be of assistance with product offering and pitch crafting, Costco-specific package designs and more.