Costco distribution tips: What CPG brands must do before approaching the retailer

By Ryan Daily

- Last updated on GMT

Image Credit: Getty Images - TrongNguyen
Image Credit: Getty Images - TrongNguyen

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CPG brands eager to break into Costco stores must first meet financial milestones and packaging and shipping requirements, assistant general merchandise manager for the retailer's Midwest region, Amy Becker, shared during a recent Naturally webinar.

While Costco doesn’t charge a slotting fee, it requires brands meet specific criteria to ensure products have the best chance of succeeding in the store, she added.

“We have less than 4,000 items in our warehouses, and in the foods and sundry side of our business, from outside suppliers, we only have 1,400 items. It's not very many items compared to some other retailers out in the marketplace. ... We genuinely want every single item that comes into our warehouse to be a success.”

Becker suggested that prospective Costco suppliers visit several locations to understand the store layout and how the retailer approaches product assortment, which rotates regularly, Becker said.

“I cannot stress enough: if you are going to approach a Costco buyer walk several locations, even if you're not a member. At least go in and see what we do, [and] understand what the packaging looks like. ... The reason why we have regional buying is because we actually tailor our product mix to the location that our building is in or to the city or the community that our building is serving.”

Creating a path for brands, Costco to grow together

CPG brands looking to sell in Costco generally need at least $500,000 in sales, and Costco shouldn't represent more than 20% of the brand’s current business, she said. 

“We really want to make sure that when we are working with a vendor that we're truly partnered with them to help them grow. We want to see them grow at the same pace we’re growing with you. So, in that relationship, we want to make sure that it is never lopsided where we are dominating any of your business.”

CPG brands trying to get into Costco also must have a commercial-grade kitchen that can pass a food-safety audit and is not a shared kitchen, Becker said. However, a CPG brand should wait to hear from a Costco buyer on when to conduct an audit and not commission one beforehand, she said.

Prospective Costco suppliers also must maintain strong ingredient-traceability practices, which isn't just a "big one when it comes to food safety" and passing audits, but it's also important for product recalls, Becker explained. CPG brands that can pinpoint an error in manufacturing based on a lot number can more accurately pull recalled products, preventing the need to pull the entire product off the shelf, she said. 

'Packaging is what has to sell your product'

Since most of Costco's products are sold off pallets, brands need to find ways to “get more units on that pallet,” which might require finding a co-packer that worked with the retailer, Becker noted. CPG brands should consider how the product's individual packaging might need to be tweaked to fit the store and the larger-size format, she added.

"Packaging is what has to sell your product to our members as they are walking by. How it looks on the pallet, how it merchandises on that pallet is important. Our ultimate goal from the buying side of our business is to really allow our stockers to be able to cut off the shrink wrap, and they pallet plug that item right in, and we start selling. That's our ultimate goal. Our whole system ... is all about how do we drive efficiency to drive down costs."

CPG brands also have several options for shipping to Costco, Becker explained. Some products, like breads, can ship directly to individual Costco warehouses, but others will need to go through Costco's deports, she added.

At these depots, Costco deploys a cross-docking approach, where they gather all the products from different suppliers and sort them into trucks to boost shipping efficiencies. Costco has also secured contracts with various trucking companies and has its “own fleet that does some backhauls" to ensure CPG brands can get their products to these depots, she added.

“Our depot system is truly designed as a cross-dock operation, so we can bring all the products into that warehouse. We cross-dock it based off of the distributions that our team puts in, and they run it to the other side to a lane that is dedicated to a specific warehouse. So, your item along with a variety of other items that have also come in on that particular day all go together to one location, again creating efficiencies.”

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