Partnerships latest food venture

When it comes to food, Costco is enhancing what has been among the most dynamic food programs in retailing, one that over the past 20 years has helped to revolutionize how stores sell edibles. In recent months, Costco has built both on grocery and perishables operations as the company refines its limited-yet-focused assortment to pace its members’ evolving preferences.

One Costco initiative has gotten particular attention. In May, word came down of a deal between Costco and Martha Stewart Living Omnimedia that would place Martha in the mass-market food business through a product line co-branded with the retailer’s Kirkland Signature label. The deal between the companies called for a multi-segment food line to hit Costco stores in 2008 under the Kirkland Signature by Martha Stewart name.

For MSLO, the initiative is part of a strategy to diversify the Martha Stewart brand in the mass market. Once confined to Kmart in the United States, brands under the Martha umbrella now also are part of the assortment at Michaels and Macy’s. For Costco, the Martha deal is part of the Kirkland brand’s evolution. The retailer has been pairing Kirkland with other labels that bring credibility in certain sectors, including a co-brand with Newman’s Own. While Kirkland has been the most successful U.S. mass market private label in terms of core consumer acceptance, it has been a workhorse brand. Consumers assume solid quality but not necessarily pizzazz or the particular qualities that niche products require. Co-branding provides Kirkland what consumers want in specialized segments, call it credibility, authenticity or just designation as a good thing.

Costco cfo Richard Galanti told Retailing Today that the Kirkland Signature by Martha Stewart rollout won’t follow the pattern that evolved at Kmart, where large segment introductions followed sequentially and hundreds of SKUs found their places on store shelves. Nor will Costco set up a dedicated Martha shop. After all, Galanti noted, Costco has carried Ralph Lauren product for years and still hasn’t marked out an in-store boutique for him.

The value of the partnership, said Galanti, is mutual in that Martha offers great brand recognition among Costco members. At the same time, Martha can address new product areas through an established, successful product development and distribution apparatus. Ultimately, Galanti said, Costco and MSLO “can both help each other.”

In the spring, Susan Lyne, MSLO president and ceo, told listeners on the company’s first-quarter 2007 conference call that the expansion phase that Martha’s merchandising arm had entered would be boosted by carefully selected licensing agreements based on media division successes.

“We’ve noted that our greatest untapped opportunity lies in the food category. We’ve built a lot of brand equity in this arena—cooking and entertaining is our leading core content area. Our Food channel is the top site category on Marthastewart.com; our Martha Stewart kitchens develop and test hundreds of new recipes each year; and our food styling and photography is unparalleled. The challenge was finding a partner that shared our commitment to raising the bar for consumers and to ramping the business to its full potential.”

In Costco, said Lyne, MSLO had found “a company we’ve long admired for its innovation, its customer service, and its focus on high-quality, high-volume SKUs. We’re already working with Costco’s private label team on a program of fresh and frozen foods.”

In August, Lyne detailed some of the progress Costco and MSLO had made on the product line. “If you ask our food group, it has been a love fest,” she said. “I think they are genuinely enjoying the intelligence of the Costco team, in terms of understanding how to create an assortment. And we will be doing one product for end of year, and then start rolling out new products, new categories, monthly, starting in January… We are looking at this as a big item business. So it is probably going to be maybe 50 [SKUs]. That is our expectation right now. And it falls into prepared foods, ready to eat, reheat and frozen. And they will be for the everyday shopper, and for people who are looking to entertain. Interestingly we think there is both the business-to-business and business-to-consumer business to be had here.”

The Martha deal may have been big news, but Costco is making an even more serious investment in the future of its food business by enhancing perishables. Costco has been adding walk-in produce refrigerators and adding more fruit and vegetable SKUs on the floor as part of a major enhancement of its perishables business.

The project isn’t being pursued as a straightforward assortment expansion, however, as Costco remains determined to hold down its SKU count. It is adding items such as Brazilian and Egyptian green grapes, for example, to enhance the treasure hunt element in perishables merchandising and add more excitement to the produce shopping experience, which is critical throughout the store.

Additionally, Costco has been developing packages that divide its bulk packs into more convenient serving sizes that make it easier for its members to pull as much as they need for dinner, but leave the rest neatly stored. Jeff Lyons, Costco vp and gmm of fresh food, said the walk-in produce coolers help with handling while satisfying member interest in healthier foods with antioxidant and other nutritional properties.

The effort seems to have had a positive impact. In Costco’s third-quarter conference call on May 31, Galanti told listeners, “Fresh foods were again up well and produce [was] again the standout among the four sub-departments within fresh foods.”